ESG in business: what’s on the horizon for 2024?

Farrer & Co’s experts set out their key environmental, social and governance (ESG) themes for our business clients for the year ahead.

For businesses that are owners or occupiers of real estate:

• Future proof your building: After the UK Government’s recent decision not to tighten energy efficiency standards for domestic premises, we don’t know quite what to expect for commercial property in 2024. However, regardless of the uncertainty about the future statutory framework, businesses should assess the energy efficiency of the buildings they own or occupy, given the impact on a building’s performance and operating costs and on its market value, rental value and rental viability. Where necessary, businesses should seek advice on the costs, responsibility, and timescales for carrying out energy improvement works.
• Consider sharing your data: The UK Green Building Council estimates that 25 per cent of the UK’s total greenhouse gas emissions are attributable to the built environment, and quality data is vital in the drive to decarbonise buildings. Farrer & Co has partnered with the British Property Federation on the new research the BPF has commissioned from Savills to investigate plugging the net zero data gap. The recent EU Corporate Sustainability Reporting Directive (CSRD) has added to the mandatory data reporting requirements imposed on businesses. While various businesses have voluntarily published their ESG data, an increasing proportion of property owners and occupiers will be required to publish information about their ESG performance. 2024 is likely to see more data sharing obligations imposed on landlords and tenants in leases as the industry recognises that sharing information and working together is crucial to improving energy performance in buildings.
• Embrace greener leases: “Green” lease provisions promote the management and improvement of a building’s environmental performance and impact by its landlord and tenant. With the recent launch of an updated industry baseline for green provisions, the Better Buildings Partnership’s new digital 2024 Green Lease Toolkit, businesses are likely to see more of a market focus on green leases in 2024.
• The year to retrofit? For some years, there has been an intense debate over whether retrofitting or refurbishment has the better ESG credentials. The proposed razing and redevelopment of the M&S Oxford Street building last year became a flagship planning application for the debate. Michael Gove’s decision to refuse consent has been billed as a watershed moment, which reaches beyond Oxford Street to impact the real estate industry’s role in decarbonising the economy. There is likely to be greater scrutiny and justification needed for redevelopment proposals this year.
• Give back to nature: 2024 brings the delayed introduction of the mandatory 10 per cent Biodiversity Net Gain requirement for (most) planning consents. The aim behind Biodiversity Net Gain is to improve biodiversity and ensure that development results in more or better quality natural habitat than there was before. The requirement will apply from 12 February 2024 for major developments and from April 2024 for small sites.
• Bring on the ESG benchmarks: There has previously been a shortage of industry recognised benchmarking tools for ESG credentials. The BREEAM Certification (Building Research Establishment Environmental Assessment Methodology), mainly used for new builds, is the oldest and arguably best-known method of assessing, rating and certifying a building’s environmental sustainability. However, GRESB (the Global Real Estate Sustainability Benchmark) is growing in popularity, following its establishment in 2009, it provides companies with a score and ranking based on their ESG performance. Other benchmarks like NABERS and Wired Score are becoming more widely used. In the coming year, businesses are likely to demand more ways in which to accurately measure the ESG performance of a building, assessing a combination of energy use, water consumption, emissions, waste, and social and community impact.

For businesses monitoring their ESG commitments:

• Beware of greenwashing: Watch out for tougher sanctions aimed at organisations who exaggerate their green credentials (“greenwashing”). Under the Consumer, Competition and Digital Markets Bill (Bill), which is currently progressing through the House of Lords, the Competition and Markets Authority will be given direct enforcement powers against infringing companies. The powers will include imposing fines of up to 10 per cent of their annual turnover, and criminal penalties for individuals engaging in misleading commercial practices. The Bill doesn’t refer to greenwashing claims directly, but it covers misleading claims which result in a consumer taking a transactional decision which they would not have taken but for that claim.
• Focus on your supply chains: We expect to see organisations increasingly focusing on their suppliers to help them meet ESG targets, with more due diligence, and negotiations over contractual obligations on monitoring and reporting of sustainable practices. For many organisations these additional compliance questionnaires will be time-consuming and burdensome. Some companies are turning to generative AI tools to automate their completion and ensure they are compliant, though whether they will be accurate enough remains to be seen. Speaking of AI…
• Approach AI with caution: Conversations around AI will continue to dominate in 2024. As AI is deployed in more varied ways, organisations must give thought to its impact on ESG factors. When implementing new AI technologies within an organisation, senior management should consider whether the technology aligns with the company’s ESG ambitions, complies with existing policies, and whether those policies take account of the use of AI. Data protection is a particular risk factor when training a generative AI tool, and organisations should seek legal advice to ensure this is properly governed. In addition, the high energy consumption required to run these tools will make meeting sustainability targets that much harder.
• Get ready for a new level of ESG reporting: The CSRD is set to transform the landscape of ESG reporting. Almost 50,000 companies will be subject to mandatory sustainability reporting, including non-EU companies which have subsidiaries operating within the EU or are listed on EU regulated markets. While the reporting requirements will initially apply to publicly traded and large privately held EU companies, small and medium-sized businesses and non-EU companies that meet certain requirements based on revenue and presence in the EU will also be included in the reporting obligations. While originally due to be introduced this year, a delay until 2026 has recently been announced, to provide the relevant companies with adequate time to prepare for the new obligations. It is worth noting that even those without direct reporting obligations may be asked for information by investors, suppliers, or customers. Over the next year, we therefore expect to see more SMEs preparing a plan not only to report, but also to improve their overall ESG performance.
• Ensure compliance with the Corporate Governance Code 2024: In January this year, important changes were made to the Corporate Governance Code (Code). The key amendment focused on internal controls eg additional disclosure requirements for annual reports and accounts and the need for a declaration by the board as to the effectiveness of those controls. The new Code will apply to financial years commencing on or after January 2025, apart from Provision 29, which will come into effect in January 2026 and will require companies to carry out, at least annually, a review of the effectiveness of all material controls, including financial, operational, reporting and compliance controls, and to describe in the company’s annual report how the board monitored and reviewed such frameworks.
• Prepare for fundamental changes to B Corp Certification: As B Corp scepticism rises, B Lab (the verifying body in charge of B Corps), is in consultation to introduce fundamental changes to its certification by moving away from the current 80-point threshold and introducing a mandate for specific areas of change within businesses. The change is said to reflect the intensifying climate crisis and more rigorous regulatory landscape. Current B Corps will need to be recertified under the new regime, the second consultation of which launched last month. The latest of the draft standards and accompanying survey can be found here, and from March 2024 onwards, input received during the second consultation will be considered for inclusion in the next version of the standards and will be shared with B Lab’s Standards Advisory Council ​​and Board of Directors. Watch this space for further guidance, although no company will certify or recertify before 2025…

