The UK needs to develop a comprehensive ESG strategy in order to regain its position of leadership in sustainable finance, according to the All-Party Parliamentary Group (APPG).
The observation is part of a report by the cross-party group titled ‘Defining ESG,’ which examines a troubling trend among British policymakers in relation to environmental, social, governance (ESG).
The report was based on roundtable discussions involving the All-Party Parliamentary Group (APPG) – a forum of MPs and Peers that work together on a cross-party basis to strengthen the capital’s voice in Parliament. It was supplemented by input from the group’s Advisory Board and secondary research.
Alexander Stafford, chairman of the All-Party Parliamentary Group on ESG, expressed his hope that the report would “address the common confusions around ESG” and “give clarity of purpose” on how businesses can deliver public goods through the adoption of ESG frameworks.
The report recognises the UK government made a powerful statement to the international community by announcing mandatory climate reporting for larger companies under the Taskforce for Climate-related Financial Disclosure (TCFD).
However, it highlights a key limitation of the TCFD climate disclosures, which primarily focus on environmental considerations rather than social and governance aspects of sustainability.
Despite the UK’s strong stance at COP26, the report indicates that its reputation has suffered in the aftermath, as the country has struggled to keep up with the European Union’s progress on ESG initiatives.
The report notes that while the UK has missed self-imposed deadlines for both the Green Taxonomy and the revised Green Finance Strategy, with the latter being published only in March 2023, the EU has made several strides forward in the sustainability space. These developments suggest that the UK must take swift and decisive action to ensure that it remains at the forefront of ESG progress and maintains its reputation as a leader in this critical area.
European progress
In the last year, the EU introduced the Corporate Sustainability Reporting Directive (CSRD), which requires all large and listed companies, around 50,000 firms, to provide ESG disclosures.
The EU has also pushed forward its EU Green Taxonomy, a crucial component of its effort to promote green finance by establishing clear labels that clearly identify investments as either “green” or “transition-related.” The UK has been working on its own version of a green taxonomy, which was originally set to be released this winter before being postponed. The taxonomy is now expected to be open for consultation in Autumn 2023.
Finally, it has proposed a new directive called the Green Claims Directive aimed at tackling the issue of greenwashing. The directive outlines clear criteria for companies to substantiate their environmental claims and labels, requiring an independent and accredited third-party verifier to validate them.
Recommendations from the report
The group calls for the government to create a UK-based ESG strategy that can use ESG to its full potential. The strategy should unify ongoing efforts to enhance reporting quality by establishing consistent standards, frameworks, and disclosure rules, while complementing the existing policies and strategies.
To kick off development of the strategy, the report recommends conducting a consultation on ESG data to gather insights on improving data accuracy and comparability, a commonly cited hurdle in the adoption of ESG practices. By addressing this issue, the UK Government can take a crucial step towards establishing a strong and credible ESG framework that can benefit stakeholders across the board.
