News analysis
ESG transparency crucial for UK firms
ESG transparency will be higher on corporate agendas now, as a UK watchdog has told auditors to get serious about greenwashing in their reviews.
British authorities are getting serious about transparency. The latest announcement from the Financial Reporting Council (FRC) – the country’s governance and auditing watchdog – is a testament to that.
This time, the agency is attempting to root out greenwashing and join a band of European Regulators who say they have had enough vague, tick-box reporting that avoids mentioning meaningful environmental progress.
What’s going on?
The FRC announced Monday that it was increasing scrutiny over auditors and how they monitor ESG (environment, social and governance) reporting in the UK.
The efforts aim to strengthen the quality and integrity of ESG efforts and to stop companies from claiming their products are environmentally friendly when they are not – a practice commonly known as greenwashing.
“Improving transparency on climate and wider ESG risks and opportunities, and related governance activities and behaviours, is a key priority for our work,” said the agency’s Executive Director of Regulatory Standards, Mark Babington.
He also stressed the importance of quality information fuelling logical investing decisions.
What does the news mean?
It’s a step-by-step answer:
- The FRC wants to know more about the ESG data companies use, and how they communicate that data to investors.
- From their unique vantage point, company auditors have a good chance of analysing this and judging compliance.
- So, the FRC has put the word out: it will conduct spot checks on auditors as their work is ongoing, particularly examining how they assess ESG matters in their reviews.
- Auditors will likely be stricter as a result, demanding more reporting compliance from companies and analysing data for more in-depth conclusions. This way, they show the FRC that its concerns are being addressed.
On the wider scene
This news comes amid a growing desire for governance oversight in the UK. British authorities are eager to flex their muscles, not only through government bodies like the FRC but through new laws that go further in holding corporate leaders to account.
You don’t need to look further than the proposed Economic Crime and Corporate Transparency Bill to understand how responsibilities are growing. Read more about it here.
Should companies be worried about ESG transparency?
Yes, but remember, this is not out of the blue.
Watchdog focus on ESG in this way has been increasing for years, ever since governments and climate activists realised the detrimental impact of greenwashing.
As a result, you could easily be familiar with this kind of rhetoric already and have had discussions with your colleagues at board and executive levels on how best to incorporate ESG into company strategy.
If you haven’t, now is the time to start.
It’s worth noting, though:
The FRC’s announcement took direct aim at companies that greenwash.
So, even though ESG has three pillars of principles, this news concerns one more than the other two: ‘E’, or the environment.
It’s pretty common for talk around ESG to boil down to talk climate.
Will some companies be in the spotlight more than others?
Yes, and it will be judged by exposure to environmental risk.
The FRC has said it will ‘consider’ selecting companies with high levels of risk and investigate their senior auditors. In particular, this is to make sure the auditor is adequately qualified to review a company’s ESG credentials.
If your company might fall into this category, take note.