Environmental, Social, and Governance (ESG) regulation is changing as regulators and governments wise up to its importance. As best practice continues to develop, accountants and business leaders need to keep abreast of changes to ensure that, where regulation is mandatory, they are on the right side of compliance. 

That said, changes to ESG regulation are relevant to all businesses, not solely the large businesses currently mandated to disclose data. The reality is that small and medium sized enterprises (SMEs) must too be ready to disclose their non-financial data. Large companies and financial institutions are requesting ESG data from the SMEs in their value chains. Our research shows that 63% of SMEs have received such a request in the last six months.

And SME specific ESG regulation is expected in the UK in 2025. So, getting comfortable with ESG, and deciding how your business can find value in non-financial data, makes absolute sense.

 In this article, I explore some of the important dates in the 2023 ESG calendar and what they could mean for businesses and accountants.  

 Who regulates ESG?

At present, there is a networked ecosystem of ESG regulators. Central banks, government agencies, and financial market regulators are working experimentally and cooperatively to produce regulation that responds to the urgency of the climate crisis and its potential impact on the stability of the global financial system. In the UK, responsibility lies with the Financial Conduct Authority and not with regulators or Government departments responsible for the environment or social welfare. 

To encourage large companies and financial market participants to report on sustainability metrics, ESG regulators must “navigate a fine line to facilitate the transition without driving it”, says Dr Megan Bowman of King’s College London .  

The role of the regulator ecosystem, then, is to foster interdependence and international cooperation. A collaborative ecosystem of transnational regulators is needed to implement successful policies that hit each relevant ESG metric

Important regulation for UK companies

In January 2023, the EU’s Sustainable Finance Disclosure Regulation (SFDR) has come into effect. This means that financial market participants with over 500 employees, and who do business in the European Economic Area (EEA), are mandated to disclose sustainability data on 21 ESG metrics (under the EU-Taxonomy). EU law is no longer automatically integrated into UK law; however, the SFDR applies to UK firms doing business in the EEA. The intention is for financial services firms to “disclose specific information regarding their approaches to the integration of sustainability risks and the consideration of adverse sustainability impacts.”

Since April of 2022, the UK government has made Task Force on Climate Related Financial Disclosures (TCFD) aligned reporting and disclosure mandatory for a range of financial players in the UK.

TCFD-aligned reporting is mandatory for applicable companies with more than 500 employees and, in some cases, a turnover of over £500m. On the face of it, this scope excludes SMEs. However, SMEs should pay careful regard to TCFD-aligned reporting regulation. As explained above, SMEs are being asked for their ESG data by larger companies who are in the scope of TCFD-aligned reporting. And the UK government has signalled that SMEs will need to integrate the TCFD framework into their business model by 2025.

In July of this year, the Financial Conduct Authority (FCA) is implementing its new Consumer Duty requirement for independent financial advisors (IFAs). At its heart, the changes seek to prioritise the customer by enabling them to make informed choices about financial services.  All UK firms, including SMEs, who are involved in the distribution chain for products and services sold to customers must comply with this new Duty.   

2023 will also see a development in the FCA’s sustainability disclosure requirements and investment labels initiative. The final rules, which are expected by September, will have a specific anti-greenwashing focus and will highlight the importance of transparency to allow consumers and investors to make informed investment decisions.

Further afield, in the United States, the Securities and Exchange Commission (SEC) is looking to enhance investor transparency through climate-related disclosure rules targeted at public companies. The new rules were meant to be published in October 2022, but political disagreement and judicial wrangling has pushed the deadline into 2023. It is expected that the rules will require companies to publish data on their Scope 1,2, and 3 emissions for the first time. 

Important regulation for UK accountants

The 2023 ESG calendar also has some important dates specific to UK accountants. The International Sustainability Standards Board (ISSB) will issue their first two Sustainability Reporting Standards by June 2023, following a long consultation process. One of the standards will concern general sustainability-related disclosures and the other will concern climate-related disclosures. Specifically, the climate-related standard will require the publication of CO2e scope 1, 2 and 3 emissions data, in line with the GHG protocol.

Why is this important? The ISSB was created by the International Financial Reporting Standards Foundation (IFRS), to develop global reporting standards for non-financial data.  The aim is to make non-financial reporting “consistent and comparable” with financial reporting across “a global baseline”. In short, the aim is to bring to ESG the same standards of discipline, rigour, and professionalism as financial reporting.  The new ISSB standards will quickly become the new accounting normal for all businesses in the UK. 

ESG or non-financial reporting is a new market which Fact.MR has estimated to be worth £3 billion in the UK alone by 2032. The UK’s accountancy firms, particularly those looking after the nation’s 1.7 million SMEs, will need to learn new skills or risk losing out on this new revenue stream.   

Furthermore, the Financial Reporting Council (FRC) is making changes to their auditing standards in autumn of 2023. The FRC – who set corporate governance standards for UK auditors, accountants, and actuaries – have chosen climate-related risks as one of their areas of supervisory focus for 2023/2024. In particular, the FRC will promote greater transparency in corporate reporting of climate-related data and net zero commitments.