The UK’s new Labour government has made much of its commitment to growth, placing a planning and infrastructure bill at the centre of its legislative programme, with the aim of boosting output and tax revenues to fund much-needed public service improvements. It has also burnished its green credentials with the rollout of Great British Energy, intended to drive the renewables transition and put its pledge for net zero electricity by 2030 within reach.
These aims are laudable and necessary – but can both policies be delivered? It’s easy to see trouble ahead, notably for rival claims on land use. Much will depend on how Labour handles the tensions that arise between property developers, local residents, energy generators and environmentalists.
Can growth be green? Does factoring in environmental, social and governance (ESG) considerations burden business – or inform its long-term strategies? These questions are not new, but they are increasingly central to public and private sector decision-making. This is nowhere more true than in the rules being set for companies and investors. But in all cases, understanding of nuance can help to identify trade-offs that can deliver sustainable growth.
Divided opinion on listings reforms
Even before the Kings’ Speech gave shape to the new government’s economic vision, one of incoming Chancellor Rachel Reeves’ first actions was to endorse the Financial Conduct Authority’s (FCA) listings reforms. The biggest overhaul in 30 years was lauded as the kind of pro-competition update that would turbocharge the growth trajectories of home-grown champions.
The FCA said its streamlined regime would “better reflect the risk appetite the economy needs to achieve growth” – but it was given short shrift elsewhere. The International Corporate Governance Network aired investor concerns over the loss of shareholder votes on ‘significant and related party transactions’. Losing influence on M&A deals would weaken minority shareholders, it said, pitting management against investors, rather than aligning interests in pursuit of long-term value.
UK pension funds also warned that the FCA’s introduction of dual share class structures – which can give directors greater voting power – would damage enterprise value, even in the short term, leading to “worse outcomes for our members”. Clearly, opinions differ on whether the UK’s business rules should free up company managers to take risks in pursuit of growth and opportunity, or uphold corporate governance standards, obliging firms to take greater account of stakeholder interests, potentially slowing action and adding cost.
Growth versus governance
This issue is also being played out nearby, with the Financial Reporting Council (FRC) – which sets standards for auditing, corporate governance and stewardship – accused of pulling its punches. In January’s update to the UK Corporate Governance Code, the FRC abandoned many of its original reform proposals – including on the ESG oversight role of audit committees – citing its responsibilities in “supporting UK economic growth and competitiveness”.
The FRC only exists in its present form due to the previous government’s failure to enact the proposed legislation needed to replace it – preferring not to toughen up audit rules despite the losses caused by inadequate sanctions, including to the pensioners, subcontractors and investors of Carillion, BHS, Thomas Cook and others. The outgoing administration also scrapped a bill introducing corporate governance requirements on £750 million-plus firms – including an annual resilience statement – as part of efforts to “cut red tape for business”.
The task of introducing the Audit, Reporting and Governance Authority (ARGA) now falls to Labour. How far it will go to “investigate and sanction company directors for serious failures” on reporting and audit quality will be another test of how it balances growth and governance.
Nor of course is this a UK-specific problem. After European Parliamentary elections saw Greens and Centrists squeezed out, the European Peoples’ Party (EPP) has sought to align Europe’s Green Deal more strongly with pro-competition policies as the price of supporting Ursula von der Leyen’s second term in charge of the European Commission. Europe isn’t about to abandon its green agenda, but it may temper and delay, including the due diligence rules imposed on importers of commodities by the EU Deforestation Regulation.
Impacts and outcomes
Each business must find its own balance. As the public sector wrestles with policy priorities, one lesson for companies and investors is the need to have the most relevant information at our fingertips to understand the short- and long-term implications of our decisions. This does not mean endless consultations and deliberations, but it does mean being alert to the most material factors that will determine real-world impacts and outcomes.
If your firm is seeking to pursue new efficiencies or markets through deployment of generative artificial intelligence for example, you should keep abreast of regulatory and policy action aimed at avoiding social harms, as well as industry moves toward responsible governance and design. For firms in the finance sector, where many regulators are developing AI-related guidelines, success will depend on the ability to anticipate and negotiate these social and governance concerns.
Property developers and housebuilders are already well-acquainted with energy efficiency rules as well as other incoming regulations aimed at managing their climate and biodiversity impacts. But their future success will depend also on angling their business models toward the projects dictated by Britain’s constantly evolving demographics – which suggest fewer large family homes and more social care facilities – as well as how they secure access to human (and natural) resources, in light of skills shortages, employment laws and immigration restrictions.
Drivers of value
The required inputs and insights are not gained by firms’ blanket compliance with rules like Europe’s Corporate Sustainability Reporting Directive (CSRD) or the Corporate Sustainability Due Diligence Directive (CSDDD). Nor are investors likely to understand portfolio companies’ grasp of these material risks and opportunities through ESG rankings from mainstream data providers.
The challenge is to understand and identify the key drivers of value within these sustainability-related information resources. Recent developments may help. New EU rules for ESG ratings and data providers insist on greater granularity and transparency beneath the headline scores previously churned out by ‘black boxes’, providing investors with deeper insights. Researchers from Harvard Business School have called for companies to be allowed to choose and publicly declare which ESG objectives they will prioritise, albeit “within a guided regulatory framework”.
Rather than being tied to a superficial checklist of ESG issues firms feel compelled to address, a more targeted, materiality-led approach would allow firms to concentrate on those closest to home, they argue. By focusing on the factors most relevant to their operations – and where they have most expertise – firms can streamline their efforts so that resources are directed for maximum impact – internally and externally.
It’s entirely possible that the EPP’s new-found attempt to link green to growth could see a variation on this approach adopted for the CSRD. ESG reporting is also one of the many items in the in-tray of the incoming UK Secretary of State for Business.
Mutually supportive
Rather than mutually exclusive, actions aimed at sustainability and growth should be mutually supportive, the one informing the other. For companies, ESG inputs are valuable additions to the decision dashboard that helps navigate the path to future growth, alongside existing factors. They can stop managers driving into a ditch, but also point the way to a short-cut or avoid traffic ahead.
Too many and too irrelevant flashing lights will confuse and cause accidents of course, but the right ones will enable businesses to steer to growth with confidence.
If you would like to learn more about how The Disruption House can help you establish an ESG strategy for achieving your business goals, contact the team by emailing info@thedisruptionhouse.com
