The UK commits to harmonizing sustainability reporting requirements with international standards

In a statement by the Department for Business and Trade (DBT), it said that “UK endorsed standards will only divert from the global baseline [of the IFRS Sustainability Disclosure Standards] if absolutely necessary for UK specific matters.” By aligning with the IFRS Sustainability Disclosure Standards and publishing internationally comparable sustainability data, UK listed companies may find that they have greater access to sustainable finance opportunities around the world.

UK listed companies should begin, if they haven’t already done so, familiarising themselves with the current IFRS Sustainability Disclosure Standards on which the UK SDS will be based. In preparation for the introduction of the UK SDS, UK listed companies should begin assessing their current data collection practices to identify and address gaps. Ensuring data is comprehensive and robust will also help protect against potential allegations of greenwashing.

While some elements of the disclosure requirements under the IFRS Sustainability Disclosure Standards will already be familiar to UK listed companies, some concepts such as ‘double materiality’ may not be. Double materiality is a key tenet of the IFRS Sustainability Disclosure Standards and means that disclosures should both outline how sustainability issues impact companies and how companies’ activities impact sustainable development in the society and environment beyond their immediate operations. It's presumed that this principle will be reflected in the UK SDS.

Finally, UK listed companies should use the enhanced data collection and disclosure requirements that will be required under the UK SDS to identify areas for cost savings and value creation.

What are the UK SDS?

The UK SDS are due to be published by the Department for Business and Trade (DBT) in July 2024. They will define how companies communicate their exposure to sustainability-related risks and opportunities. The UK SDS will underpin any subsequent UK laws or rules that will require UK companies to disclose how they manage sustainability issues, such as those related to climate change.

The UK SDS will be based on the IFRS Sustainability Disclosure Standards issued in June 2023 by the IFRS’ standard setting body, the International Sustainability Standards Board.  There are currently two IFRS Sustainability Disclosure Standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information which provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term; and IFRS S2 Climate-related Disclosures which sets out specific climate-related disclosures and is designed to be used with IFRS S1. 

The UK SDS are part of a package of measures that the UK government is taking to improve the quality of the sustainability information that investors and consumers have access to.

Who will the UK SDS apply to?

The UK SDS will apply to UK listed companies, large UK registered private companies and large limited liability partnerships. Oversight of disclosures from UK listed companies will be managed by the Financial Conduct Authority (FCA), while disclosures from UK registered companies and limited liability partnerships will fall under government supervision.

Alignment

The plan to introduce the UK SDS comes in the wake of the UK government’s updated Green Finance Strategy, published earlier this year, in which the UK Government pledged to evaluate the IFRS Sustainability Disclosure Standards once published. By aligning the UK SDS with the IFRS Sustainability Disclosure Standards, the information companies disclose under UK SDS will be globally comparable and aid decision making for investors.

The UK SDS will also be closely aligned with existing frameworks such as the Task Force on Climate-related Financial Disclosures (TFCD), which already underpins the climate-related components of the IFRS Sustainability Disclosure Standards, as well as future frameworks such as the UK Green Taxonomy, also due to be published in July 2024.  

Furthermore, the UK SDS will sit alongside the FCA’s proposed Sustainability Disclosure Requirements (SDR), due to be published in Q4 of 2023. The FCA’s SDRs will apply specifically to FCA-regulated asset managers and distributors of investment products and will include a general ‘anti-greenwashing’ rule for all FCA-regulated firms.

Implementation

The UK government has established two committees to assist with the assessment and endorsement of the IFRS Sustainability Disclosure Standards and implementation of the resulting UK SDS:

• UK Sustainability Disclosure Technical Advisory Committee (TAC) which will assess the IFRS Sustainability Disclosure Standards on a technical basis and provide independent recommendations on endorsement to the Business and Trade Secretary, via DBT. TAC’s operations will be supported by the Financial Reporting Council (FRC). More information is available on the FRC website including a call for evidence on the IFRS Sustainability Disclosure Standards.
• UK Sustainability Disclosure Policy and Implementation Committee (PIC) members include UK government departments and regulators such as the FCA and FRC who will analyse the interactions between IFRS Sustainability Disclosure Standards and existing UK legislation and regulation and provide advice on an endorsement decision to the Business and Trade Secretary. If the Business and Trade Secretary endorses the standards, PIC will coordinate the implementation of UK SDS by the UK government and the FCA.

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