If you operate a UK business, you could be one of more than 130,000 owners to have your company size reclassified under new government proposals.
On the face of it this is a good thing, as it is intended to reduce the non-financial reporting obligations for businesses. But it is an automatic adjustment you’ll have no control over, which could mask hidden costs that companies simply aren’t prepared for.
The suggested deregulation is projected to save around £150m per year for UK companies
Profit margins, staff retention and recruitment – and even securing favourable finance terms and new supplier agreements – are all at risk of significant losses if companies fail to prioritise carbon reporting as a result of the proposed new regulations.
Risk of isolation
If enforced by whichever party wins the General Election on 4 July, the current government’s proposed changes to company size limits would see 5,000 large companies reclassified as medium-sized, 13,000 medium-sized companies reclassified as small and 113,000 small companies reclassified as micro-entities.
The legal process to enforce this is expected to begin in early October, and the suggested deregulation is projected to save around £150m per year for UK companies through the reduced administrative burden. But there are other factors at play.
On the surface, the changes would reduce onerous auditing thresholds and other reporting requirements but, importantly, this would include carbon reporting obligations for a huge swathe of industries. It means that only companies that will still sit in the ‘large’ classification would face mandatory requirements to report their carbon emissions and offsets.
This new laxity is likely to worsen existing risks around sustainability obligations
The freedom to no longer publish a company’s environmental impact may seem a welcome relief but it isn’t quite that simple because this new laxity is likely to worsen existing risks around sustainability obligations.
But having an ESG policy is increasingly vital for businesses’ stakeholders.
Fewer finance options
According to a recent study in the Journal of Banking & Finance, 30 countries are more likely to offer lower loan rates to companies that demonstrate clear environment and sustainability concerns than their competitors who overlook environmental, social and governance (ESG) reporting.
As well as making banks less likely to lend finance, failure to keep accurate emissions records and ESG performance (and targets) may also lead businesses to struggle to win tenders against more socially responsible competitors.
One in three jobseekers researches a company’s ESG policies before deciding whether or not to engage
This is especially important when looking at a company’s wider supply chain and client base. Larger suppliers may still require businesses to disclose ESG strategy in order to trade with them as part of their Scope 3 obligations.
Employee expectations
The consequences of opting not to report emissions are more than financial: one in three jobseekers researches a company’s ESG policies before deciding whether or not to engage; one in five has turned down a job because a company’s ESG values have not been in line with their own; and almost half of all workers claim they expect their employers to have a clear ESG policy, according to research by KPMG.
Jobseekers deeply value community-driven companies that respect the environment. For them, it’s not enough to simply minimise their negative impacts; they want to increase their positive influence.
So, employers must recognise that there is clear and undeniable value in investing in continued carbon reporting and being transparent about their emissions.
With insufficient or unambitious sustainability aims effectively turning away talent as well as potentially driving up finance costs, businesses must continue to diligently monitor their carbon emissions and the environmental footprint of doing business, even if not required to by law in future.
If your company is reclassified as a medium-sized entity, the value of prioritising a robust and responsive ESG policy in today’s market could well make the difference between ensuring your business thrives or flounders.
