Introduction to ESG

The origins

Environment, social and governance (ESG) were first brought together as a concept by the United Nations Environment Programme Initiative in 2005, aimed at bringing sustainability to the finance and investment communities.

“E” includes environmental matters such as climate change, energy use and energy efficiency, pollution, biodiversity and resource scarcity.

“S” focusses on social issues, stakeholder and employee engagement, community and human rights issues, gender pay gaps, modern slavery, DEI (diversity, equity and inclusion).

“G” covers bribery, corruption, executive pay, cyber and data security & protection, board diversity, tax avoidance and money laundering.

How is it applied?

The investment community initially (and still) apply ESG principles and frameworks to assess how a business or organisation is set up to support and generate value for all of its stakeholders and not just for its shareholders. This has broadened the stakeholder group to include everyone impacted by an organisation including its employees, customers, suppliers, lenders, public bodies, people in the communities where businesses are based and local environments.

However, the term has picked up momentum and is now widely accepted as defining how responsible and sustainable business practice is managed, measured and enforced across the business community globally.

Why is it important?

ESG is gaining importance as investors, customers, lenders and authorities – arguably the entire business ecosystem – place more emphasis on sustainable business practice.

Are customers more willing to buy from companies that show a credible investment in inclusivity and ‘green’ products? Are lenders reducing the risk in their portfolio by working with businesses that have longer term prospects as a result of their commitment to reducing their impact on local communities? Are employees willing to take a pay cut to work for a company that shares its values?

The statistics have been supporting positive answers to these questions for a number of years and the direction of travel is towards a systemic recognition of ESG.

Ok, but it’s not a legal requirement?

Correct. Well, incorrect. There is no single ESG law or regulation in the UK however, the UK does have a fragmented set of domestic and EU-derived laws that include ESG-related requirements.

What are now likely to be familiar legislation and regulations such as the Companies Act 2006, the Environment Act 2021, the Bribery Act 2010, the Climate Change Act 2008, the Plastic Packaging Tax Regulations 2022, the UK Corporate Governance Code, the Modern Slavery Act 2015, even the Data Protection Act 2018 include elements of ESG focussed restrictions or incentives.

Although the obligations and reporting requirements within the various pieces of legislation are, for the moment, often limited to larger businesses and those which are publicly traded, many smaller companies are choosing the manage themselves in the same way (e.g. making a statement under the Modern Slavery Act or an annual confirmation that their directors took certain ESG-related matters into account when discharging their S.172 duties under the Companies Act).

How do I make sure I’m on top of this as a small business?

ESG can be approached in much the same way as any new policy, legislation, standard or regulation.

First, define your requirements as a small business. You may need advice on what does and doesn’t apply to you but once you’ve established this you can move on to the next step.

Secondly, identify the baseline within your business for the various requirements. At this point you may want to identify an ‘ESG lead’ who will engage with your key team members.

Thirdly, establish processes, incentives and measures to influence and improve your baseline. Invest in ESG. At this point you may want to broaden your ESG team to include ‘ESG champions’ within each department. Involve your employees as they will be responsible for driving much of the good behaviours within your business.

Fourthly, measure your progress and communicate the results – good and bad – with your key stakeholders. This may include your suppliers and customers. Transparency is central to good ESG management and showing a willingness to address issues is widely seen as fundamental.

Fifth, do not underestimate the importance of directors’ attitudes towards ESG and the ‘tone from the top’. Although this is a difficult-to-measure influence, ESG-focussed leadership will drive behaviours into the business and set the standards that your stakeholders increasingly expect.

As ever, we’re here to help.