Decoding UK ESG: Understanding the Changes in Corporate Governance Code

With the recent publication of the revised UK Corporate Governance Code by the Financial Reporting Council (FRC), UK Environmental, Social, and Governance (ESG) practices and sustainability in corporate governance are set to see some drastic changes from January 2025. This new code, focusing on sustainability, continues to operate on a “comply or explain” basis, signifying a shift towards more accountable and transparent corporate practices in the UK.

The new code, applicable from 2025, aligns with the UK’s corporate governance framework, applying to all Premium-listed companies on the London Stock Exchange.

Background and Purpose of the FRC Consultation

In the latest revision of the UK Corporate Governance Code, the Financial Reporting Council made a decision to exclude any references to Environmental, Social, and Governance standards.

Initially, the draft code included 14 references to ESG. However, in the final version, these references were removed, along with several planned changes concerning audit committees’ roles in ESG, diversity, over boarding, and shareholder engagement.

The FRC’s approach was to make minimal changes necessary to maintain trust and confidence in UK PLC. This decision reflects a broader debate within the corporate world about the prioritisation of ESG standards and their impact on business operations and accountability.

What Businesses Believe About the Impact of ESG Removal?

The removal of ESG references from the UK Corporate Governance Code has sparked a variety of reactions and potential implications for UK businesses and their governance practices.

As per FRC, “The FRC is conscious that the expectations for effective governance must be targeted and proportionate.”

This decision is seen as a win for those who argue that stringent governance standards contribute to the UK’s economic challenges. However, the backlash against ESG and stakeholder capitalism, driven by populist and traditional economic viewpoints, could influence future political and economic policies.

Conclusion

The recent revisions in the UK Corporate Governance Code, particularly the removal of explicit references to ESG standards, mark a shift in the corporate governance and responsibility landscape within the UK. These changes reflect the complexities of aligning corporate action with evolving sustainable and ethical imperatives.

ZRC believes that companies need to be well-prepared for the new changes in the corporate governance code and emphasises the necessity for companies to rigorously examine and validate the factual basis of claims related to ESG to avoid misrepresentation and focus on the accuracy of public disclosures and statements regarding ESG issues.

ZRC has expertise in implementing, integrating, and reviewing Risk & Control frameworks and offers support to organisations striving for excellence in governance and sustainability.

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