The Role of ESG Regulation in UK IPOs: Implications for Businesses, Legal Practice, and Consumer Interests

Written By York Law Society

Introduction & Background

In recent years, Environmental, Social, and Governance (ESG) considerations have emerged as pivotal factors shaping the landscape of Initial Public Offerings (IPOs) in the United Kingdom. ESG criteria, once overlooked in the IPO process, is now central to a company’s ability to attract investors, meet regulatory standards, and secure a successful public listing. The increased focus on ESG is driven by a combination of investor demand, regulatory changes, and the UK’s commitment to sustainability under frameworks like the Climate Change Act 2008 and the Paris Agreement. Consequently, the Financial Conduct Authority (FCA) has implemented stringent climate-related disclosure requirements for companies pursuing a premium listing on the London Stock Exchange, following the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

This shift marks a significant change from past IPO processes, where financial performance was often the sole metric of concern. The introduction of ESG mandates represents an ethical and operational transformation that affects not only businesses but also the legal sector and consumers. 

This article analyses the impact and necessity of ESG regulations in the UK IPO market, focusing on the consequences for businesses, the legal sector, and consumers. Through an evaluation of these impacts, the essay assesses whether the overall effect of ESG regulations is beneficial or challenging for each group. This article argues that, ESG regulations, though complex, ultimately strengthen the ethical framework of UK financial markets, for all parties involved. 

Effects of Tightened ESG Regulations on Businesses

The introduction of ESG regulations has profound implications for businesses seeking to go public. Today, companies preparing for an IPO must comply with more rigorous ESG standards than ever before, which can affect both their operational structure and public valuation. This compliance requirement stems from legislation such as Section 172 of the Companies Act 2006, which mandates that directors consider the long-term impacts of their decisions on a broad range of stakeholders, including employees, the community, and the environment. ESG regulations thus expand traditional fiduciary duties, obligating companies to address sustainability and governance as part of their corporate strategy.

The case of Re Smith & Fawcett Ltd laid the groundwork for understanding directors' duties, establishing that directors must act “in what they consider to be the best interests of the company.” This fiduciary duty is further complicated by ESG expectations, which demand that directors consider factors beyond immediate financial returns. Neglecting material ESG risks can have serious implications for a company’s reputation and legal standing, as seen in the 2021 Deliveroo IPO. Major institutional investors declined to participate in Deliveroo’s offering, citing concerns over the company’s treatment of gig-economy workers. This backlash resulted in a substantial decrease in Deliveroo’s market valuation, demonstrating that ESG issues are not just ethical considerations but also material financial risks.

In addition to reputational concerns, not adhering to these ESG standards can expose companies to legal liabilities. HRH Emere Godwin Bebe Okpabi and Others v Royal Dutch Shell plc illustrate this point. The case involved Nigerian communities affected by environmental degradation allegedly caused by Shell’s operations. The UK Supreme Court ruled that the parent company could potentially owe a duty of care to affected parties, establishing a precedent for holding UK-based companies accountable for ESG failures even in foreign jurisdictions. UK courts are increasingly willing to hold corporations accountable for ESG-related breaches, even across borders. This sets a precedent that reinforces the importance of robust ESG standards for companies, highlighting how regulatory shifts are mirrored in judicial decisions that prioritise global corporate responsibility.

While ESG compliance can be costly, especially for small and medium-sized enterprises, the benefits often outweigh the initial investment. By adhering to ESG standards, companies can attract a broader range of investors, enhance their market reputation, and mitigate long-term risks. In an increasingly ESG-conscious investment landscape, businesses that prioritise sustainability and governance gain a competitive edge, appealing to institutional investors and funds dedicated to responsible investment. 

Effects of Tightened ESG Regulations on the Legal Sector

The legal sector has seen a dramatic rise in demand for ESG-related services as companies navigate increasingly complex compliance obligations. With regulations like the Companies Act 2006 (Section 414C), requiring companies to disclose non-financial information, including social and environmental impacts; corporate law practices now play a pivotal role in guiding clients through ESG compliance frameworks. These disclosure requirements have made ESG advisory services essential for law firms, especially as clients seek to align with regulatory expectations while mitigating potential legal risks.

The case of Commonwealth Oil and Gas Co Ltd v Baxter highlights directors’ fiduciary duties to act in good faith, a principle now extended to encompass ESG considerations. In an environment where ESG-related risks are increasingly material, directors and legal advisors must ensure that corporate decisions align with both shareholder interests and broader societal impacts. Failure to consider ESG risks could expose directors to claims of breaching fiduciary duties, adding new layers of responsibility for legal advisors.

One area of particular concern is greenwashing, where companies falsely claim to adhere to environmental standards to attract consumers or investors. The Competition and Markets Authority (CMA) has taken a firm stance on greenwashing, launching investigations into misleading environmental claims in sectors such as fashion and food. This regulatory scrutiny means that legal advisors must be vigilant in helping clients develop accurate, defensible ESG claims to avoid enforcement actions and reputational damage.

