Growing web of complex ESG regulations will fundamentally change accounting for UK businesses

Environmental, Social, and Governance (ESG) regulations are rapidly evolving worldwide, demanding greater accountability from businesses to monitor and report their environmental impact. These regulations continue to expand in number and scope. 

In the UK, scope 1 and 2 emissions reporting is mandatory, while scope 3, all indirect emissions up and down stream in supply chains, remains voluntary.  The EU goes one step further; having some of the strictest ESG regulations in the world, with frameworks like the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), and the upcoming EU Deforestation Regulation (EUDR). 

Globally, the pressure to address the climate crisis is pushing countries to adopt similar regulations, often with severe penalties for non-compliance. As finance and sustainability functions become increasingly interconnected, accounting departments must be prepared to support these regulatory demands. Implementing advanced software solutions is critical to ensure accurate reporting and prevent the risk of non-compliance. 

Preparing for ESG Regulations is a global imperative 

Regardless of location, businesses need to assess and manage their environmental impact. This may arise from local government mandates or through supply chains, subsidiaries, and partnerships in regions with strict ESG reporting requirements, particularly within the EU.   

Non-compliance with ESG standards can result in significant consequences, including fines, restricted access to EU markets, and reputational harm. This underscores the global reach and increasing complexity of ESG regulations, particularly for businesses tied to international supply chains.

The EUDR: a sign of things to come

The European Deforestation Regulation (EUDR), which was adopted in 2023 and will come into force in 2025, obliges European companies to ensure that their supply chains are deforestation-free. 

The regulation focuses on the raw materials – like coffee, cocoa, palm oil, soya, rubber, wood and cattle, as well as a large number of relevant products such as chocolate, leather and paper. All market participants who import these product categories into the European market, place them on the market, trade them within the EU or export them must guarantee that they do not originate from a deforested area, have been produced in accordance with the legislation of the country of origin (e.g. with regard to land use, labour rights, human rights) and are covered by a ‘duty of care’ In its current form, the EUDR will affect 25% of UK businesses – enforcing the need to responsibly source deforestation-free goods.

Understanding the due diligence obligations that apply throughout the entire supply chain and manufacturing process is key. Appropriate preparations for affected businesses must include a stringent internal audit of all manufacturing processes, and the adoption of data management and risk analysis software. 

In the event of non-compliance, companies face severe sanctions – such as fines of up to 4% of turnover and the confiscation of the affected products.

The role of accounting in ESG compliance

For accounting teams, these regulations bring new responsibilities. ESG reporting requirements, especially those set by the EU, necessitate advanced solutions that can streamline and automate compliance. Automated, AI-augmented ESG platforms will become essential for businesses of all sizes, especially those managing complex global supply chains or lacking dedicated sustainability expertise.

Furthermore, the UK accounting industry is facing a ‘perfect storm’ of unique structural challenges which could limit the sector’s capacity to adapt effectively to these new rules. According to research by Advancetrack, an outsourcing specialist, nearly 45% of accounting firms are “severely” or “significantly” impacted by a shortage of skilled accountants, while three-quarters of the firms reported that partner hours had increased. While this is not a new or UK-specific issue, 2024 has seen the problem get worse – with the UK among the hardest hit. 

Investing in technologies that integrate seamlessly with existing ERP systems can save accountants’ precious time and reduce the risk of penalties by ensuring compliance with ever-evolving regulations. A regulatory landscape growing in scope makes one thing clear: inaction is no longer an option.