Embedding ESG in Board Oversight: A Guide to the UK Corporate Governance Code

When the Financial Reporting Council published its revised Corporate Governance Code in January 2024, it buried a quiet bombshell in Provision 29. From 2026, boards of listed companies must formally declare whether their internal controls are effective. That includes controls over sustainability reporting. For directors who have treated embedding ESG as a reputational exercise rather than a governance discipline, the implications are sobering.

The shift matters because embedding ESG into board oversight is no longer about optics. Institutional investors managing over £52 trillion have signed up to the UK Stewardship Code, which requires them to integrate environmental and social factors into engagement with companies. Regulators are tightening disclosure requirements. And a Deloitte analysis found that 46% of FTSE 100 companies restated sustainability metrics last year, some because measurements evolved, others because the original figures were simply wrong. The infrastructure underpinning ESG reporting at many companies is not fit for purpose. Boards are about to be held accountable for that.

UK Corporate Governance Code 2024: What Boards Must Know

The Code operates on a “comply or explain” basis, a distinctly British approach that prizes flexibility over prescription. Unlike America’s Sarbanes-Oxley Act, the Code allows deviation provided companies offer a compelling explanation. But the FRC has little patience for boilerplate excuses.

The 2024 revision, effective for financial years beginning on or after 1 January 2025, brings targeted but significant changes. The most consequential is Provision 29, which from January 2026 requires boards to declare the effectiveness of their material internal controls. Crucially, this now extends to reporting controls, including those governing ESG disclosures.

This is where embedding ESG becomes operationally demanding. Boards can no longer simply approve a sustainability report and move on. They must ensure the controls underpinning that report can withstand the same scrutiny applied to financial statements. For many companies, this will expose uncomfortable gaps between aspiration and execution.

Section 172 and Embedding ESG in Stakeholder Reporting

The Code intersects directly with Section 172 of the Companies Act 2006, which obliges directors to consider the interests of employees, suppliers, customers, communities and the environment. This is not soft law. Directors who fail to demonstrate such consideration leave themselves exposed.

Embedding ESG into governance means operationalising Section 172. The Code requires boards to describe in annual reports how stakeholder interests have influenced decision-making. The FRC’s guidance goes further, encouraging formal workforce engagement mechanisms, whether through employee directors, advisory panels or designated non-executive directors.

The practical challenge is significant. How does a board balance shareholders seeking short-term returns against employees concerned about job security, or communities affected by environmental impacts? The Code offers no easy answers, but it demands that boards show their working.

TCFD Climate Disclosure Rules for UK Listed Companies

The climate reporting landscape has transformed with remarkable speed. In April 2022, Britain became the first G20 nation to mandate Task Force on Climate-related Financial Disclosures reporting, affecting over 1,300 companies, pension funds and financial institutions. The “comply or explain” era for climate disclosure is ending; “comply and apply” is taking its place.

For boards embedding ESG into oversight frameworks, TCFD compliance requires disclosure across four pillars: governance arrangements for climate risks, strategic and financial planning impacts, risk management processes, and metrics and targets. The FCA introduced mandatory TCFD-aligned rules for premium listed companies in January 2021, extending to standard listed companies and asset managers the following year.

The FRC’s thematic reviews have been unsparing. While companies have made incremental progress on net zero commitments, disclosures of concrete actions remain unclear and comparability between companies is poor. Boards assuming their current approach will satisfy regulators may be in for a rude awakening.

Provision 29: Embedding ESG in Internal Controls

Provision 29 deserves particular attention. The requirement for a declaration of effectiveness over material controls represents a significant escalation in board accountability.

The FRC has been deliberately non-prescriptive about what constitutes a material control. But as PwC has observed, given ESG’s growing profile among investors but often immature control framework, controls over sustainability reporting should be considered material for many companies.

This creates a practical problem. Financial controls have been refined over decades. ESG controls are frequently ad hoc, under-resourced and poorly documented. A Deloitte analysis found that 46% of FTSE 100 companies restated sustainability metrics in 2023, either because measurements evolved or, more worryingly, because they were incorrect. Prior year restatements are comparatively rare in financial reporting. Boards will need to invest in infrastructure to support credible declarations, or face disclosing control failures in annual reports.

Investor Pressure and the Stewardship Code

Boards would be mistaken to view these requirements as purely regulatory. The UK Stewardship Code, substantially revised in 2020, has placed ESG at the centre of investor expectations. The Code defines stewardship as the responsible allocation of capital to create long-term value leading to sustainable benefits for the economy, environment and society.

