FRC’s ESG exclusion: A step back for sustainable investment?

The recent decision by the UK Financial Reporting Council (FRC) to exclude explicit environmental, social, and governance (ESG) requirements from the updated UK Corporate Governance Code marks a significant moment for sustainable investors and asset managers. While the FRC argues that this move reduces administrative burdens, it raises concerns about the UK’s commitment to sustainable corporate practices.

For years, the investment community, particularly those focused on sustainability, has pushed for clearer guidelines and rules that require company boards to manage ESG risks and opportunities effectively. The initial proposals by the FRC to include specific ESG requirements felt a progressive step towards integrating sustainability into corporate governance. However, the latest update, which favours a less prescriptive approach, suggests a shift away from this path.

Is ‘comply or explain’ sufficient?

The ‘comply or explain’ principle, while offering flexibility, might not be sufficient to ensure that companies adequately address ESG concerns. This approach allows companies significant leeway in determining how they address ESG issues, if at all. In a time where there is a global push towards net-zero targets and sustainable practices, this decision may be considered a step back. It potentially undermines the efforts to make real-world changes necessary for a sustainable future.

For sustainable investors and asset managers, this development is somewhat disheartening. It suggests a missed opportunity to embed ESG considerations firmly within the corporate governance framework. Clearer rules are not just about compliance; they are about setting a standard for corporate responsibility towards environmental and social issues. The lack of explicit ESG requirements in the governance code may lead to a varied and potentially inadequate approach to sustainability across different companies.

Without clearer rules requiring company boards to manage ESG-related risks and opportunities, the journey towards net zero and sustainable development will face significant hurdles. The investment community, especially those focusing on sustainable investments, must continue to push for more robust governance frameworks that prioritise ESG issues, driving the real-world change needed in our journey towards a sustainable future.

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