ESG and British business: proposed law re-ignites debate

ESG and British business: it’s a relationship that may change in future if proposed laws over boardroom priorities gain traction. 

ESG has its fair share of critics, advocates, and those still trying to wrap their heads around the broad concept. 

As with most countries, however, corporate boards remain free to choose whether they embrace ESG or not. 

Will that change? Should that change?

A new report by think-tank Demos has suggested that the UK would be better off reforming its Companies Act – the primary legislation covering corporate governance within its borders. 

The reforms would focus on amending the act, requiring directors to consider a company’s environment, social and governance (ESG) obligations in their work. 

This would be in addition to their primary responsibility of serving their company’s shareholders.

The report claims that recent measures to drive economic growth in the UK – cutting taxes and raising spending – have not helped. 

It’s proposing this Companies Act reform as an alternative, saying that – among other things – it would encourage money flow to corporations’ lowest-paid workers. The current estimate is £44 extra per week for someone on minimum wage. 

This would provide huge swathes of workers with a more remarkable ability to save and spend, stimulating the economy in the longer term, the report said. 

Overall, the estimated boost to the UK economy is £149 billion.

If enacted, the reforms would fundamentally change directors’ roles on a board in the UK. 

The country is one of many where the single-board, shareholder-orientated strategy is paramount. Directors are legally bound to make decisions in the best interests of those who invest in the company. 

This law would give more of a voice to other stakeholders, primarily employees, consumers, and communities affected by business activities. It would also require directors to listen to those voices.

Undoubtedly, the proposal could easily be highly divisive in British business. 

Some corporations that are more welcoming of ESG may support it (indeed, some critical brands like grocery retailer Iceland and Tony Chocoloney have already voiced their interest). 

On the other hand, many businesses have mixed to negative feelings about ESG and would view the proposal as forcing them to behave a certain way.

Pros:

• It would align boards more closely with reality. ESG is the corporate buzzword that doesn’t quit, and – like it or hate it – it remains a widely used tool that investors use to dictate where their money goes. 
• It will enable boards to connect more closely with other stakeholders like employees. 

Cons:

• It would take a lot of work to adapt. UK businesses are used to one governance model, and this kind of reform would be a significant overhaul. 
• It would likely encounter opposition from pro-business and laissez-faire advocates. Such resistance may delay implementation and leave directors in the dark about how they must govern a company long term. 
• The name “ESG” is falling out of favour even among supporters because of its ability to cause an adverse reaction. Even if the principles behind it are still popular, backlash against the term might cause problems for a law like this.

Under the current Conservative government – no. Conservatives have historically been against efforts to further regulate businesses, and their current policies for growth in the UK don’t align with these proposals. 

Demos – the company behind the report – has had more connections to the liberal and left wings of British politics since it was founded in the early 1990s. Therefore, we should watch and see if the proposals gain any traction among the Labour opposition and whether they retain that traction if Labour wins the next election.

ESG and British business