09/08/23

GREEN FINANCE: UK Government sets out next steps for UK Sustainability Reporting

As published on: lexology.com, Wednesday 9 August, 2023.

Guidance published on the government’s framework to create UK Sustainability Disclosure Standards

Why should I read this?

Following the recent publication of the first two IFRS Sustainability Disclosure Standards (IFRS S1  –  General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 – Climate-related Disclosures) by the International Sustainability Standards Board (ISSB) UK businesses may be wondering about the next steps as regards sustainability and climate reporting in the UK.

The UK Government have now published guidance on the framework to create UK Sustainability Disclosure Standards (UK SDS). UK SDS will be based on the IFRS Sustainability Disclosure Standards, and will require disclosures on the sustainability risks and opportunities that companies face. Future legislative and regulatory requirements for UK corporate sustainability reporting will be based on UK SDS.

The government intends to create UK SDS, reflecting the matters covered by IFRS S1 and IFRS S2, by July 2024. There is likely to be consultation to determine the companies initially in scope. The timing for reporting will also need to be confirmed, which could be as early as financial years commencing from 1 January 2025.

What else do I need to know about UK SDS?

In its 2023 Green Finance Strategy, the UK Government stated they would set up a framework to assess the IFRS Sustainability Disclosure Standards for their suitability for adoption in the UK once the final standards were published.

The published guidance states that UK endorsed standards, to be known as UK SDS, will only divert from the global baseline published by the ISSB if absolutely necessary for UK specific matters, to ensure that disclosures are globally comparable and decision-useful for investors.

Who will UK SDS apply to?

Decisions to require disclosure in line with UK SDS will be taken by the UK Ggovernment for UK registered companies and limited liability partnerships (LLPs) and by the Financial Conduct Authority (FCA) for UK listed companies.

Currently, certain UK companies, including ‘large’ UK private companies and LLPs with an annual turnover of more than £500 million and having at least 500 employees, are required to make certain mandatory climate-related financial disclosures based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) under the UK Companies Act. While the government has not yet confirmed whether the same financial thresholds will apply to require private companies to report under UK SDS, this may be their starting point. The Listing Rules also require listed companies to make TCFD-aligned disclosures. The FCA have stated their intention to consult at the appropriate time on amending the Listing Rule disclosures to align to the ISSB standards. IFRS S1 and IFRS S2 fully incorporate the recommendations of the TCFD, and the IFRS Foundation will take over the monitoring of climate-related disclosures going forwards.

Timing and next steps

Work is underway to assess and endorse the IFRS Sustainability Disclosure Standards to create UK SDS. The Financial Reporting Council (FRC) recently issued a call for evidence inviting those who will be responsible for preparing disclosures of non-financial information to give their views on the application of the standards in the UK.

The government intends to create UK SDS by July 2024. The guidance does not state whether exposure drafts of the first two standards will be made available earlier for comment. There may also be a period of consultation to determine which entities are in scope to report and when before we see UK reporting in line with UK SDS.

How will this impact my organisation?

Based on the FCA’s intention, listed companies will find themselves in scope of UK SDS once changes to the Listing Rules take effect and may be the first to apply the standards. Other ‘large’ UK companies currently required to make TCFD-aligned disclosures may also be in scope (although this will not be known until the government publishes a consultation or further detail about the UK companies it intends should apply the UK standards). Such companies may therefore wish to consider the IFRS Sustainability Disclosure Standards and the questions raised by the FRC in their call for evidence to understand the nature and scope of the enhanced sustainability-related disclosures they will have to make under UK SDS and how they will manage this process.

Tags

Green Finance UK ESG Sustainable Finance Regulation