All companies must adhere to various reporting requirements under Part 15 of the Companies Act 2006 (the Act).
Whilst certain small companies are exempt from some reporting requirements, generally, an unquoted company must prepare the following reports:
- Annual accounts (consisting of a balance sheet as of the last day of the financial year, a profit and loss account and notes to the accounts)
- A strategic report
- A directors' report
- An auditor's report on the annual accounts
For financial years beginning on or after 1 January 2019, a new requirement was introduced for inclusion, within the strategic report, of a statement describing how the directors of a company have had regard to the matters set out in section 172 (1)(a) to (f) of the Act when performing their duties under section 172. These regulations sought to tackle increasing demand for reporting on a company's environmental, social and governance (ESG) credentials.
The Financial Reporting Council (FRC), the UK's independent regulator of corporate governance and reporting, details the purpose behind the section 172 statement as follows:
“The section 172 duty is consistent with the principle of enlightened shareholder value; recognising that companies are run for the benefit of shareholders, but that the long-term success of a business is dependent on maintaining relationships with stakeholders and considering the external impact of the entities activities. The section 172(1) statement should explain how the board has had regard to the broader matters in their actions behaviors and decisions.”1
Whilst this reporting requirement applies to larger companies that meet at least two of the following requirements,:
- Turnover of more than £36 million
- Balance Sheet total of more than £18 million
- More than 250 employees
the increasing importance of ESG in a company's lifecycle is sure to establish some precedent in smaller companies for voluntary reporting, and a firm's ESG credentials will no doubt have an impact on potential investors or purchasers.
Indeed in 2022, further reporting requirements on climate-related matters came into force for, amongst others, traded companies and banking companies, showing ever-increasing pressure from the listed markets.
Much like cyber security and data protection in previous years, ESG matters are thought, industry-wide, to be an emerging risk for companies and should be adequately included in a company's governance and strategy. Further regulation or reporting requirements are sure to require SMEs to follow in the footsteps of their larger counterparts.
In practice, it is important that all companies asses their reporting requirements and keep abreast of the ever-changing requirements. In the meantime, it is advisable to take some basic governance steps to ensure that ESG is on the company's agenda, here are some examples:
- Make sure the directors of the company are adequately briefed and up to speed on the Company's ESG agenda.
- Identify what practices and policies the company already has and assess any gaps in reporting or coverage.
- Set some targets for ESG goals, focusing on ESG targets can be a helpful marketing and investment attractive tool.
Footnote
1. Financial Reporting Council – Guidance on the Strategic Report (June 2022) at page 62
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