COP26 and what’s next for ESG reporting

Posted: 10/12/2021

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The coming and going of COP26 firmly focused the world’s attention on environmental matters last month. Leaders from more than 100 countries came together five years on from the Paris Agreement to update on plans and to increase ambitions to tackle climate change.

A key way to see how organisations are prioritising issues raised by COP26 and beyond is their environmental, social and governance (ESG) ratings and reporting. ESG matters continue to be a growing area of importance for the social housing sector and registered providers of social housing (RPs) are continuing to deal with the opportunities and challenges of demonstrating their ESG credentials.

Whilst the environment is just one part of the ESG puzzle, there is a time-pressured need for RPs to act as they race to meet the Government’s legally binding target of achieving net zero greenhouse gas emissions in housing stock by 2050. The investment needed to meet this target will be balanced against the need to source additional funding to help solve the current housing crisis by providing, maintaining and improving high-quality affordable housing.

This time last year, we considered the opportunities and challenges posed by ESG matters for RPs. We also discussed the challenges RPs face when juggling strategic choices, as set out by the Regulator of Social Housing (RSH) in its latest Sector Risk Profile. In this article we discuss how RPs can get their reporting requirements right.

ESG reporting and section 172 statements

For an organisation to effectively demonstrate its ESG credentials it must produce an ESG statement showcasing all of the good work it is doing in this area. We know that RPs are increasingly seeking to take advantage of the opportunities in the funding market and their unique ability to demonstrate their ESG credentials. By its very nature, social housing is delivering a desirable outcome in terms of social impact.

RPs must be able to demonstrate that they can fulfil the objectives of potential investors in a consistent and meaningful way, particularly in light of concerns about “greenwashing”. To provide some guidance in this area, the Financial Reporting Council (FRC) published a report in July titled ‘Reporting on stakeholders, decisions and section 172’. This sets out what investors and other stakeholders are looking for in relation to reporting on these areas and how companies can improve their reporting to better meet investors' needs.

The report also provides some tips on producing section 172 statements and best practice examples.

Whilst the requirement to produce a section 172 statement derives from the Companies Act 2006 and applies only to companies, it is arguable that all organisations, including community benefit societies, should consider the benefits of producing something similar. It will demonstrate how the board is acting in the best interests and promoting the success of the organisation. 

Scope for using the section 172 statement to showcase ESG credentials

So, what is a section 172 statement?

Section 172(1) of the Companies Act 2006 requires company directors to act in good faith and in a way most likely to promote the success of the company for the benefit of its members. They must take into consideration a non-exhaustive list of matters including the impact of the company's operations on the community and the environment.

Since 2019, large companies (and some other types of companies) have been required to produce a strategic report annually describing how the directors have dealt with the matters set out in section 172. This requirement has meant that companies are rethinking how they engage with their stakeholders, particularly in relation to ESG reporting matters.

The section 172 obligation and reporting requirements will apply to RPs or members of their groups that are registered companies and meet the definition of a large company. It will also apply to groups that have companies excluded from being 'medium sized', which will include public companies such as bond vehicles within group structures.

However, as mentioned above, it is arguable that all boards, regardless of whether your organisation must comply with the legal reporting requirement, should, in ensuring they act in the best interests of the organisation, have due regard to the long-term success of their organisation and the factors set out in section 172.

In today’s climate, ESG factors would of course need to be included in the considerations of determining what will promote the success of the organisation. The measure of success is often viewed as the financial success or the long-term increase in the value of the organisation, to which ESG factors will most certainly be relevant. This relevancy increases in light of the 2050 target and the growing availability of sustainability linked finance.

Tips from the FRC report

The FRC Financial Reporting Lab's report provides some useful guidance on how investors would like organisations to create their strategic report and in their section 172(1) statement. We know there are currently a number of barriers for organisations aiming to achieve an effective and efficient system of ESG reporting in a way that meets stakeholder demands (see our previous article discussing the FRC statement of intent on ESG challenges).

The report concludes that better section 172 (or similar) statements:

• do not only focus on stakeholder engagement, but also consider the other aspects of section 172;
• discuss principal decisions (linking to the long-term success of the company) and how stakeholders and other factors were considered in making those decisions;
• bridge information on stakeholders and decisions by considering them in a two-way approach, and incorporate both in the statement;
• can be a standalone and concise source of information; and
• fit into a connected narrative linking to the business model, strategy and how business is done (through consideration of the governance arrangements and culture) demonstrating how the organisation is progressing in its pursuit of its purpose and long-term success.

