Environmental, Social, and Governance (ESG) considerations are becoming increasingly important in today’s business landscape. As regulatory bodies worldwide introduce stringent requirements for ESG-related disclosures, business owners – especially those planning to exit their enterprises – must stay ahead of the curve to ensure compliance and maximize valuation.
For UK businesses, understanding the current and upcoming disclosure requirements is crucial, particularly given the overlapping and sometimes confusing array of frameworks. This article outlines the key ESG disclosure mandates in the UK and relevant EU regulations that UK businesses should consider.
The Growing Importance of ESG Disclosures
In recent years, stakeholders – including investors, customers, and regulators – have increasingly demanded transparency in ESG practices. Comprehensive and credible ESG reporting is not only a compliance necessity but also a competitive advantage. For business owners planning an exit, robust ESG disclosures can significantly enhance buyer confidence and potentially lead to a higher valuation.
Key ESG Disclosure Requirements in the UK
- Streamlined Energy and Carbon Reporting (SECR)
The SECR framework mandates large UK companies to report on their energy use, carbon emissions, and energy efficiency actions. The aim is to encourage businesses to reduce their environmental impact while improving operational efficiency. Companies in scope must include this information in their annual reports, which is critical for demonstrating sustainability credentials to prospective buyers.
- Task Force on Climate-Related Financial Disclosures (TCFD)
Since April 2022, large companies are required to align with TCFD recommendations. These disclosures focus on climate-related risks and opportunities, with a particular emphasis on governance, strategy, risk management, and metrics.
TCFD compliance has become a key consideration for investors and buyers who prioritise climate resilience in their acquisition decisions.
- UK Corporate Governance Code
Applicable to premium-listed companies, the UK Corporate Governance Code emphasises the importance of ESG factors in corporate governance. While compliance is not mandatory for all businesses, aligning with its principles can signal robust governance practices, a critical factor for potential acquirers.
- Sustainability Disclosure Requirements (SDR)
The UK government is working on a new Sustainability Disclosure Requirements framework to harmonise ESG disclosures across various reporting standards. Though still in development, the SDR will likely become a critical compliance requirement in the near future, especially for businesses with complex supply chains or significant environmental impacts.
Overcoming the Challenges
For many business owners, navigating ESG disclosure requirements can be daunting. The sheer variety of frameworks and acronyms can create confusion about where to begin. Here are some practical steps to streamline the process:
- Conduct a Materiality Assessment – Identify the ESG factors most relevant to your business and stakeholders. This will help you prioritise efforts and resources.
- Engage Experts – Consider working with ESG consultants or advisors to ensure compliance and alignment with best practices.
- Leverage Technology – Utilise ESG reporting software to streamline data collection, analysis, and reporting.
- Stay Informed: Keep abreast of regulatory updates to ensure your business remains compliant and competitive.
The ESG Advantage in Business Exits
For business owners planning an exit, strong ESG credentials are increasingly seen as a value driver. Buyers and investors are looking for businesses that demonstrate long-term sustainability and resilience. By ensuring compliance with ESG disclosure requirements and adopting a proactive approach to sustainability, you position your business as a more attractive acquisition target.
If you’d like to find out more about how The MGroup Corporate Finance can support your exit strategy, contact Geoff Pinder: g.pinder@themgroup.co.uk