ESG Reporting in Farming and Rural Businesses

There is a lot of buzz around sustainability, ESG and the creation of a more just society with better prospects for more people and a more equitable distribution of wealth. It is often couched in complicated terms and acronyms which send us to Google to decipher, but quite simply, it boils down to businesses acting with consideration. Consideration for the environment. Consideration for employees. Consideration for supply chains and partners. And of course, consideration for investors and shareholders.

With government focus on a green economy, alternative investment booming and consumers increasingly wanting to make ethical purchasing decisions, industry is constantly seeking to refine its measurement and reporting to showcase the good work it is doing to care for people and planet. In many cases, it also highlights where a business can do better to the benefit of people, planet AND profit. Today’s accountant needs to be fluent in sustainable accounting to optimise their contribution to the businesses they advise. However, keeping up with changing legislation and regulation and the introduction of new schemes can seem like a full time job. So below is run down of recent changes to reporting standards.

Reporting requirements vary for different types of entity and the legislative and regulatory landscape is something of a moveable feast as we continue to better understand climate change and the important role business can play.

For FTSE constituents, the FCA introduced a new listing rule (LR 9.8.6(8)) to promote better disclosures on how they are managing climate-related risks and opportunities. Building on older reporting requirements, the new rule requires in-scope issuers to state in their annual report whether they have made disclosures consistent with the recommendations of the Taskforce on Climate Related Financial Disclosures (TCFD) or explain why not. This rule comes into effect for accounting periods beginning on or after 1 January 2021 for premium listed companies and 1 January 2022 for standard listings.

Since Brexit, the EU Non-Financial Reporting Directive (NFRD) has been implemented in the UK through company law. It continues to apply to large public-interest entities with more than 500 employees. Companies in scope are required to disclose information in their annual reports on environmental, social and employee matters, respect for human rights, anti-corruption and bribery.

All companies qualifying as large under the Companies Act 2006 are required to disclose in their strategic report a ‘section 172(1) statement’ describing how directors have had regard to the matters set out in sections 172(1)(a)-(f) of the Companies Act 2006 in the performance of their duties. These matters focus on engaging with all stakeholders, as well as the impact of the company’s operations on the environment. While this legislation is not new it is worth noting as S172 statements are often a gateway for those new to ESG reporting because they prompt directors to consider who their stakeholders are in a broader sense and the impact of their actions on all those groups. The risks, KPIs and business model and strategy disclosures from the strategic report require directors to discuss ESG considerations, to the extent that they are material to the business.

All UK registered companies with more than 250 employees have to include a statement summarising how their directors have engaged with employees, how they have had regard to employee interests, and the effect of that regard, including on the principal decisions taken by the company during the financial year. Most farming and rural businesses required to report on their environmental impact will fall into this category.

Farms and rural businesses are oxygen for their local community. Directors live locally. They are an important source of training, employment and wealth creation for the local community. And because staff are often local too, that wealth goes back into the local economy. Perhaps more than in any other industry, these businesses have a personal stake in their operating environments. So, it is easy not to notice how much regard, or consideration, directors have when making myriad small decisions which have a big impact. This is even truer for intergenerational farms and businesses which have been established in their local area for many many years.

At a moment in time when farms face immediate threat from labour shortages, rising costs of inputs, shrinking export markets, new tax liabilities on plastic packaging and red diesel (April 2022), and the removal of subsidies it may seem inopportune to look to ‘softer’ ambitions for environmental social governance (ESG). However, meeting compliance obligations is just one of the business benefits of ESG and to sideline it is to underestimate the benefits which reverberate through the entire business. A successful ESG strategy – one that is proportionate to the size of the business – can improve employee morale and productivity, reduce sickness absence, improve the reputation of a business or product, support marketing, business development and sales targets, attract investment and ultimately benefit both profit and profitability.

ESG considerations are also important aspects in preparing a business for sale – an option many farmers may need to consider in light of prevailing business conditions and succession planning. Many potential buyers will have their own green agendas and need to acquire business which are capable of supporting that. It is also worth remembering that the acquisition of a company could push the parent into a new reporting band and tougher compliance obligations.

There is no escaping the fact that cash in farm businesses is tight. Beginning an ESG journey may be as simple as ensuring machinery and plant is serviced and operating efficiently, opening a dialogue with suppliers if payment cannot be made on time or conducting a staff survey. Consideration for your stakeholders.

Through sustainable accounting professional advisors can help their clients improve every aspect of their business for the benefit of people, planet and profit and avoid falling foul of compliance requirements through correct reporting.