UK’s Sustainability Reporting Standards: scope for divergence, timing and implementation process

In May, the Department for Business and Trade (“DBT”) published its Framework and Terms of Reference for the Development of UK Sustainability Reporting Standards (“UK Framework”). The UK Framework sets out the timing and process for endorsing, and then implementing, the sustainability (S1) and climate-related (S2) disclosure standards published by the International Sustainability Standards Board (“ISSB Standards”) ^[1] in order to develop a set of UK Sustainability Reporting Standards for businesses (“UK SRS”). 

For corporates, the UK Framework offers a bit more clarity on what, when and how they may become subject to updated requirements relating to sustainability disclosures in the UK. It also offers opportunities to engage with the changes early on to help shape them or, in any event, better understand what is coming down the track.

This continues the UK’s long-term ambition to align its corporate sustainability and climate-related reporting with international standards, and sits within wider government efforts to develop a Sustainability Disclosure Requirements regime (“SDR Regime”), which will include work on transition plans, nature-related disclosures, sustainability investment labels, and a UK green taxonomy^[2].

Setting the parameters for any changes 

The UK Framework sets the parameters within which the UK might seek to diverge from the ISSB Standards, in particular emphasising that a wide range of factors can be taken into account by the Secretary of State for Business (“SoS”) in making their endorsement decision. These factors include whether the use of the standards in the UK would be conducive to economic growth, whether they would support the UK’s international competitiveness, and the extent to which they would inform investor decision-making.

The UK Framework also clarifies that the UK SRS are not expected to be applied to companies before accounting periods beginning on or after 1 January 2026. The text of the UK SRS, following endorsement and public consultation, is expected to be available in the first quarter of 2025 for review (it was initially going to be created by mid-2024), followed by an implementation process, as summarised in the next section below. 

The UK Framework should also be read alongside the DBT’s consultation on simplifying non-financial reporting in the UK, which was also published in May, and which proposes to take forward changes to reclassify an estimated 7,000 “large” companies as “medium-sized” companies. This would effectively take such companies out of scope of the non-financial and sustainability reporting requirements. So, as the Government looks set to move towards more standardised sustainability reporting, there is also a move to reduce the number of companies in scope of the reporting requirements.

Finally, the UK Framework has announced the creation of two bodies to help advise and oversee the process of first endorsing (or modifying) the ISSB Standards, and then implementing them: the UK Sustainability Disclosure Technical Advisory Committee (“TAC”), which will provide technical analysis; and the Policy and Implementation Committee (“PIC”), which will help coordinate implementation between the UK government and the FCA.

The proposed process for how the UK SRS will be brought in

The UK has proposed a multi-stage process over the next year and a half for bringing in the UK SRS for companies, and parallel FCA rule changes for listed companies:

1. in the next 6 months, the TAC is expected to consult on the ISSB Standards and then propose amendments to them to the SoS, taking into account:
   
   1. whether they consider changes to be necessary for “effective application” of the ISSB Standards in a UK context;
   2. if a failure to amend the ISSB Standards would “be of detriment to the long-term public good in the UK”; 
   3. whether changes are desirable to build on the material provided by the ISSB Standards, based on a specific request from the DBT or UK stakeholders;
   4. if companies would be able to provide the disclosures required within their normal reporting timeframes, without undue cost or effort;
   5. if changes would lead to an improvement in the international comparability of sustainability-related reporting in the UK, support companies in making disclosures, and improve the quality of corporate reporting; and
       
2. Likely in Q1 2025, the SoS will decide whether to endorse the ISSB Standards in a modified or unmodified form, drawing on considerations of economic growth, competitiveness and informativeness as mentioned above, thereby creating the UK SRS;
    
3. Likely in Q2 2025, the FCA will consider how to use the UK SRS to introduce sustainability-related reporting requirements for listed companies, and at the same time, the UK Government will decide on disclosure requirements and exemptions for companies that do not fall within the FCA’s remit. In doing so, we would expect the Government to look to balance factors such as the associated costs of reporting against the potential benefit to investors of this information; 
    
4. Finally, and subject to public consultation, the FCA, using existing powers under the Financial Services and Markets Act 2000, would look to implement changes to the Listing Rules, and the UK Government would seek parliamentary approval for legislation to bring in the changes (presumably via primary legislation), not to take effect before 1 January 2026.

All of this is, of course, subject to the potential impact of the upcoming UK General Election, which will be held on 4 July.

[1] A more detailed look at the ISSB’s Standards can be found in our Getting Ready series. 

[2] The Government’s Sustainability Disclosure Requirements: Implementation Update 2024 can be found here.