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How Will New ESG Regulations Impact Your Business?
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How Will New ESG Regulations Impact Your Business?
According to a survey completed by the Office for National Statistics (ONS), ‘approximately 64% of adults in Great Britain said they were somewhat or very worried about the impact of climate change’.
The unprecedented impact of climate change in the past decade has sparked widespread efforts to mitigate the waste of energy and materials, as well as to limit the use of harmful processes and materials which adversely affect the planet as a whole.
ESG, or Environmental, Social and Governance, are a set of regulations companies must adhere to so that their business meets nationwide standards of sustainability, diversity and ethical business practices.
As outlined by the Chancellor of the Exchequer in November 2020, the UK aims to have mandatory full ESG disclosures for companies by 2025, which the Task Force would enforce on Climate-related Financial Disclosure (TCFD).
But what does this mean for businesses? And how might your EPC rating impact your business or personal property in the coming year?
What are ESG Regulations and How Can You Prepare for Them?
The UK’s commitment to ‘Building Back Greener’, a slogan devised in 2021’s Net Zero Strategy, represents a significant undertaking by the UK government to decarbonise all sectors of the UK economy by 2050 – and tighter ESG regulations is a small, but significant step forward in that effort.
ESG regulations aren’t just guidelines for environmental protocols, they also represent a company’s dedication to creating a positive workplace culture and fairness in society overall, and that financial performance transparency and ethical business practices are maintained to a high standard.
Previously, ESG regulations followed a “comply or explain” approach–you can either follow the ESG regulations or explain why you are unable to comply. This year, businesses are required to be transparent about their current approaches to Environmental, Social and Governance factors.
Failure to comply with ESG regulations can result in fines and even imprisonment, so efforts towards ethical and sustainable practices must be strived for.
Complying with ESG regulations, however, isn’t without financial incentives for business owners, and countless lenders are offering an extensive selection of finance products to encourage businesses to adopt environmentally sustainable practices.
As stated in the HM Treasury’s ‘Future Regulatory Regime for Environmental, Social, and Governance (ESG) ratings providers Consultation’: “Of the £10 trillion worth of assets under management in the UK in 2021, nearly half (47%) had integrated ESG into the investment process”, which is expected to reach $33.9 trillion globally by 2026. These astronomical figures suggest that ESG ratings are becoming a crucial aspect of investment for businesses, which is fuelled by consumer demand.
If you own a business and are keen to reduce the environmental impact of your operations, be it through sustainable practices, energy-efficient assets, or the use of renewable energy sources - cost can be a major concern.
However, banks and high-street lenders majorly support green financing and investing in sustainable assets, with up to 100% of the funds provided on select investments.
Banks such as Natwest and Lloyds, with which Clifton Private Finance closely works, provide a variety of financial products and services catered to sustainable assets which actively contribute to reducing energy usage, and better improving your business’s ESG performance.
But your ESG performance isn’t the only factor worth considering when investing in renewable energy finance, for property owners, both domestic and non-domestic, EPC ratings are of growing importance for business owners.
What Are EPC Ratings and Why Are They Getting Stricter?
EPC ratings, or an Energy Performance Certificate, is a method used in Europe, as well as the UK, to grade your domestic and non-domestic premises. The energy efficiency of a property is graded from A to G, G being the worst rating a property can achieve.
Currently in the UK, a property is expected to meet an EPC rating of at least an E, but these standards are highly subject to change over the coming years. Increasing concerns over climate change have resulted in stricter, more efficient use of energy for businesses.
So, what’s the difference between ESG and EPC ratings? Primarily, ESG is an evaluation of a business from a holistic approach: it is an overall review of its Environmental, Social and Governance standards, which are graded with a number from 0 to 100.
An EPC rating, however, is tied directly to the energy use of a business: it considers only energy efficiency as a rating factor, and not wider practices that might impact the environment.