Furthermore, the introduction of mandatory climate-related disclosures has increased the need for expertise in environmental law and regulatory adherence. Law firms have adapted by creating dedicated ESG teams, providing both compliance and litigation services in response to the risks of non-compliance. The heightened demand for ESG related legal services underscores how these regulations have reshaped corporate law practice, creating new responsibilities for legal professionals to help clients navigate a rapidly evolving regulatory landscape. 

Whilst ESG regulations have created new opportunities for law firms, smaller firms often lack the resources to develop specialised ESG advisory services. This may lead to restricting the consolidation of ESG expertise to only larger, well-resourced firms, potentially widening the gap between large and small practices in the corporate law sector.

Effects of Tightened ESG Regulations on Consumers

The impact of ESG regulations on consumers is both direct and indirect, affecting their decision-making power, access to information, and product pricing. ESG regulations require companies to disclose information about their environmental and social practices, thereby increasing transparency and allowing consumers to make informed choices based on ethical and sustainability considerations. 

For example, the recent introduction of mandatory climate-related financial disclosures enhances transparency, enabling consumers to assess the environmental footprint of companies listed on the London Stock Exchange.

Case law also highlights the role of ethical considerations in consumer-related cases. In Lundie v Scottish Equitable, a case involving pension funds, the court acknowledged the relevance of ethical investments in financial decisions. This decision reflects a growing trend in which ethical considerations, such as environmental and social impacts, influence consumer choices and legal standards alike. ESG transparency allows consumers to make decisions aligned with their values, contributing to a more responsible marketplace.

However, ESG regulations also have cost implications for consumers. Adherence with ESG standards often increases operational costs for companies, which may be passed down to consumers in the form of higher prices. For instance, brands with strong ESG commitments, like Patagonia, often sell products at premium prices, which may be unaffordable for lower-income consumers. This raises concerns about the accessibility of sustainable products, as the cost burden of ESG compliance disproportionately affects price-sensitive consumers. While some consumers are willing to pay a premium for ethical products, ESG regulations may inadvertently limit access for a broader audience.

To address these accessibility issues, some companies are adopting a 'circular economy' model, offering repair and recycling options to reduce costs for consumers. Additionally, government incentives for companies that adhere to ESG standards could help offset compliance costs, allowing these savings to be passed on to consumers. Such solutions could make sustainability more inclusive, ensuring that the benefits of ESG regulations extend to a wider demographic.

This shift reflects a broader societal movement toward sustainability, suggesting that ESG regulations contribute positively to consumer welfare by promoting ethical standards and reducing corporate misconduct.

Conclusion

In conclusion, ESG regulations in the UK IPO market represent a transformative shift that affects businesses, the legal sector, and consumers in distinct yet interconnected ways. For businesses, these regulations introduce substantial compliance costs and necessitate new governance structures, but they also offer a pathway to reputational enhancement and investor attraction. The Deliveroo IPO and the Okpabi case reinforce the risks of neglecting ESG concerns, highlighting how regulatory expectations and societal pressures increasingly converge.

For the legal sector, ESG regulations create both opportunities and challenges. Law firms must provide comprehensive advisory services to clients navigating these standards, ensuring compliance, and helping companies avoid greenwashing claims. The evolving regulatory environment has spurred demand for ESG expertise within corporate law, reflecting how ESG considerations are becoming essential to corporate governance.

Consumers, meanwhile, benefit from increased transparency, enabling them to make more informed and value-aligned decisions. However, the potential for higher product costs raises concerns about the accessibility of sustainably produced goods, particularly for lower-income groups. Nonetheless, by promoting corporate accountability and encouraging ethical consumption, ESG regulations have a net positive effect on consumer welfare.

Overall, the necessity and impact of ESG regulations in the UK IPO market underscore the shift toward a more ethical and sustainable economic framework. While compliance can be challenging, especially for smaller companies, the long-term benefits for businesses, the legal sector, and consumers are substantial. Businesses gain enhanced reputation and investor trust, law firms see new growth opportunities in ESG advisory and compliance, and consumers enjoy greater transparency, enabling value aligned choices.

Ultimately, ESG regulations serve as a foundation for creating a more responsible, and transparent marketplace that aligns with the UK’s broader goals of sustainability and ethical governance. By compelling companies to consider their broader social and environmental responsibilities, ESG regulations contribute to the development of an ecosystem where profitability and accountability coexist, ultimately strengthening the integrity of the UK market, for everyone group involved, specifically in the long term. 

Andreas Frangeskides

Bibliography

Legislation

  • Climate Change Act 2008.

  • Companies Act 2006.

Cases

  • Commonwealth Oil and Gas Co Ltd v Baxter [2009] SC 15.

  • Lundie v Scottish Equitable [2000] 1 BCLC 725 (CA).

  • Okpabi v Royal Dutch Shell plc [2021] UKSC 3.

  • Re Smith & Fawcett Ltd [1942] Ch 304 (CA).

International Agreements

  • Paris Agreement (adopted 12 December 2015, entered into force 4 November 2016) 

Regulatory and Government Publications

  • Competition and Markets Authority, 'Guidance on environmental claims on goods and services' (CMA, 2021).

  • Financial Conduct Authority, 'PS20/17: ‘Enhancing climate-related disclosures by listed issuers' (FCA, 2020).

Articles and Websites

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