ESG Reporting Requirements in the UK: Comprehensive Guide on ESG Reporting Basics

According to the Capterra UK Survey, 48% of British SMEs pursuing environmental, social, and governance goals don’t know where and how to start. Meanwhile, recent ESG regulatory updates put large corporations and SMEs within their supply chains under significant pressure to report sustainability performance.

This guide will help you learn about mandatory and voluntary ESG reporting standards for UK SMEs. Discover ESG reporting requirements, recent updates to British ESG regulations, and non-compliance consequences. Learn about ESG challenges and check helpful tips to optimize ESG reporting.

What are ESG reporting requirements?

ESG reporting is the disclosure of business performance in ESG areas:

• Environmental (E). It encompasses the company’s impact on climate change, biodiversity, and natural resources. These factors include greenhouse gas emissions (GHG), waste management, water pollution, etc.
• Social (S). It regulates how companies interact with employees, customers, stakeholders, shareholders, and communities. Social factors include employee well-being, inclusion and diversity, human rights, pay equity, and customer management.
• Governance (G). It defines how companies approach decision-making. Governance factors include board succession planning, executive compensation, board composition, shareholder rights, responsible investment policies, risk management, and work ethics.

UK businesses must follow ESG reporting requirements to comply with existing ESG standards.

ESG reporting requirements regulate the contents, deliverance, and specifications of ESG reports by different types of businesses.

ESG reporting requirements in the UK

The UK government exercises ESG compliance through ESG regulations, directives, and initiatives for UK-registered companies. The UK ESG regulations can be mandatory, voluntary, and comply-or-explain.

Comply or explain approach means the company should clearly explain why it does not comply with the requirements and provide alternative mechanisms to overcome related issues. Existing UK ESG regulations affect mainly publicly-traded companies, UK premium listing companies, large private companies, and limited liability partnerships with 500+ employees and £500+ million turnover.

Combined with SOX compliance in the UK financial reporting reform, ESG regulations aim to make businesses more sustainable, responsible, and valuable to the communities they serve. Here is the list of mandatory disclosures and ESG regulations affecting large companies:

• Disclosure Guidance and Transparency Rules (DTR).
• UK Corporate Governance Code (UKCGC).
• Companies Act of 2006.
• Modern Slavery Act of 2015.
• Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022.

UK ESG reporting requirements and guidelines for small businesses

Small (0-50 employees) and medium-sized businesses (50-249 employees) together comprise 99.9% of the UK business population, while medium-sized enterprises alone account for only 0.7%. Additionally, individual entrepreneurs account for 74% of small businesses. In total, there are 5.5 million small and midsize enterprises (SMEs) with an average annual turnover of £386,173 per entity. 

Since UK SMEs have fewer than 500 employees and less than £500 million annual turnover, they are not subject to most climate-related disclosures and ESG regulations. However, several ESG bills, standards, and initiatives still apply to SMEs.

ESG regulations for small businesses	Compliance for SMEs	Reporting requirements link	Effective date
The Task Force on Climate-Related Financial Disclosures (TCFD)	Mandatory	TCFD report	2022-2025
The UK Stewardship Code 2020	Comply or explain	Review of Stewardship Reporting 2022	January 1, 2020
The Climate Change Act (CCA) of 2008	Voluntary	Environmental Reporting Guidelines	November 26, 2008

You can check the detailed ESG requirements and reporting guidelines for small businesses below.

The Task Force on Climate-Related Financial Disclosures (TCFD)

The Task Force on Climate-Related Financial Disclosures (TCFD) is an ESG initiative that helps businesses disclose financial data related to climate impacts.. TCFD reporting is mandatory for SMEs who are asset owners, asset managers, and insurers. Here are the key reporting requirements for small businesses taken from the TCFD report:

• Disclose board directors’ and  executives’ role in managing climate-related risks and environmental improvements.
• Identify short, medium, and long-term actual and potential impacts of environmental risks and sustainability opportunities.
• Describe business resilience in different climate change scenarios, including a 2°C global temperature increase.
• Describe methods and approaches to climate risk assessment and identify climate management targets.
• Make carbon reporting, including scope 1, 2, and 3 GHG emissions.

UK Stewardship Code

The UK Stewardship Code works on a comply-or-explain basis. It targets asset managers, asset owners, and services providers, including pension schemes, insurers, foundations, investment consultants, and advisory firms. 

The UK Stewardship Code focuses on responsible capital management that creates long-term customer value. The UK Stewardship Code has the following reporting requirements:

• Implement stewardship principles into business activities.
• Document and describe stewardship activities and their outcomes across all assets and geographies.
• Provide annual reports on stewardship activities for the past 12 months.

Climate Change Act (CCA)

The Climate Change Act of 2008 (CCA) is the core environmental regulation aiming to significantly reduce GHG emissions by 100% of the 1990 level by 2050. This approach also determines carbon budgeting (max amount of emissions in five-year periods) nationwide. 

Although CCA is a nationwide initiative that applies to all UK businesses, only large companies are subject to GHG (greenhouse gas emissions) reporting. 

Section 85 of the CCA requires companies to provide a director’s report on climate change data specified in the Environmental Reporting Guidelines. Small businesses and medium-sized enterprises can report the following info voluntarily:

• Progress against GHG emission reduction targets, including energy efficiency improvements, issues, and setbacks.
• Environmental expenditures, including production processes, recycling facilities, and environmental investments.
• Environmental management systems, according to ISO 14001 or EMAS.
• Environmental risks and opportunities.

