Sustainability reporting in the UK: what’s next?

There has been a flurry of activity in the sustainability reporting landscape in recent weeks. We discussed the launch of the International Sustainability Standards Board (“ISSB”) standards back in July (see here), which were closely followed by the European Commission adopting the EU sustainability reporting standards (“ESRS”) (see our blog here, which includes a brief analysis of the interoperability between the ESRS and the ISSB standards). We have provided a brief round-up of recent developments in the UK below.

UK Government response to the ISSB standards

The UK Government has long indicated its intention to integrate the ISSB standards into law. This process will be spearheaded by the Department for Business and Trade (“DBT”), who published high level guidance earlier this month.

Whilst the guidance gathered some press attention, the contents are not wholly new, as they effectively reiterate the UK Government’s commitment to adopt the standards, and provide a bit more colour on the process, which can be split into two stages:

1. Endorsement: over the next year, the UK Government will consider whether or not to endorse the ISSB standards to create the UK Sustainability Disclosure Standards (“SDS”). A decision is expected to be taken by July 2024, and a framework document for the endorsement process is expected shortly. The intention is that the UK SDS will only differ from the ISSB standards “if absolutely necessary for UK specific matters”. The overarching aim appears to be ensuring that the UK SDS can work effectively in UK legislation. For example, the ISSB standards contain references to the SASB standards which would need to be modified for use in domestic legislation (as they are third party standards). 

To assist with the endorsement process, the UK Government has created two committees:

• The UK Sustainability Disclosure Technical Advisory Committee (“TAC”), which will assess the ISSB standards on a technical basis and provide independent recommendations on endorsement to the UK Government.[1]
• The UK Sustainability Disclosure Policy and Implementation Committee, whose work will include an analysis of the interactions between the ISSB standards and existing UK legislation and regulation.

2. Legislating: following endorsement, the next step will be to introduce legal requirements for UK entities. Similarly to when TCFD-related requirements were introduced in the UK, the UK Government will decide how such standards will apply to UK registered companies and limited liability partnerships, whilst the Financial Conduct Authority (“FCA”) will decide on the approach for listed companies. 

FCA response to the ISSB standards

The ISSB standards were the first item on the FCA’s agenda in its Primary Market Bulletin 45, published on 10 August 2023. Anticipating the likely UK Government endorsement, the FCA intends to consult on proposals to implement disclosure rules referencing the UK-endorsed ISSB standards for listed companies in the first half of 2024. If the UK Government completes the endorsement process by July 2024, the FCA will aim to finalise its policy position by the end of 2024, “with a view to bring new requirements into force for accounting periods beginning on or after 1 January 2025”. As a result, the first wave of UK SDS reporting would be expected to begin from 2026 for listed companies (reporting on financial year 2025).

Whilst consulting on the ISSB standards, the FCA will also seek feedback on guidance that will set out its expectations for transition plan disclosures for listed companies, which it will develop with reference to the final outputs of the Transition Plan Taskforce (“TPT”) (expected to be published this October). The FCA notes that, whilst the ISSB standards do include disclosures that relate to transition planning, listed companies would benefit from “additional clarity on what a good practice climate transition plan should cover”. The FCA expects the TPT to provide that detail. Consulting on both topics at the same time will enable the FCA to “explicitly recognise” the relationship between the TPT Framework and the ISSB standards.

We note that the UK Government has separately committed to consult on introducing requirements for the UK’s largest companies to disclose their transition plans, if they have them. The consultation is expected in Q4 2023, following the release of the TPT Framework. This is expected to complement the FCA’s requirements and ensure that disclosure requirements for listed and large private companies are consistent.

Helpfully, in the Bulletin, the FCA set out actions that listed companies can take to prepare for reporting in line with the ISSB standards and enhanced transition plan guidance:

• Continue to improve reporting in line with existing climate-related disclosure rules. The ISSB standards build on existing rules such as the TCFD framework (a helpful comparison between the two has already been published – see here). As a result, it makes sense for listed companies to continue to improve their existing climate reporting, by reviewing the TCFD recommendations and guidance and advice produced to date by the FCA and the Financial Reporting Council.
• Engage early with the ISSB standards, the associated guidance, and the TPT Disclosure Framework and Guidance (once published) and consider reporting on a voluntary basis. Putting the work in now will help listed companies to identify data gaps and opportunities to improve internal processes well ahead of the requirements becoming mandatory. In fact, the FCA actively “encourage[s]” listed companies to report in alignment with the ISSB standards and the TPT Framework on a voluntary basis.
• Engage with the UK endorsement and implementation process for the ISSB standards. The FCA encourages listed companies to engage with the TAC’s call for evidence (described at footnote 1) and the FCA’s upcoming consultation.

Non-listed companies looking to prepare for making ISSB-aligned disclosures may also wish to take note of these suggestions. In particular, identifying the work needed to be done (and who will need to do that work) in order to comply with the requirements will be an important task.

Other developments in non-financial reporting

The DBT is also focused on the bigger picture when it comes to non-financial reporting. As part of the UK Government’s push for ‘smarter regulation’, the DBT launched a consultation in May on the non-financial reporting requirements UK companies need to comply with to produce their annual report, in part to consider whether these could be streamlined.

The UK Government is keen to “improve regulation across the board”, to reduce burdens and drive economic growth following the UK’s departure from the EU. The DBT is hoping to assess whether non-financial reporting could be made simpler, taking into account the UK’s specific circumstances. The review is seeking feedback on the content of the Strategic Report and the Directors’ Report (amongst other things).

The review will also consider current company size thresholds (micro, small, medium and large) to determine whether they remain appropriate. The UK Government wants to explore whether these could be rationalised and simplified, given that the current thresholds and systems of exemptions are thought by many to be too complicated.

We can expect to see ideas being developed over the coming months, which will likely range from ‘quick wins’ (e.g. streamlining the content of the Strategic Report and the Directors’ Report) to bigger picture changes to the reporting framework. As recommended by the FCA above, engaging with the process at an early stage can be a useful way for companies to prepare for any upcoming changes.

Overall, there is a lot coming down the track – whilst the impact will not be immediate, companies should start engaging with these developments at an early stage to ensure that they are well placed to meet the growing expectations around sustainability reporting in the UK.

[1] call for evidence to gather feedback on the application of the ISSB standards in a UK context, which closes on 11 October 2023.

The Financial Reporting Council is supporting the TAC, and recently issued a