Sustainability - An important factor in running a successful business

This article provides an overview of the current and future regulations surrounding sustainability along with some of the wider benefits of sustainable business practices.

• Streamlined Energy and Carbon Reporting (SECR)

SECR requires quoted companies to report on annual greenhouse gas (GHG) emissions from activities the company is responsible for and the annual emissions from the purchase of electricity, heat, steam or cooling for the company’s use. Large companies and LLPs are required to report on their UK energy use covering gas, electricity and transport at a minimum. There is an exception for low energy users exempting them from the requirement to report on their emissions. All SECR reports must contain energy efficiency measures taken to improve the energy efficiency of the business.

The goal of SECR is to increase awareness of GHG emissions and to encourage energy efficiency action to be taken to reduce emissions whilst increasing transparency around environmental impacts and actions.

• Energy Savings Opportunity Scheme (ESOS)

ESOS is a mandatory energy assessment scheme requiring large UK undertakings (>250 employees or has an annual turnover of >£44m and an annual balance sheet total >£38m) to carry out ESOS assessments every 4 years to audit the energy used by their buildings, industrial processes and transport with the intention of identifying cost-effective measures to save energy and achieve carbon and cost savings.

• Taxes

There are currently various taxes in place to encourage more sustainable behaviour such as plastic packaging tax and landfill tax which are intended to deter the use of unsustainable products and practices.

In June 2023, the International Sustainability Standards Board (ISSB) launched two new sustainability reporting standards which are expected to be brought into UK regulations requiring more standardised reporting around sustainability and climate related disclosures. The implementation has been delayed until 2025, with a decision expected to be made by the end of March.

IFRS S1 will require disclosures of sustainability related risks and opportunities likely to impact the entity’s prospects. Reporting must cover the governance processes, controls and procedure used, the strategy for managing, processes used to monitor and the entities performance in relation to sustainability related risks and opportunities.

IFRS S2 will require disclosures of climate related risks and opportunities including physical and transition risks.

It is currently uncertain as to the scope of the new regulations but a consultation period is expected to determine whether the new policies should apply to SME’s.

So, if sustainability reporting requirements only apply to large entities, why should SME’s be taking note?

Supply chain pressures – large entities and public bodies falling under the scope of reporting regulations are looking for ways to reduce their carbon emissions. It is becoming more common for business to look at their supply chain to ensure it is aligned with their sustainability goals.

Future regulations - The Prime Minister has said that Britain would cut greenhouse gas emissions by 81% by 2035 at COP29 which means regulations will likely widen in scope more rapidly than we have seen to date. Sustainability reporting regulations are evolving and will continue to do so the closer we get to the 2050 net zero target. Businesses who put sustainability high on their agenda even before it becomes a requirement will be better equipped to comply with future regulations.

Cost savings - having awareness of your carbon footprint can help to identify areas of high emissions where improvements can be made. Any reductions in emissions will likely come hand in hand with cost reductions either directly, through waste reduction or lower costs, or by new efficiencies. Being ahead of the curve in implementing more sustainable practices will mean businesses are better equipped when facing future consequences of climate change on the environment.

Reputation - sustainable practices are becoming more of a priority to employees and customers. The competitive edge gained by having sustainable practices can help attract high calibre staff, maintain and attract new customers. Furthermore, cost savings generated from using more sustainable options can be passed on to the customer to offer more competitive prices.

Finance – a UK green taxonomy is in the works which will provide guidance on what constitutes a sustainable investment. This will result in investors looking for businesses with established sustainable practices. It is also possible to obtain green loans from banks for green assets and projects with cheaper interest rates.

Having sustainable practices is essential for longevity in successful businesses. The sooner businesses start their journey to become more sustainable, the more robust they will be in facing the future challenges of climate change and transition risks as regulations begin to have a broader scope.

For more information on this topic please contact me or your usual Albert Goodman contact.