The UK Government has announced the endorsement of the UK version of the IFRS Foundation’s Sustainability Reporting Standards (UK SRS) with immediate effect. This will provide a framework for companies to report on a voluntary basis. This sits alongside the FCA’s consultation to finalise UK Listing Rules around the mandatory adoption of UK SRS S2 to replace TCFD.
This has followed extensive consultation with the market and emphasises the Government’s support of the transition to a climate resilient and sustainable economy as well as its ambition for the UK to be a centre of sustainable finance.
While they closely follow the above frameworks the key amendments made for the UK market are as follows:
1. Sustainability reports under these standards have to be produced in or at the same time as annual reports to be compliant. The global standards grant a relief but this relief has been removed for UK purposes. The consultation concluded that later publication would damage connectivity linking financial statements and narrative reporting.
2. S2 (the climate reporting standard) can be implemented first; before S1 (general sustainability requirements). Extension of the ‘climate-first’ approach to two years allowing entities to report on climate only for the first two years and bringing in wider sustainability-related matters in the third year of reporting. (This differs from the IFRS version which has a one year relief.) Entities may choose not to use this relief.
3. Removal of the ‘effective date’ clauses from UK SRS to avoid any confusion with the introduction of any reporting requirements. Instead, the effective date for UK SRS will be set out in any regulation or legislation if and when any reporting requirements are introduced. For voluntary reporters, UK SRS is available to use immediately.
4. Amendments have also been made to the reliefs within UK SRS S1 and UK SRS S2 which concern reporting on non-climate matters and Scope 3 GHG emissions, removing time limits on these with application of reliefs to be determined by the Companies Act, FCA’s Listing rules and any other regulations mandating use of the standard.
5. The government has confirmed that companies reporting in accordance with UK SRS S2 do not need to duplicate their disclosures in order to meet their obligations under section 414CB(2A) – climate related financial disclosures, so long as the relevant requirements under section 414CB (1) to (5) are met and the use of UK SRS S2 is clearly referenced in the relevant statement.
6. UK SRS has reduced the obligation on companies to refer to SASB standards when considering metrics. This reduces potential problems with providing evidence that all SASB standards have been considered.
7. The Government was asked to consider whether a specific relief from compliance with disclosure for scope 3 category 15 disclosures (financed emissions) was needed for financial institutions and additionally whether there should be a relief from restating comparatives to update for information from investees or borrowers. The government has added a mechanism for financial institutions to explain why they have not been able to comply with the financed emissions disclosure requirements. In respect of comparatives it has emphasised that exercise of judgement around materiality should be sufficient in many cases to achieve the desired effect.
What does it mean?
The new UK SRS do not, in themselves, oblige any company to implement them. They are, however, being used by the FCA as a basis for implementing sustainability disclosures from 2027. In addition these standards give UK voluntary adopters a basis for reporting that is aligned with global markets. Where adopted they will encourage entities to be transparent about the risks and opportunities of sustainability on the financial performance of the company.
Who are they applicable to and when?
The FCA is consulting on scope and timing of the regulation roll out for listed companies. They will be the first entities required to implement the regulations with a proposed effective date of reporting commencing after January 2027. While the government has previously indicated that it intended to introduce a similar obligation for the largest private companies, the timetable for this is now unclear.
Full details of the consultation are available here.
A standard governing the disclosure of material information that applies to any sustainability related risks and opportunities that could reasonably be expected to affect:
Cash flows.
Access to finance, or
Cost of capital over the short, medium, or long term.
These risks go beyond climate and may include biodiversity, workforce, supply chain and diversity topics where they have a material impact on the company. Disclosure is based around Governance, Strategy, Risk management and Metrics & Targets (following the structure of TCFD disclosures).
2. What is S2?
A standard governing the disclosure of material information about climate-related risks and opportunities, including physical and transition risks including:
Risk management processes and policies.
Responses to climate-related risks and opportunities (including progress against previous plans).
Climate resilience.
Metrics including greenhouse gas emissions.
Climate-related targets.
The disclosures should follow the same structure as S1 as detailed above.
3. How does S2 differ from TCFD?
SRS S2 is based on the TCFD framework (and will replace this disclosure for listed companies) but focuses on increasing quantitative information. These include: the financial impacts of risks and opportunities, detailed scenario modelling, material emissions disclosure, and assurance ready data quality. We will be releasing a more detailed account of the differences.
4. What are financed emissions?
Financed emissions are greenhouse gas emissions by investees of the company reporting such as emissions by investment holdings or fund managers.
5. What is SASB?
The Sustainability Accounting Standards Board (SASB) was founded in the US to simplify and standardise the reporting language of sustainability. The Standards identify sustainability disclosure topics that are reasonably likely to be relevant within 77 different industries by producing materiality maps.
The SASB Standards have been adopted, and are now maintained, by the International Sustainability Standards Board (ISSB). They help companies apply the ISSB’s requirements particularly IFRS S1 and provide a starting point by which to assess a company’s financially material sustainability topics and apply industry specific metrics. UK companies can, but are not required, to use the SASB standards under SRS S1 and S2.
Our sustainability experts
Andrew Jones
Head of Narrative and Sustainability Reporting
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London
