Climate Risk, ESG and Law in UK

Introducing sustainability stewardship and regulations regarding increasing climate risks

Climate Risk and the Business Sector

According to the Working Group 2 of the 6th Assessment Report of Intergovernmental Panel on Climate Change (IPCC):(1).

The human-induced climate change causes ‘impacts’ and ‘risks.’ Risks involve the interactions amongst physical hazards of, exposure to, and adaptation to climate change within our human systems and ecosystems. For instance, the sea level rise (climate hazards) at a coastal city negatively impacts the urban infrastructure and people’s health (exposure to impacts). Recognising the vulnerability of the region to the hazards, the city government devises better strategies to protect the infrastructure and people’s lives from the impacts (adaptation), or ones to reduce the CO2 emissions that cause the climatic changes (mitigation). Knowing climate risks of our human systems is crucial to invent better policies for a climate-resilient environment.

‘‘Knowing climate risks of our human system is crucial to invent better policies for a climate resilient environment’’

Facing those impacts and following risks, global corporations started establishing decarbonisation commitments. They have learnt that impacts such as the extreme weather events could result in a significant amount of financial loss. Towards the ‘net zero’ journey, companies, especially those in greenhouse gas-intensive industries such as manufacturing and mining industries are experiencing financial pressures. The decarbonisation trend is also associated with governments’ declarations of net-zero (balance between the amount of greenhouse gases produced and the amount of those removed from the atmosphere; the removal can be done by emission reductions and emission removal technologies). For example, the UK government is committed to net-zero by 2050. Countries like Japan, South Korea, Canada and New Zealand, and European countries such as Sweden and France have also pledged to achieve net-zero by 2050 (Source: UK Parliament).(2).

With such trends, companies are now working towards a better transparency of their non-financial information since investors, asset managers and insurers take their climate risks and sustainability into account when engaging with businesses. This comes from the idea of ‘sustainable investing,’ which will be discussed in the next section.

Environmental, Social and Governance (ESG)

ESG is a corporate framework that help stakeholders to understand how an organisation is managing risks and opportunities related to environmental, social and governance criteria (Source: CFI) (3).

ESG was first discussed in 2004 by the UN’s collaborative financial initiative “Who Cares Wins”, which led to formation of UN Principles of Responsible Investment (4).

To be specific, the responsible investing was encouraged by the international organisations to foster sustainable development, which necessitates effective non-financial disclosure of corporate information. Before the ESG’s popularity, corporate social responsibility (CSR) was used ubiquitously. Both frameworks are used interchangeably in the sense that CSR is for businesses to operate in an ethical way for society (Garcia, Mendes-Da-Silva and Orsato, 2017) (5).

After Davos Forum in 2020, a further 22 metrics for four different criteria were published by World Economic Forum: (Source: Forbes) (6).

• Principles of Government
• Environmental
• Human Capital
• Prosperity (Source: Forbes)

There have been a variety of ESG frameworks regarding their uses and metrics, such as Global Reporting Initative and Carbon Disclosure Project which are rated by private institutions such as MSCI and Sustainalytics. Notably, about measuring climate risks specifically, Taskforce on Climate-related Financial Disclosure (TCRD) was established in 2017 (7).

The transformative corporate behaviours have been found to be effective in making profits. Top 20% of ESG-performing companies in 2014–2018 increased the return by 53% (Source: VettaFi) (8).

ESG in United Kingdoms Capital Markets

According to a survey by PwC (9) in July 2021, 82% of the respondents in businesses said that they have an ESG programme in place, with 75% of the same group responding that the role of ‘investors’ played a substantial role in it. However, the majority of them stated that the ‘inconsistency’ of international ESG regulations pose a significant challenge to corporations. Currently, in the UK, Section 172 of the Companies Act 2006, UK Corporate Governance Code 2018 and Disclosure and Transparency Rules (DTRs) serve as key regulations which companies are to follow (Source: ESG PRO)(10).

These regulations build foundations of ESG policies, including ones that enable the consideration of welfare of employees, the environment and local communities. Also, it outlines how enterprises should disclose the information about its environmental and social impacts and issues, and internal governance processes. PwC’s survey (9) report that previously mentioned UK-initiated legal amendments on disclosure based on previously mentioned TCFD such as ones on Listing Rules (LR) were proven to have many impacts on UK corporate governance. Due to Brexit, UK’s announcement of Green Taxonomy (roadmap setting out coalitions for labelling an activity “sustainable” and helping the economy meet net zero targets.), now planned to be announced in early 2023 (Source: Reuters)(11).

It will be to some extent in line with EU Taxonomy. In addition, UK government is to launch a consultation on ESG ratings as part of a package to reform UK financial systems for the post-Brexit era. It will discuss a new plan for green finance and consult private ESG data providers rating private sectors (such as MSCI, Sustainalytics, Bloomberg) so as to form the “regulatory perimeter” within ESG data provision (Source: Responsible Investor)(12).

Closing remarks

This article is written to increase the awareness of University of Bristol students and student bodies on popular ESG framework within private sectorsgoverned by wider level of climate discussions at global levels. Sustainability in the corporate world is highly important, evidently, because it is responsible for heavy greenhouse gas emissions which are central to worsening the level of the climatic changes and impacts. It is also because, often times, such non-financial information from companies is concealed and poorly published, even in a way that deceives the consumers for accumulation of profits (so-called ‘greenwashing’). Through this knowledge sharing, I hope Bristol students will be able to identify the importance of disclosure and further their understanding of sustainable corporate governance linked to domestic and international regulations on ESG and sustainable development. Hopefully, Bristol University communities will soon start popularise the ESG integration into systems within student groups and university administration to decarbonise its operations and further its positive impacts to Bristol’s local society and economy.

About the author

This blog was wrote by one of our Climate Action Bristol volunteers Chandler for Sustainability Month 2023!

If you want to learn more about sustainability, go follow @bristolsustainability and join our Climate Action Bristol project.