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Teneo UK ESG Insights 4.21.22

April 21, 2022
By Edward Bottomley

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Welcome to Teneo's UK ESG Insights. Each fortnight, we’ll help you to cut through the noise around ESG by exploring some key market developments and the implications for companies.

FCA Releases New Diversity Reporting Requirements

Yesterday, the Financial Conduct Authority (FCA) published new rules for listed companies, making it mandatory for them to disclose in their annual financial report whether they have met specific board diversity targets. These targets include having women make up at least 40% of the board, with a woman in at least one senior board position, as well as having at least one board member from a minority ethnic background. This rule comes into force for the financial years starting on or after 1 April 2022. The FCA has also expanded reporting requirements to cover the diversity policies of key board committees. The targets have been set on a ‘comply or explain’ basis.

  • Teneo takeaway: These new rules are designed to increase transparency for investors and companies by establishing better, comparable information on executive and board diversity. It’s interesting to see the FCA take a more muscular approach, through ‘comply or explain’, which is a notable break from previous voluntary initiatives such as the Hampton Alexander Review. This is potentially only the beginning, with the FCA describing this rule as a “starting point to encourage scrutiny and consideration of diversity and inclusion more broadly”, strongly suggesting that other demographic factors, such as sexual orientation, socio-economic class and disability may soon come under the purview of mandatory reporting – so it's highly likely that we will see UK companies' ESG regulatory and reporting burdens continue to grow. Listed companies in the UK should adapt their recruitment to get ahead of such regulatory changes, not least to take advantage of the well-recorded benefits that diversity brings to a business.

Better Business Act has its Day in Parliament

UK business leaders have renewed their call for a review of UK company law to compel UK directors to align their company’s interests with those of wider society and the environment. The Better Business Act campaign, which enjoys support from over 1,000 companies as well as politicians across the aisle, has called for the Government to amend Section 172 of the Companies Act to ensure businesses are legally responsible for benefiting workers, customers, communities and the environment while delivering profit. The campaign celebrated its first anniversary on 20 April with the Better Business Day event in Parliament, working to build political momentum in the run up to the Queen’s Speech. The campaign for this legislation has been strengthened by the ongoing P&O Ferries scandal, which was cited in Better Business Act co-chair Mary Portas’ recent opinion piece in the FT, which argued for the implementation of the Better Business Act.

  • Teneo Takeaway: The Better Business Act would represent a massive change in the regulatory environment for businesses in the UK, shifting their obligations from reporting to acting on ESG issues. The draft text of the act raises interesting questions as to how such legislation could be implemented. The campaign’s draft amendments call for directors to act ‘in good faith’ with regard to issues such as the impact of the company’s operations on the community and the environment, and demand that companies report each year on how they have met their obligations under this legislation. How can the Government judge whether such decisions were actually made in good faith, and how should companies report against these obligations? It will be a challenging process to convert well-meaning legislation to tangible progress. Given the current political climate, it is unlikely that such legislation will be implemented in the immediate future, but the P&O saga is illustrative of growing public support for regulatory mechanisms to force companies to consider their impact on the world around them. Whether through the Better Business Act or by other means, businesses should expect regulatory scrutiny on all aspects of their ESG policy to increase as time goes on.

Asset Managers Choose Words Over Action?

Yesterday, NGO Reclaim Finance published its 2022 scorecard ranking 30 major asset managers on their climate commitments, analysing their exposure to companies with fossil fuel expansion plans. The report found that none of the 30 asset managers currently list ‘no new fossil fuel projects’ as one of their key demands for companies with whom they engage in dialogue. Reclaim Finance argues that this is contradictory to the membership status of 25 of the 30 asset managers in the Net Zero Asset Manager Initiative, in which they pledge to achieve carbon neutrality by 2050, following a 1.5°C pathway. Overall, the 30 asset managers have combined holdings of $468 bn as of March 2022 in 12 companies that are among the biggest short-term developers in oil and gas.

  • Teneo takeaway: This report resurfaces the question of what makes a good (or even passable) climate commitment? Here, the focus has shifted from words to action – it's no longer enough to say that you will align to the 1.5°C pathway; investors, and business in general, will be expected to demonstrate the tangible steps they are taking to reduce (and certainly not increase) emissions now, or face accusations of kicking the can down the road.

Looking Ahead: Upcoming ESG Events & Happenings

The views and opinions in these articles are solely of the authors and do not necessarily reflect those of Teneo. They are offered to stimulate thought and discussion and not as legal, financial, accounting, tax or other professional advice or counsel.

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