The significance of COP26 cannot have passed business owners and managers by. Whilst the conference participants discussed a wide range of topics, any resulting Government policy is likely to include an increase in regulation and pressure on businesses to improve their sustainability credentials.

Small and medium sized enterprises (SMEs) have, to date, been largely unaffected by legislative changes, with most of the headline announcements from the Government focussing on large corporations. However, with the vast majority of UK businesses being SMEs, it is only a matter of time before the spotlight will shift to them.

What changes lie ahead?

The Chancellor’s recent announcement has made it clear that he intends to make the UK the world’s first net zero-aligned financial centre. He has already taken steps by introducing new reporting requirements for larger organisations to publish plans for transitioning to net-zero, however it is not clear what he has in store for SMEs.

Whilst SMEs may not be directly affected by the government’s initial transition plans, the proposed regulations will impact investors and private equity houses, which regularly invest in SMEs. An increase in environmental, social and governance (ESG) related disclosure requirements is therefore expected for businesses looking to receive investment, alongside potentially greater pressure from existing investors for businesses to increase their sustainability credentials.

As well as greater pressure from investors, there could also be a fundamental shift in what companies, and directors in particular, are required to consider when making business decisions. A growing group of organisations are calling for Parliament to bring in the ‘Better Business Act’. This act would mean a change to s172 of the Companies Act 2006, the fundamental piece of legislation governing the management of companies. As currently drafted, s172 requires directors to put shareholders, and their profits, first when making business decisions. The Better Business Act would ensure that all companies are legally obligated to consider the wider impact of any business decision, beyond that of its shareholders and profits. This would result in directors being required to take a broader view of stakeholder issues, such as the company’s impact on the environment, their employees, and the wider community, alongside their commercial objectives and profits.

Whilst the Better Business Act movement is still in its early stages, other countries, such as Italy, Colombia, and Canada have successfully introduced similar provisions to their legislation. The Government has made it clear it wants to be at the forefront of solutions to the climate crisis so it may only be a matter of time until this is enacted.

This type of fundamental shift my seem dramatic, but many argue it is what is needed to ensure all businesses, not just the large corporations, are focussed on transitioning to net-carbon zero.

How can businesses prepare for change?

If businesses want to stay ahead of any potential regulatory or legislative changes, they must first understand what their current impact is and then look at ways to improve this. Many businesses are likely to find that there are a number of changes that can be made relatively quickly and with little hassle which could greatly improve their ESG credentials. These could include switching to renewable energy tariffs and improving recycling facilities within offices.

Businesses may also look to achieve accreditations such as Planet Mark or B Corporation certification to show to investors and consumers that they are taking their ESG responsibilities seriously. These organisations work with businesses to help them continually improve their practices.