Recent updates to ESG reporting requirements

Here are the latest updates to ESG regulations applying to UK companies:

• TCFD became mandatory for large UK businesses and financial institutions, including occupational pension schemes, starting on April 6, 2022. SMEs planning to scale should consider adapting their ESG frameworks to TCFD as early as possible.
• The Financial Conduct Authority (FCA) will finalize UK Sustainability Disclosure Requirements (SDR) in Q3 2023. This initiative targets financial market participants (FMP), financial advisors, and environmentally-aligned funds of all sizes. It reflects European ESG reporting requirements, including Sustainable Finance Disclosure Regulation (SFDR) targeting the same business categories. It may also create a UK Green Taxonomy focusing on net zero targets.
• The UK government will prepare Sustainability Disclosure Standards (SDS) in 2024 to keep up with the EU sustainability reporting standards. UK SDS will align with the EU Corporate Sustainability Reporting Directive (CSRD). It will target large UK businesses, premium listed companies with 500 employees and a £500 million turnover, and companies under the Modern Slavery Act.
• ESG may soon become a part of the fiduciary duties of directors in the UK. If approved, the climate change lawsuit against Shell’s directors will become the first case when board directors are sued for fiduciary duties violation regarding ESG matters.

Non-compliance consequences

Non-compliance penalties apply under mandatory ESG bills and directives. Small UK businesses under TCFD can face non-compliance penalties of £5,000 – £50,000 per breach.

SMEs will not face penalties for non-compliance with voluntary disclosures. Also, penalties under mandatory ESG reporting standards for larger companies do not apply to SMEs since SMEs are beyond the radar of such regulations.

Tips to optimize ESG reporting in the UK

According to the ID Crypt Global report, only 12% of SMEs in the UK implement ESG practices and engage in ESG reporting. 

The main roadblock toward ESG comes from insufficient resources. Thus, sustainability ratings can cost $220,000 to $480,000 per entity annually, which would take 40% – 87% of an average SMEs annual turnover.

However, SMEs willing to build ESG reporting into the business strategy may adopt the following approaches to optimize ESG reports and reduce related costs.

Prioritizing ESG reporting

Small business owners don’t need to consider all non-mandatory ESG bills and frameworks. Instead, SMEs can prioritize and report selected ESG factors:

• Choose an ESG reporting framework based on your business model and relevant material ESG issues.
• Pick ESG factors you can realistically improve within your company’s operations.
• Report on selected ESG factors and key performance indicators within chosen ESG frameworks, such as TCFD or complementary Global Reporting Initiative (GRI).

Streamlining data management

It may be challenging to measure, collect, and analyze ESG data. However, small businesses can take the following steps to streamline ESG data management:

• Define relevant ESG metrics, such as GHG emissions and waste volumes.
• Map sources for ESG metrics, such as financial records, supplier records, or waste collection documents. 
• Automate and centralize data collection using sensors, data repositories, or APIs.
• Assign ESG reporting teams to collect, analyze, and prepare ESG disclosures.

Leveraging ESG technology

SMEs can optimize ESG efforts with enterprise management software like board portals. A board portal is a secure workspace for business owners, board directors, C-suite employees, and senior managers. You can use it to optimize your ESG efforts in the following ways:

• Arrange meetings. Build effective meeting agendas, plan meetings using calendars, track attendance, record meeting minutes, and view board materials in one system.
• Manage ESG materials. Store and organize ESG data in a synced centralized repository with 24/7 access for authorized members. Compile ESG data into well-structured board books and reports using built-in board pack creation tools.
• Collaborate on ESG efforts. Share board books between members and highlight ESG matters using built-in discussion comments. Survey board members, vote on critical decisions, and sign ESG reports in the board portal.
• Ensure security and transparency. Use role-based access, two-factor authentication, digital rights management tools, 256-bit file encryption, and audit trails to ensure industry-leading data security.

Get a free board meeting agenda template for UK businesses and learn about the best meeting agenda practices.

You can also significantly reduce ESG reporting costs by transferring all ESG-related workflows to a board portal that costs as low as a few hundred pounds per month. At Board-room.org, you can compare the top board software providers and choose the one meeting your ESG requirements and financial needs.

The bottom line

• Most UK ESG regulations are mandatory for public companies with 500 employees and a £500 million turnover, large private, and premium-listed companies.
• Small businesses in the UK must comply with TCFD reporting. But they are not subject to mandatory reporting under most ESG standards.
• Most UK SMEs lack the resources to follow ESG initiatives and frameworks while facing significant pressure from corporations and communities.
• Small businesses can prioritize relevant ESG frameworks, start with basic ESG factors, and use enterprise management software to optimize ESG reporting.
• UK SMEs will be subject to stricter regulations in 2024, 2025, and beyond.

FAQ

What are ESG reporting requirements UK?

ESG reporting requirements define the scope of ESG data reported under existing ESG regulations in the UK.

Is ESG a regulatory requirement in the UK?

ESG reporting is a regulatory requirement for most large UK companies with 500 employees and a £500 million turnover.

Is ESG disclosure mandatory in the UK?

ESG disclosure is mandatory for UK businesses that fall under following regulations:

• Disclosure Guidance and Transparency Rules (DTR).
• UK Corporate Governance Code (UKCGC).
• Companies Act of 2006.
• Modern Slavery Act of 2015.
• The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022.
• The Task Force on Climate-Related Financial Disclosures (TCFD).
• UK Stewardship Code.
• Climate Change Act (CCA) of 2008.

Do SMEs need to report ESG?

• UK SMEs who are asset owners, asset managers, and insurers must comply with the Task Force on Climate-Related Financial Disclosures (TCFD).
• In 2024, UK SMEs will report ESG under the UK Sustainability Disclosure Requirements (SDR) if they are financial market participants (FMPs), financial advisors, and environmentally-aligned funds. Other ESG regulations are voluntary for UK SMEs.