There are currently 297 signatories to the Stewardship Code, representing over £52 trillion in assets under management. These investors are required to demonstrate how they integrate ESG factors into investment decisions and engagement activities. The FCA has made clear that if there is insufficient evidence of active stewardship on environmental and social goals, it will consider further regulatory action.

This creates a pincer movement. Companies face pressure from regulators through the Corporate Governance Code and from investors through the Stewardship Code. Boards that fail to demonstrate credible embedding of ESG will find themselves caught between both.

Board Diversity Rules Under FCA Listing Requirements

The 2024 Code addresses diversity as a governance imperative. Principle J requires appointments and succession plans to promote diversity, inclusion and equal opportunity. The FRC has avoided prescribing specific characteristics, instead encouraging boards to consider diversity in its broadest sense.

The rationale is straightforward: diverse boards make better decisions. Research consistently shows that varied perspectives reduce groupthink and improve risk identification. For boards embedding ESG into oversight, diversity of thought is essential to understanding stakeholder concerns.

The numbers tell their own story. The 2024 Parker Review reported that 70% of FTSE 250 companies now have at least one ethnic minority director, up from 60% in 2022. Listing Rules require 40% female board representation, at least one woman in a senior board position, and at least one director from a minority ethnic background. Progress is real, but unevenly distributed.

Setting Up a Board Sustainability Committee

For companies grappling with how to embed ESG into governance, sustainability committees offer one solution. Research from Mattison Public Relations found that 54% of FTSE 100 companies now have board-level ESG committees. Every oil, gas and mining company in the index operates one, including BP, Shell, Anglo American and Rio Tinto.

The Chartered Governance Institute published model terms of reference in January 2024 at the FRC’s request. Such committees can take responsibility for monitoring sustainability targets, reviewing ESG reporting, and advising remuneration committees on sustainability-linked incentives.

But committees alone are insufficient. Embedding ESG requires integration across the entire governance framework. Audit committees must scrutinise sustainability data reliability. Nomination committees must ensure boards have expertise to oversee complex environmental and social issues. Companies without ESG committees that think they can avoid this integration are, as one industry observer put it, now in a shrinking minority.

Executive Pay and ESG Performance Metrics

Executive pay remains contentious, and ESG adds new dimensions. The 2024 Code strengthens requirements around malus and clawback provisions, mandating detailed disclosure of circumstances triggering their use, applicable time periods and any invocations during the reporting period.

For companies embedding ESG into remuneration, this creates both opportunity and risk. Linking pay to sustainability outcomes can align management incentives with long-term value creation. But poorly designed metrics invite gaming, while aggressive clawback provisions may deter talented executives.

The guidance suggests sustainability committees may advise remuneration committees on ESG metrics for incentive plans. This cross-committee coordination reflects the integrated nature of effective ESG governance.

Corporate Culture and ESG: FRC Expectations

The 2024 Code places renewed emphasis on culture. Provision 2 now requires boards not merely to assess and monitor culture, but to evaluate how desired culture has been embedded throughout the organisation. The FRC’s guidance links culture explicitly to transparency, trust, respect and inclusion.

For boards embedding ESG into governance, culture determines whether sustainability commitments translate into operational reality. A company can publish ambitious net zero targets, but if prevailing culture rewards short-term financial performance above all else, those targets will remain aspirational.

The guidance encourages boards to monitor cultural indicators, employee engagement and ethical standards. Effective whistleblowing policies are highlighted as essential. Boards that fail to create environments where employees can raise concerns will be blindsided by problems that could have been addressed earlier.

FRC Reform and the Future of UK Governance

The regulatory trajectory is clear. The King’s Speech in July 2024 announced plans for an Audit Reform and Corporate Governance Bill to replace the FRC with a new statutory regulator, the Audit, Reporting and Governance Authority. This body will have strengthened enforcement powers, including the ability to sanction directors directly. The era of self-regulation is ending.

The first Code-compliant annual reports will appear from early 2026, with Provision 29 declarations following from early 2027. Boards that delay action risk scrambling to meet requirements their competitors have already addressed.

Private companies should not assume immunity. Large private companies subject to The Companies (Miscellaneous Reporting) Regulations 2018 must disclose governance arrangements. Many follow the Wates Principles, which draw heavily on the Code. Embedding ESG into governance will become a baseline expectation across the corporate landscape.

The companies that grasp this reality will build more resilient businesses. Those that treat ESG as a compliance burden rather than a strategic imperative will discover that both markets and regulators have ways of enforcing accountability, whether boards are ready or not.