For businesses as employers:

• Look out for new legislation: Last year, we provided some key updates on employment-related legislation that we expect to come into force throughout 2024:
  
  
  • Family-friendly legislation: A variety of family-friendly legislation including the Carer’s Leave Regulations 2024, the Maternity Leave, Adoption Leave and Shared Parental Leave (Amendment) Regulations 2024, and the Paternity Leave (Amendment) Regulations 2024 w be coming into effect on 6 April.
  • Worker and Agency Worker Rights: With the Workers (Predictable Terms and Conditions) Act 2023 (expected to come into force around September 2024), eligible workers and agency workers will have a new right to request a predictable working pattern. This will give workers across all sectors the chance to improve their own working pattern, whilst giving employers tools to create consistency and predictability in how their workforce functions.
  • Equality Act 2010 Update: Under its powers under the Retained EU Law (Revocation and Reform) Act 2023, the Department for Business and Trade have put forth new amendments to the Equality Act 2010 (Draft Equality Act 2010 (Amendment) Regulations 2023). Since 1 January 2024, the following changes are in effect:
    
    (1) The definition of “disability” has now been widened to include a person’s ability to work fully and effectively on an equal basis with their colleagues.
    
    (2) A new indirect discrimination claim has been introduced which allows a person without a protected characteristic, but faced with substantively the same disadvantage, to bring a claim.
    
    (3) For the purposes of an equal pay claim, a valid comparator can now be used when there is one employer responsible for the alleged pay inequality and capable of rectifying the pay terms.
    
    (4) Direct sex discrimination claims can now be brought in respect of breastfeeding, pregnancy, and maternity.
    
    (5) A general discriminatory statement made in connection with a relevant recruitment decision need not require an active recruitment exercise or an identifiable victim to be classed as direct discrimination.

For businesses as borrowers:

• Consider Transition Finance: “Sustainable Finance” means making ethical decisions in business and investment and incorporating ESG factors into financial decisions which will result in long-term investments in sustainable projects / activities. This includes Transition Finance (TF), which involves providing funding and support for businesses and initiatives to ‘transition’ from their traditional, environmentally harmful practices towards more sustainable and climate-friendly practices (it’s like a bridge between standard finance and sustainable finance). For high-emitting sectors or businesses which are looking to reduce their emissions, the requirements for standard sustainable finance products are not often met. It is therefore expected that in 2024 many companies looking to introduce long-term plans to achieve net zero, who cannot access standard sustainable finance products, will look to make use of TF. We are hoping to get more clarification as to the technical criteria for this type of finance, what the ESG targets will look like and what the penalties will be if those ESG targets are not met / breached.
• Don’t forget SLLs: Following an FCA review of the sustainability-linked loan (SLL) market in June 2023, the FCA issued warnings around market integrity after suggestions that some lenders were accepting weaker performance targets as part of their SLL standards in order to improve their own ESG qualifications. Subsequent increased regulation around SLLs has meant lenders are now introducing tougher standards to mitigate any potential reputational risk or greenwashing claims. This has resulted in a fall in demand by borrowers for SLLs, as these borrowers now face increased risks themselves like higher economic penalties if they do not achieve their performance targets under the SLL. However, as SLLs do not need to be used for a ‘green’ purpose, they remain more accessible and prominent in the market, and we are likely to see more SLLs rather than green or social loans during 2024. The Loan Market Association (LMA) continues to support the development of the SLL market through the publishing of revised / updated SLL principles and model provisions for SLLs in 2023, which are both vital to protect the integrity of the SLL market. As the SLL market continues to evolve, these SLL principles and model provisions may require updating or refinement during 2024 to reflect market practice.

For businesses that are FCA-regulated:

• Read the anti-greenwashing guidance: The FCA has introduced an anti-greenwashing rule which will apply from 31 May 2024 for all FCA authorised firms. This will ensure that any sustainability related claims that those firms make about the environmental and social characteristics of their products are fair, clear and not misleading. In November 2023, the FCA opened a consultation on guidance around the new anti-greenwashing rule and how it will operate in practice. This consultation has recently closed to new responses, and firms are looking forward to seeing the formal guidance once it’s published. This is likely to coincide with when the anti-greenwashing rule comes into force in May 2024.

With thanks to Tasneem Bhindarwala and Charlotte Elliott, our knowledge lawyers, Suzanne Conticelli, Jane Randell and Christina Tennant, and current trainees Emily Waterhouse and Winnie Robinson-Fell.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2024