Welcome to Teneo's UK ESG Insights. Each fortnight, we’ll help you to cut through the noise around ESG by exploring some key market developments and the implications for companies.
Is Audit and Corporate Governance Reform Finally on its Way?
A draft audit reform bill, after much speculation that it wouldn’t be included in the Queen’s Speech, was incorporated within the supporting papers issued alongside the speech. According to that document, the main elements of the Draft Audit Reform Bill could include:
- Providing new measures to open up the audit market, including a new approach of managed shared audit in which challenger firms undertake a share of the work on large-scale audits. This it is hoped will improve the quality and usefulness of audit and boost resilience, competition, and choice in the audit market.
- The establishment of a new statutory regulator, the Audit, Reporting and Governance Authority, that will take over the responsibilities of the Financial Reporting Council, promoting the interests of investors, other users of corporate reporting and the wider public interest.
- The new regulator will also be given effective powers to enforce directors’ financial reporting duties, to supervise corporate reporting, and to oversee and regulate the accountancy and actuarial professions.
- Bringing the largest private companies in scope of regulation in the definition of ‘public interest entities’, recognising the public interest in companies of this size.
- Reforming the regulation of Insolvency Practitioners to give greater confidence to creditors and strengthening corporate governance of firms in or approaching insolvency so that ‘asset stripping’ can be more effectively tackled.”
The published documentation also suggested that the Government’s response to the consultation on the BEIS White Paper will be “published shortly”. It is hoped that the response will make clear the steps the Government is planning for each of the proposals.
- Teneo takeaway: While many stakeholders will be pleased to see the Government set out its commitment to reform with the draft bill announced, some uncertainty remains as to the detail and timing of the bill. Indeed, some commentators have observed that it is highly unlikely to feature within the 2022/23 Parliamentary sessions but at least its trailing will enable some consultation and pre-legislative scrutiny to commence.
EU Lawmakers Seek to Expand Green Bonds Rules
This week, the EU Parliament’s Economic and Monetary Affairs Committee announced a series of proposals to create more stringent rules for the EU Commission’s planned Green Bond Standard (EuGB). The new rules would increase regulatory standards and require companies allocating green bond proceeds to finance nuclear energy or fossil gas related activities to add a statement on the first page of the EuGB factsheet.
- Teneo takeaway: The proposals are an attempt to improve transparency and reduce greenwashing by creating a ‘gold standard’ for how businesses and public authorities use green bonds. These new proposals significantly widen the scope of EU regulation and require complete alignment with the EU’s taxonomy regulation which legislates that green bonds are not used to fund activities that harm people or the planet. The EU Commission’s inclusion of legal recourse can also be viewed as a means to increase accountability for EuGB issuers if the value of a green bond falls due to a failure to comply with the rules of the law.
COP26: The Aftermath
It is safe to say that, with the war in Ukraine and the worsening oil crisis, COP26 has fallen down the news agenda. To mark six months since the signing of the COP26 treaty, Alok Sharma was in Glasgow where he announced that the time left to take decisive action was closing fast and a failure to so would be an “act of monstrous self-harm". For decades, scientists have warned of the dangers of a global temperature rise if 1.5°C above pre-industrial but the latest research shows that there is only a small chance of meeting this threshold and that even if global governments fulfil all their climate pledges, global temperature rise is likely to be closer to 2°C.
- Teneo takeaway: The Russia-Ukraine war and energy crisis should be seen as the impetus to act to mitigate the West’s over reliance on Russian oil and gas from. The energy crisis would have been less acute without this over reliance and if the transition to green energy begun earlier. While there have been some calls for the move to net zero to take a back seat to enable the UK Government to address the cost of living crisis, according to CEN data, 53% of those polled want the Government to do more to tackle climate change. It is also up to businesses to take a tougher stance as support from the general public is not enough. Like with all crises, some businesses will thrive, but even those that are struggling should use this as an opportunity to develop their climate policies and apply pressure on the Government to take action on the pledges made at COP26.
UK Unemployment Hits Lowest Levels in Nearly 50 Years...
This week, the Office for National Statistics (ONS) reported that unemployment levels had fallen to 3.7% in the first three months of 2022, exceeding economists’ predictions of little change or no improvement. Instead, the UK now has more job openings than unemployed people for the first time since records began, with 1.29 million vacancies.
- Teneo takeaway: But does this mean the nation is becoming more prosperous? Some may argue that the reality is actually far from it as employees are struggling to secure wage increases in line with inflation despite this apparent short supply of workers, which in theory should act as a bargaining chip. Companies have even resorted to offering more and even new benefits, such as cutting summer working hours, in a bid to retain and attract employees amidst the great resignation. While the average employee experienced a 4.2% increase in weekly earnings in the first three months of 2022, the ONS’ data reveals that this is in fact a real term fall of 2%. This is because inflation climbed above 9% in April after a 54% rise in energy tariffs took effect and is set to hit double-digits this year. On top of stagnating wages, workers are also dealing with the burden of increased taxes as national insurance contributions rose to 13.5%, which does little to ease fears over the growing cost of living. This latest employment data should therefore be taken with a grain of salt as even though it appears positive, economic forecasts are still quite bleak with the Bank of England unofficially predicting a recession to hit by the end of the year.