Wednesday 21 July 2021
One of life’s “joys” (and I do use that term very loosely) is, arguably, moving house. I’m sure most of us have experienced at some point the ups and the downs of the process, the first step of which will probably be an on-line search for properties of the ‘right’ size in the ‘right’ area. We click through the gallery of pictures and read the description as provided by the estate agent, that intermediary tasked with selling the owner’s property. Like us accountants, these agents have their own language, their own way of describing things, and at times it does appear rather creative.
For example, several properties we’ve viewed are described as “having the benefit of private drainage”. This sounds rather special, a plus point, thereby attracting a premium price maybe. But not necessarily so. Septic tanks - that’s the private drainage being talked about here; sewage systems that are typically governed be environmental laws. In the UK the legislation is now far stricter than previous on how and when these tanks, or similar, can be used, both domestically and commercially. The most important issue, it appears, is to eliminate, or severely restrict, discharges of untreated or partially treated sewage into watercourses, i.e. streams, rivers, the sea. And rightly so I hear you say. For the environment and for society at large, of course this is the right thing to do, law or no law. Why? Because as individuals we care, or at least we should care. And naturally, we expect businesses to have similar values as ours?
But of course, that’s not always the case.
Take for example Southern Water, a utility company. They’ve recently been fined £90 million. That’s a record amount for breaking UK environmental law. The crime? Well, someone didn’t quite get the message about caring. The actions of Southern, a company that devotes pages online to “Protecting the environment”, in effect turned parts of our coastline into a vast watery septic tank; caught, dumping untreated raw sewage into the sea. Estimates have placed the amount discharged at anywhere between 16 and 21 billion (yes billion) litres. According to reports of the case Southern "showed a shocking and wholesale disregard for the environment, for the precious and delicate ecosystems along coastlines, to human health and to the fisheries and other legitimate businesses that depend on the vitality of the coastal waters". The judge is reported to have said “the sheer scale of offending meant it was inherently unlikely this was due to a small number of rogue employees. It is far more likely to be due to deliberate disregard for the law from the top down”.
It’s worth reading more about the case. A quick search will lead you to many articles. Consider also the Chairman’s Open Letter, published following the sentencing, which you can read here. Within its many paragraphs reference is made to ‘thinking long and hard about what sort of company we want Southern to be’, about a ‘revision to our company values’, about taking ‘positive action’ to ‘regain trust’, and I quote - “Our ambition is that by 2025 we will ensure our operations cause no serious pollution incidents affecting local rivers, streams and beaches”.
Are these just words, for the sake of words? Is this just another case of words rather than actions? Is this yet one more example of “we’ll learn so that this never happens again” – and then it does?
Well, hopefully not. And, in any case the words that companies publish are set to become (even) more important. Why? Because of the rapidly evolving importance of ESG principles for businesses and the need for formalised reporting of actions towards meeting them. For corporate reporters it’s going to require honest, clear narrative across all facets of the Environmental, Social and Governance spectrum with no room for the more creative descriptions (see the estate agent above) or disclosures that are mere platitudes. We’ll need to have narrative that ‘tells it as it is’, reporting that hopefully (and some would say finally) becomes the catalyst for better decision making on behalf of many stakeholders.
Southern failed, spectacularly.
Would things have been different in a mandated ESG reporting world? We’d certainly hope so. For example, would they have contravened environmental laws if compulsory, standardised reporting existed, and with it the risk that the reporting of their criminal actions would lead to an immediate loss of access to capital markets or for capital to be premium priced? Who knows for sure, but what we do know is that ESG Reporting is on the way, and we need to start preparing for it. Why? Because we care.
This ESG journey is going to be a challenging one. It’s going to be complex. But however difficult it will be for us we must hope that what is written will be that driver for better actions. And surely, that really is a benefit for us all.