UK ‘falling behind the EU on ESG standards’, MPs warn

That is according to a group of MPs, who are warning that the EU is now outpacing the UK in terms of delivering a joined-up approach to ESG disclosures.

Last year, the EU brought forward a new Corporate Sustainability Reporting Directive, mandating unified ESG disclosures from all large and listed companies. It covers almost 50,000 firms, who must produce their first aligned reports by 2025.

Moreover, the EU last year finalised its green finance taxonomy, defining which investments can be considered as ‘green’ or ‘transition-related’. The UK’s own version was due this winter but has been delayed and was not included in last month’s update to the British Green Finance Strategy.

More recently, the EU has outlined a new directive aimed at stamping out greenwashing, partly by phasing out ineffective and confusing certification schemes.

The All-Party Parliamentary Group on ESG has this week expressed concerns that the UK is lagging behind. A new report this week from the cross-party Group notes that fewer than ten MPs not associated with the Group have mentioned ESG in the past year in Parliament, speaking to a widespread lack of knowledge or passion among policymakers on the issue.

The report states that while the UK is “ideally placed to become the world’s ESG standard bearer”, it “will not assume global leadership without a more joined-up policy infrastructure that addresses the inherent difficulties in ESG while leveraging the tremendous assets and knowledge the country possesses, notably, its world-class regulatory expertise and the City of London.”

An overarching call to action in the report is the development of a single ESG strategy for the UK. This would bring together work already underway to improve reporting quality by clarifying standards, frameworks and disclosure rules. A starting point for developing the strategy, the report states, is a consultation of ESG data, to collect information on how data can be made more accurate and comparable.

Beyond the top-line strategy, the APPG’s report notes the importance of recognising that businesses of different sizes and sectors will have different ESG-related risks, negative impacts and chances to drive positive impact. It therefore recommends a sector-by-sector assessment, to be used to identify pathways to standardisation for different industries.

SMEs and skills

A common argument against ESG reporting is that it is a lengthy, complex and often expensive process that can be a burden on businesses.

The APPG’s report states that this burden is most heavily felt by SMEs, who may not have the in-house expertise and resource nor the ability to hire consultants that corporates benefit from. It calls for the Government to convene an advisory council of SMEs to co-develop its ESG strategy and to develop a specific ‘sub-strategy’ for smaller British firms.

Speaking of in-house expertise, the report emphasises that the green skills gap is not only being felt in low-carbon transition sectors such as energy and transport – there are also a lack of experienced ESG advisors and reporting experts.

The UK Government has repeatedly faced criticism for failing to update its skills strategy after legislating for net-zero by 2050 back in 2019. It has also neglected calls for a unified definition of a green job.

The APPG wants the SME advisory group to produce recommendations for developing a larger and more skilled cohort of UK-based ESG professionals to avoid a market proliferated with “cowboys”.

“My natural instinct is for the Government to intervene less, not more, but we have to acknowledge that ESG is a mainstream business function across the UK, encompassing businesses of all sizes,” said APPG chair Alexander Stafford, Conservative MP for Rother Valley.

“In an unregulated market, charlatan consultants can run riot, damaging businesses and undermining markets. This needs to be checked through Government-led solutions.”

The report notes that, even in the EU, Government policymaking on ESG is behind the curve of what leading businesses are doing on a voluntary basis. It argues that the UK has even more to do to catch up.