According to GOV.UK, “the 2020 Energy white paper confirmed that the future trajectory for the non-domestic minimum energy efficiency standards (MEES) will be EPC B by 2030.”This major boost to the energy efficiency of non-domestic properties across the UK is likely to appear in several ways, from the use of wall insulation, energy-efficient boilers, and double-glazed windows – even the use of renewable energy, which can have major benefits for your property’s EPC rating.
The UK government’s guidance details that “from 1 April 2023, the requirement for non-domestic landlords to obtain at least an EPC E rating, unless they have registered a valid exemption, applies to all privately rented non-domestic properties (even where there has been no change in tenancy). For the time being, non-domestic property owners must ensure that their rented property meets an EPC rating of E, or they will face charges and penalties.
However, if your business lacks the funds to meet these requirements or for other reasons, it may be exempt from meeting the new EPC measures.
How Can I Become Exempt From Certain EPC Measures?
Though the changes are massively beneficial to the environment, with properties contributing up to 40% of carbon dioxide emissions in the UK according to the Climate Change Committee, not every non-domestic property owner has access to the necessary funds to complete costly renovations for their property.
If meeting EPC measures is too expensive, or otherwise difficult due to the nature of your property – you can apply for exemption.
Read some of our latest case studies to see what we can achieve at Clifton Private Finance:
Though there are a variety of causes for exemption, here’s a list of the most common:
High-Cost Exemption (applies only to domestic property):
You do not have to improve renovations of your property if the least expensive improvement exceeds £3,500.
Seven-year payback exemption (applies only to non-domestic property):
If the owner of the non-domestic property is recommended a measure to improve energy efficiency, but the measure itself doesn’t meet the seven-year payback test (which determines whether the estimated savings over seven years should be “equal to, or greater than, the cost of implementation”– MEES energy efficiency regulations), the property owner can apply for exemption.
‘All Improvements Made’ Exemption (applies to domestic and non-domestic property):
If a property has all of the recommended necessary improvements, but the EPC rating is still substandard, you can apply for exemption.
Wall Insulation Exemption:
In certain properties, both domestic and non-domestic, wall insulation may not be appropriate for fitting, regardless of if the property owner can afford it.
Consent Exemption (applies to domestic and non-domestic property):
Certain improvements to domestic property may require third-party consent prior to installation, equipment such as solar panels or external wall insulation.
Devaluation Exemption (applies to domestic and non-domestic property):
If a property is evaluated by an independent surveyor who is a member of the Royal Institution of Chartered Surveyors (RICS), and it is deemed that the value of the property would be reduced with the installation of recommended EPC measures, the property owner may apply for exemption.
New Landlord Exemption (applies to domestic and non-domestic property):
If a landlord has newly acquired property, it is considered by the UK government to be “unreasonable” for them to comply with the regulations immediately. The property owner can apply for exemption, which will last for six months from the date that they became the landlord.
What Are the Benefits of Adhering to ESG Regulations?
Adhering to ESG regulations might become an expensive process, but the benefits for business owners are significant.
For one, businesses that comply with ESG regulations are actively reducing their carbon footprint and other damages to the environment, whilst also operating in a manner that is beneficial for employees.
With consumers that are increasingly concerned about the environment in the UK, having a high ESG score ensures that customers are aware that you’re complying with environmental, social and governance measures that ultimately reduce the effects of climate change.
Not only can following ESG regulations improve your perception from customers, it can massively reduce your yearly energy consumption and therefore operational costs. In rapidly increasing numbers, business owners have flocked to invest in sources of alternative energy, with some even using it to generate income.
To incentivise business and property owners to tackle climate change, several high-street lenders, such as Natwest, will provide up to 100% of financing for energy efficiency improvements for your property.
When purchasing a new property, those with an EPC rating of A or B may be subject to lower interest rates through a Green Mortgage.
Why choose Clifton Private Finance?
As such, investing in improving your property is an essential part of owning a business or domestic property, and it’s one that is only bound to become more necessary over the coming years.
With Clifton Private Finance, we’ve built and maintained strong relationships with a selection of lenders with a strong appetite for green financing, and with our expert asset finance brokers who offer a tailored, bespoke service for your business, we’re bound to achieve a competitive interest rate for you.
