UK employers rethink ESG beyond compliance amid rising scrutiny

The UK government has updated its official guidance on how environmental and sustainability claims should be made by businesses. The update, published last week on the Government’s website, reinforces what regulators expect organisations to substantiate when they talk publicly about their green credentials, from marketing and corporate reporting through to wider communications.

That update matters because it lands at a moment when many businesses are reassessing their sustainability strategies. Parts of the ESG regulatory framework are being recalibrated, and there’s a growing sense in some quarters that the pressure to comply may be easing. But this guidance is a reminder that, even as rules evolve, scrutiny of sustainability claims is not going away, and may in fact be sharpening.

For employers, that raises some important questions. Does this shift create an opportunity to move away from compliance-driven ESG and think more proportionately about sustainability risk and value? Where should responsibility for sustainability now sit inside organisations? And how should businesses think about legal and litigation risk when making ESG claims in this changing environment? We’ll get a view from climate and sustainability expert James Hay.

For several years now, many firms have approached sustainability largely through a regulatory lens, focusing on meeting disclosure requirements and preparing for new rules as they emerged. That has sometimes led to ESG becoming a compliance exercise, rather than a broader assessment of business risk and value. The government’s updated guidance shifts the emphasis back to substance. It reinforces the need for organisations to be able to evidence the sustainability claims they make, at a time when enforcement powers are now firmly in place. The focus is less on labels, and more on what companies are actually doing in practice.

That, in turn, raises questions about governance. If ESG is no longer just about ticking regulatory boxes, where should responsibility for sustainability risk sit within the organisation? Is it something owned by a central team, or something that needs to be embedded across functions that manage operational and commercial risk day to day?

And there’s also the legal dimension. Even as parts of the ESG rulebook are being recalibrated, regulators and claimants continue to scrutinise misleading or unsubstantiated sustainability claims. That means businesses need to be careful about assuming that regulatory change automatically translates into lower legal or litigation risk.

So, how should companies adjust their ESG strategies as a result of this upheaval in sustainability regulation? I put that question to climate and sustainability expert, James Hay:

James Hay: “So for the last several years, companies have really been focused on compliance with new sustainability regulations that have been coming into place and really that led to some sort of tunnel vision, essentially. But now with this rollback, what we're seeing is that companies have a bit more leeway to think more seriously about why they are seeking to manage sustainability risks, and essentially what that means is that companies can be more proportionate, more pragmatic, when it comes to their sustainability strategy. There are many benefits to this. First of all, because you're not focused strictly on compliance, you are thinking about some of the risks that your business may face, but also some of the business enhancement, and value enhancement, opportunities that may arise as a result of sustainability issues as well. Another aspect in terms of a company's sustainability strategy is thinking about where responsibility for sustainability risk management lies. In the past, again, because companies were focused on regulation, there were central sustainability teams who were responsible for compliance, but now we're seeing that a lot of companies are dispersing responsibility for sustainability throughout the organisation. The benefit of that, of course, is that you have got functional experts who not only understand their core area but are also thinking about sustainability issues as well and this essentially creates more buy in for sustainability within organisations as well. So that's another benefit to thinking about sustainability in a broader sense, rather than just focusing on compliance with regulation.”

Joe Glavina: “I guess there must be a risk that some companies just drop sustainability altogether, James?”

James Hay: “That's right. So there is definitely a risk that some companies take a big step back with their sustainability ambitions and may even seek to cut budget for sustainability or reduce the size of sustainability teams. However, I think that that would be a response that doesn't reflect the true risk management benefits of taking sustainability into consideration, again, thinking about having some more sophisticated conversations about sustainability risk and what that means for the value of the business. So while there may be companies that are seeking to step back, I would definitely urge companies to think about some of these risks, some of the benefits of sustainability, so that you are really thinking about sustainability in the context of your business strategy rather than purely focusing on sustainability to make ambitious commitments, or to comply with regulation.”

Joe Glavina: “What are the legal risks companies should be considering, James?”

James Hay: “So, essentially there are two forms of legal risk, broadly, that I would think of. The first, obviously, is regulatory – the risk that regulators may seek to take enforcement actions against you. What we've seen over the last couple of years is that in some areas, at least, regulators have appreciated that companies need to build up maturity when it comes to sustainability and so they've taken a bit more of a hands-off approach but the tide is somewhat turning with regards to how regulators are approaching sustainability issues, and regulators are taking greater enforcement action because enough years have gone by now where companies have built up that maturity. The other big legal risk is litigation risk, essentially, with companies, or NGOs, seeking to take legal action against other companies for not seeing through their sustainability commitments, or by being involved in sustainability-related controversies. In particular, there are some very well-funded and very sophisticated NGOs who are bringing, in some cases, novel lawsuits seeking to really push the boundary on where companies can be liable for actions that they take or even, in some cases, actions that have been taken by their suppliers, upstream their supply chain, that they may be responsible for. So with this evolving nature of the legal risks and regulators taking greater enforcement action, companies definitely should be thinking about those regulatory issues, and the legal risks as well.”

James is already working with a number of employers on the practical implications of these changes, including the challenges facing multinational organisations. If you would like help in this area then please do contact James – his details are on the screen for you.