ESG pillars: three labels, many separate laws

ESG stands for environmental, social and governance, three groups of non-financial issues that investors, lenders, customers and regulators ask a company about.

The environmental pillar is about what the business uses and emits: energy, greenhouse gases, pollution, water, nature and materials.

The social pillar is about people: the company’s own workforce, workers in its supply chain, the communities its operations affect and the people who use its products.

The governance pillar is about how the company is run: the board, its committees and controls, how directors are paid, and how bribery and misconduct are prevented.

A UK company does not “comply with ESG”: it complies with SECR, section 54, the Code and the rest, and ESG is the name for the whole set.

The term itself, and its history, are covered on what ESG means; this page is about the pillars and the law under each.

The statutory social duties concern modern slavery, pay equality and, for the largest listed and financial companies, a statement on employees, social matters and human rights.

Modern slavery. Under section 54 of the Modern Slavery Act 2015, a commercial organisation that supplies goods or services and has total turnover of not less than a prescribed amount prepares a slavery and human trafficking statement for each financial year.

The amount is £36 million, set by regulation 2 of SI 2015/1833 rather than by the Act, and it counts the turnover of subsidiaries too (SI 2015/1833).

What the statement contains is largely the organisation’s choice: section 54(5) lists six areas it “may include”.

Gender pay gap. The Gender Pay Gap Information Regulations 2017 apply to an employer with 250 or more employees on the snapshot date of 5 April (regulation 1(2)).

It publishes six figures within 12 months of the snapshot date, on its own website and on the government’s, with a statement signed by a director; a failure is an unlawful act the Equality and Human Rights Commission can enforce.

Board diversity. A company in the commercial companies category states in its annual financial report whether it met three board diversity targets at a reference date, and publishes numerical data on its board and executive management (UKLR 6.6.6R(9)–(10)).

Employees, social matters and human rights. For traded, banking and insurance companies with more than 500 employees, section 414CB(1) puts these in the strategic report with the policies pursued and their outcomes.

The EU sorts this pillar more finely, into own workforce, value-chain workers, communities and consumers; customers asking about the last of those usually follow the EU standards, which is the subject of the ESG questionnaire.

One provision covers all three pillars in a single list.

The strategic report of a traded company, a banking company, an authorised insurance company or a company carrying on insurance market activity, with more than 500 employees, gives information on five matters “to the extent necessary for an understanding of the company’s development, performance and position and the impact of its activity”.

For each it describes the business model, the policies pursued and any due diligence, their outcomes, the principal risks and the relevant non-financial KPIs (section 414CB(2)).

Where it pursues no policy on a matter, section 414CB(4) requires “a clear and reasoned explanation” for not doing so — the nearest UK statute comes to a required ESG policy.

The list reaches only those four kinds of company: an AIM company or a high-turnover private company gives the climate disclosures but not the five matters.

And “traded” means any transferable securities on a UK regulated market, so listed bonds alone can bring a company in.

Searches for the “4 pillars of ESG” are almost always after a different framework.

The TCFD recommendations organise climate disclosure into four thematic areas — governance, strategy, risk management, and metrics and targets — with eleven recommended disclosures between them.

They describe how to report one topic, climate, and cut across ESG’s three pillars rather than adding a fourth.

What became of the Task Force itself, and where its recommendations still apply in the UK, is on TCFD.

The TCFD was set up by the Financial Stability Board in December 2015 and disbanded on 12 October 2023; its four areas live on as the core content of IFRS S1 and S2 and of UK SRS S1 and S2, and the eight Companies Act disclosures cover the same ground.

“The 7 principles of sustainability reporting” has no single owner either.

The seven most often meant are the TCFD’s principles for effective disclosure: relevant; specific and complete; clear, balanced and understandable; consistent over time; comparable; reliable, verifiable and objective; and timely.

GRI 1 sets eight reporting principles — accuracy, balance, clarity, comparability, completeness, sustainability context, timeliness and verifiability — and the GHG Protocol Corporate Standard sets five: relevance, completeness, consistency, transparency and accuracy.

Pick an issue — emissions, water, modern slavery, board diversity — and the panel says which pillar it sits under, which UK instrument, if any, requires a company to report on it, and which voluntary frameworks cover it.

“No duty names it” is a statement about reporting law, not about whether the issue matters: water and biodiversity have no general UK company reporting duty, and are still material for many businesses.

The frameworks themselves are compared on ESG frameworks in the UK.

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