New EU and UK Environmental, Social and Governance Regulations: Intricacies and Implications
Competitiveness in business is no longer about the simple bottom line. The only unregulated, swashbuckling capitalism of today is in completely unregulated businesses like the illegal drugs trade. A new raft of regulations are coming into force that will make a company’s non-financial behaviour critical to competition – the EU’s Corporate Sustainability Reporting Directive (CSRD) and the UK’s Sustainability Disclosure Standards (SDS). Both will inform stakeholders and customers as to an organisation’s environmental and social behaviour, which in turn will lead to a new direction in which they can compete.
New EU/UK regulations and what they mean
The EU developed its new CSRD regulations in parallel to the development of the United Nations International Sustainability Standards Board (ISSB). It is well ahead of the UK, whose Department for Energy Security and Net Zero will publish guidance (the SDS) in July 2024.
EU and UK based large publicly listed businesses will have to comply immediately, with new reporting requirements for 2024 to be reported in the financial year 2025. The approximately 12,000 companies have had to comply under 2019 legislation, the Non Financial Reporting Directive (NFRD) and its equivalent raft of regulation in the UK. Under the CSRD, 38,000 more companies will have to comply at some stage:
An insight into climate reporting regulation
Where the UK is concerned, the government has indicated that the new regulation will not differ greatly to the UN ISSB reporting guidance. The EU’s is very similar too, though there will be small differences. Broadly there are four precepts and seven reporting standards:
Precepts:
Reporting standards
Disclosure should:
All of this will have to be sewn into company annual reports, whether Companies House filings or the documents published annually on their websites.
Where the UK differs to the EU is that SMEs will likely be excluded altogether, so the regulation is likely only to apply to large businesses, defined as having more than 250 employees or a turnover of more than £36m. Even so, logistics companies like Evri and the Culina Group will have to report when previously they did not have to. In the EU, family-owned logistics companies Fiege Logistik and Geis Group will have to comply, both of which have revenues of €1.5bn or more.
Implications for business
At the outset I stated that this has positive benefits. There will be a whole new level at which businesses can compete – competition to be the cleanest and greenest logistics company is no bad thing. As Scope 3 emissions become an issue, so this could impact how suppliers are selected, and a heavily polluting but cheaper company might lose out over a more expensive but cleaner one.
On the ground though, with the metrics and governance required, businesses new to this will already have had to hire teams to measure and present such data. As indicated above, the new regulations will apply from the board down to the ground. Glossy waffle, that infests so many sustainability reports, will be a thing of the past as ESG becomes an important focus for all companies involved. Greenwashing will be a thing of the past.
Stakeholder implications
As an analyst at Transport Intelligence I look closely at ESG data and reports. From 2025 my life will be so much easier! I’ll hit the appendixes and risk management sections and harvest the data in half the time I do today. Potential investors, client companies and end customers will be able to make quick judgements as to trends and efforts to tackle climate change. Evri will be directly comparable to DHL Parcel UK, and in just moments.
Institutional investors and hedge funds will be concerned about their climate impact. A dirtier company might have less interest from these financial institutions than a cleaner company, and we’re not just talking of a potential investor in cycle couriers Zedify but large carriers too.
Weaknesses to regulation
There are weaknesses to both the EU and UK’s regulations – Zedify is too small to be forced to comply with these regulations. The European Commission did consider forcing all SMEs to comply but the cost proportionate to the size of the companies involved could have crippled them. A large company will spend much less per € of revenue than a mid-sized company on complying with the same regulations.
Where these exceptions are given, there are implications for the climate. By far the majority of businesses in the EU and UK will not be affected simply because they are too small. A classic example is the owner-driver hired by Evri or Amazon to do deliveries. Thousands of these owner drivers at least equal the size of the fleets of FedEx, UPS and DHL that ply the EU and UK’s roads. They will not be forced (unless due to a change in contracting company policy) to report or change their ways.
In the face of the generalised economic malaise that has hit Europe, there has been a pushback against climate regulation. Last week the European Commission instructed the European corporate reporting lab EFRAG not to introduce sector specific reporting to eight industries including those in road transport for two more years. Again, the loser here will be the climate, with the climate once again taking second fiddle to the economy.
Glass half empty or full?
In 2023 it was widely reported that global temperatures had already breached the much warned about 1.5ºC barrier. Fires raged across the Americas, Europe and Asia in summer and typhoons did double loops across the Pacific and Indian Oceans. No one is escaping climate change, and it is high on the mind of stakeholders from the newly burned out holiday home owner in Greece to institutional investors who have to shoulder losses to climate related problems.
The term ‘bureaucracy’ is often used as an 11 letter expletive. The expletive in question was used to good effect in Brexit campaigns. But even the supposedly bureaucracy free UK is affected by new regulations to do with climate change. It is beholden upon logistics businesses large and small to look at ESG not just as another example of the expletive but as a chance to compete. Could Culina be greener than DHL Supply Chain one day? It might just win them business if they try!
Author: Richard Shrubb
