Corporate Governance: ESG Standards in Focus

Governance and accountability are under increased scrutiny, with new regulatory developments highlighting the importance of Environmental, Social, and Governance (ESG) measures. 

Key highlights

The UK plans to introduce legislation in 2025 to regulate ESG ratings providers, in order to enhance transparency and reduce confusion for investors. The proposed regulation will place ESG ratings providers under the supervision of the Financial Conduct Authority (FCA), as demand for ESG integration in investment strategies continues to grow. This is in line with the EU, which has brought ratings providers under the oversight of the European markets regulator, ESMA.

The aim is to boost growth, contribute to a cleaner economy and prevent companies in certain sectors, such as defence, from being unfairly penalised by unclear ratings.

2.    Non-Financial Misconduct and ESG: The FCA has emphasised the link between governance and ESG by addressing non-financial misconduct as a critical concern for leadership. Companies are expected to demonstrate strong ethical practices and ensure accountability at the executive level.

3.    Executive Pay and Governance: Ofwat, the UK’s water regulator, is consulting on restrictions to executive remuneration for water companies failing to meet governance or sustainability targets. This reflects a broader trend of holding executives accountable for aligning company practices with ESG goals.

4.    Broader ESG Impact: Stakeholder expectations around governance are evolving. Companies must prioritize workforce engagement, sustainability initiatives, and pay transparency to mitigate reputational risks and foster stakeholder trust.

Action Points:

·      Businesses should conduct internal audits to assess ESG compliance and identify areas for improvement.

• We would recommend updating governance policies to reflect ethical considerations and incorporate stakeholder feedback.

Boards should view ESG compliance not only as a regulatory requirement but also as a strategic advantage for fostering trust and resilience in a competitive marketplace​.