The report provides practical tips for approaching section 172 (or similar) statements, which include:

• consider whether the templates for board papers, agendas and minutes need prompts on all aspects of section 172 matters that are intrinsically linked to the success of the business;
• those responsible for drafting the statement should work closely with the board to facilitate drafting and better reflect the board's priorities and actions. It is ultimately for the board to ensure that the statement is an authentic reflection of its key considerations of the relevant factors during the year;
• the section 172 statement should reflect how the section 172 duty is met throughout the year, so it is worth considering gathering information throughout the year to compile the statement;
• consider where best to include the section 172 statement within the annual report so that it is clearly labelled and reflects links to strategy and other parts of the report as part of a connected narrative. There should be a correlation with strategic prioritisation; and
• consider appropriate cross-referencing where the section 172 statement links to various components of the annual report that provide more detail on highlights provided in the statement, and those sections then link back to the statement.

COP26 and updates

Whilst, to date, the onus has remained on individual organisations to interpret ESG requirements themselves, the social housing sector can take pride in its efforts to come together to formulate the Sustainability Reporting Standard for social housing, which was published in November last year. This standard provides a common framework that housing associations can use to report on their ESG arrangements and helps to tackle some of the barriers faced by many organisations when navigating the ESG waters.

To coincide with COP26, the announcement of the creation of the International Sustainability Standards Board (ISSB) was further welcome news in the fight to provide some consistency on reporting requirements and ensuring organisations can most effectively demonstrate their ESG credentials. One of the things that is particularly interesting and meaningful with the launch of the ISSB is that it is incorporating within it the Climate Disclosure Standards Board, the Carbon Disclosure Standards Board and the Value Reporting Foundation, showing a real attempt to harmonise the various requirements within this area.

The work that the ISSB carries out will need to target more than just the environmental ESG factors, albeit that these challenges are the most pressing issues faced by the world today as highlighted during COP26. The recent PwC’s 2021 Global Investor ESG Survey showed that whilst investors identified reducing greenhouse gas emissions as the top priority for companies, second on their list was worker health and safety, followed by improving workforce and executive diversity, equity and inclusion. These are very familiar issues that most, if not all, housing associations in the country and grappling with. There is a clear message that while climate is critically important, social issues are high up on the agenda. This has already been highlighted in various ESG-linked funding deals, which have included a wider range of factors such as gender pay gap and employee wellbeing.

Adding further weight, the UK Department for Business, Energy and Industrial Strategy (BEIS) announced on 28 October 2021 that new climate-related disclosure requirement proposals would be introduced. This will require publicly-listed companies, large private companies and LLPs, as part of their strategic reporting, to provide information in accordance with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). These proposals will be contained in the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021 (Regulations) and would amend the Companies Act 2006.

If passed into law, the Regulations will be effective from 6 April 2022. Companies and LLPs subject to them will need to comply with the new reporting requirements for accounting periods starting on or after 6 April 2022.

The Regulations propose mandatory disclosure of material information in all four of the TCFD’s core categories: governance, strategy, risk management, and metrics and targets. Companies will be required to make climate-related financial disclosures in the non-financial information statement that forms part of the strategic report and is to be renamed the non-financial and sustainability information statement. LLPs will be required to report climate-related financial information in either the non-financial and sustainability information statement that forms part of the strategic report, or the energy and carbon report that forms part of the annual report.

We await the final details of the reporting requirements and BEIS is expected to publish a more detailed explanatory note soon. Whilst most RPs may not be caught by this new reporting requirement, members of their group structure may be, and this is just the latest update in a growing drive to improve reporting and increase accountability on ESG requirements.

Conclusion

Sustainability-linked finance deals continue to feature in recent sector news. Just last month social housing bond aggregator MORhomes completed its first sustainable bond through its new sustainability framework, with Cornerstone Housing securing £19.3 million. Social housing bond aggregator Blend has converted a £75 million issue on behalf of GreenSquareAccord into a sustainability bond, whereby proceeds are required to be allocated to projects that meet green targets.

As more and more housing associations launch ESG reports and frameworks, including Hyde, Optivo, Clarion, it becomes clear that this is an area that the sector cannot shy away from. It is also an area that presents significant opportunities linked to the existing priorities of the sector.

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