Sustainability rules will be a headache for British business

The Cop 29 talks are grinding to a close in Baku with a row over how much wealthy countries should pay poorer ones to shift away from fossil fuels.
It takes a while for what is agreed at Cop to filter through to the real world, as British companies are about to find out. Three years after an agreement at Cop 26 in Glasgow, big changes are coming in how companies report what they are doing on sustainability.
Most annual reports already contain an ESG — environmental, social and governance — section. Some are a bit of a joke; cynics say they measure a company’s ability to take pictures of smiling children frolicking under blue skies, not its commitment to improving the environment or society.
That era of greenwashing is coming to an end. Thanks to the Glasgow Cop, new rules are about to arrive that will bring some rigour.
It is much more than net zero. The new regime is an attempt to nail down and put numbers not just on E but S and G too. For most companies this will mean a truckload of new red tape, lots of new forms to fill in, extra staff, and, almost certainly, bundles of cash paid to accountants and specialist sustainability consultants to help make the necessary changes.
Will it be worth it? That depends on your world view. If you think that business urgently needs to stop taking a toll on the environment and to behave more responsibly in society, you will be onside. If you think that is all a load of rubbish, you will hate it.
Regardless of your view, you might be taken by surprise at the scale of the change. Big UK companies are used to reporting greenhouse gas emissions. Quoted companies have had to keep track for nearly a decade and the rules were recently updated in the Streamlined Energy and Carbon Reporting regime (SECR, the first of the forest of abbreviations that has grown rapidly in the fertile ground of sustainability).
There are much broader rules coming soon. The previous government said it was minded to adopt two new accounting standards drawn up by the International Sustainability Standards Board (ISSB). They are one of the concrete results of Cop 26, the climate talks held in Glasgow three years ago. One, IFRS S2, is all about climate change and should not hold too many terrors for big companies already up to speed on greenhouse gas reporting.
The other, IFRS S1, will be new territory for most. It puts a broad duty on companies to “disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term”.
In case you think that leaves you with the wiggle room to say something bland and imprecise and fill out the report with more pictures of smiling children, there are more detailed requirements on top. The Sustainability Accounting Standards Board (SASB — there really are lots of abbreviations) has put out a host of industry standards that give guidance. They are pages long and remarkably specific. If you are in consumer finance, for example, you will be required to report on the incentives you give to your sales staff and provide details of your safeguards against data breaches.
All this could become law quite soon. The Sunak government said it would take a decision in the first quarter of next year. If Labour sticks to that timetable the Financial Conduct Authority would start work on putting the standards into the listing rules of quoted companies straight away. Depending on how fast they work, that might mean new rules by the end of 2025.
At the same time the government has to work out which other UK-registered companies will have to comply. The obvious thing to do would be to use the thresholds already in place for carbon-emissions reporting. That would mean organisations that have two of the following: a turnover of £36 million or more; a balance sheet of £18 million or more; or 250 employees or more. That is a wide net, catching many medium-sized private companies.
It is perhaps possible that Labour will not adopt the new rules, or will drag its heels. After all, deregulation is a hot topic. Audit reform was dropped by Sunak after five years of preparation, the listing rules have been relaxed and Rachel Reeves said last week that she would give all financial regulators a new mandate to promote growth. It would be a big step, however, for Labour not to go ahead with a change agreed at international climate talks. Ed Miliband would not be able to hold his head up in public.
In the unlikely event that Labour were to say no, many companies will have to fall into line anyway. The European Union is on a faster timetable, having adopted even tougher and more prescriptive standards last year.
Big European companies will have to comply from the start of next year and foreign companies with a meaningful turnover in the EU will eventually be caught. There is also a strong demand from investors. Fund managers who have sucked in money by promising to be green are being forced by regulators to prove this is more than just marketing fluff. They can tick the box by buying shares in companies that take the new rules seriously.
All this is giving finance directors a real headache. There are lots of questions, and not many good answers. How do you decide what is material, and once you have done so how do you collect the information? Is your IT system up to the task? Is this a job for your current sustainability people, who are brilliant at finding pictures of happy children, or do we have to hand it over to the tough nuts in finance?
The biggest question is whether to embrace the rules wholeheartedly or to treat them as another annoying compliance issue. The first approach will require some fundamental rethinking of how the business works and making improvements in sustainability as important as improvements in profit.
That is a big shift and one that would probably need a complete change of culture and be quite expensive. Go too fast, or get the implementation wrong, and you risk alienating staff and maybe wrecking the company. If you only pay lip service you risk leaving the change too late and in extremis open yourself to attack by disgruntled investors and environmental activists.
If you want to avoid the whole thing, you could perhaps move the company to the United States. In March the Securities and Exchange Commission adopted a climate rule roughly modelled on the new international standards. It was paused almost immediately, however, after legal challenges from companies saying that it went too far.
One of the challenges was from Liberty Energy, an oil and gas services company. Its boss is Chris Wright, who recently acquired a new job: he is Donald Trump’s nomination as energy secretary. The chances of the US going down this road now look slender.
Dominic O’Connell is business presenter for Times Radio