Out-Law News 4 min. read
16 Aug 2023, 3:10 pm
New UK sustainability corporate disclosure standards are expected to be endorsed by the UK government by July 2024.
The UK standards will be based on those issued by the International Sustainability Standards Board (ISSB) in June and “will only divert from the global baseline if absolutely necessary for UK specific matters”, the government said.
“The disclosures required by these standards will help investors to compare information between companies, thereby aiding decision making; supporting the efficient allocation of capital, and smooth running of the UK’s capital markets,” the government said.
The ISSB’s ‘S1’ and ‘S2’ standards envisage the disclosure by businesses of material information about all sustainability‑related and climate-related risks and opportunities they are exposed to.
Currently, the ISSB standards can be voluntarily adopted by businesses. In time, however, they are expected to form the basis of new disclosure obligations in law and regulation, globally – including in the UK.
As well as the UK government exploring new ISSB standards-based requirements for UK registered companies and limited liability partnerships, the UK’s Financial Conduct Authority (FCA) has separately confirmed that it intends to update its existing rules on climate-related reporting for listed companies – which are based on recommendations made by the Task Force on Climate-Related Financial Disclosures (TCFD) – to “refer to the UK-endorsed ISSB standards”. It said it expects to consult on proposals to implement disclosure rules referencing the UK-endorsed standards for UK-listed companies in the first half of 2024.
It is currently envisaged that the FCA’s new rules would come into force for accounting periods beginning on or after 1 January 2025, meaning the first reporting in line with the new rules would begin from 2026.
Euan McVicar, a climate and sustainability adviser at Pinsent Masons, said: “Some will say, given that the ISSB standards have been finalised since June and their evolution had been clearly signposted by ISSB, that a goal of endorsing them by June 2024 is too slow, particularly if little change from the standards is anticipated. This may suggest that significant thinking is still ongoing as to which entities will be required to report against these standards.”
“We know that it is proposed that listed companies will be included, but it is unclear whether the requirements will extend to those large companies and LLPs currently required to make mandatory TCFD-style disclosures in the UK. The intended application across the wider economy is also unclear,” he said.
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It seems sensible to encourage companies to engage sooner than later and to use a voluntary period to implement to the best they can, with gaps in implementation being explained … TCFD is the perfect foundation on which to prepare for ISSB disclosures
McVicar said that businesses need time to prepare for the new rules and would welcome further signposting from the government on who will be in-scope. He said businesses in the EU benefit from a “very clear roadmap” which lets companies understand when they will need to comply with the new – CSRD – sustainability reporting standards, with a staggered roll-out planned from 2024 through to 2030.
McVicar said: “UK endorsement of the standards in July 2024 will lag a year behind the EU’s finalisation of the comparable EFRAG standards and will coincide with the time by which EU member states are required to have implemented the CSRD. While the two sets of standards have much in common and interoperability has been considered, the earlier roll out of CSRD may mean that the EU effectively sets the bar and leads the agenda going forward given the global reach of the groups that will be in-scope for mandatory CSRD reporting compared to mandatory ISSB reporting and the information they will disclose.”
The FCA said that it further intends to consult on new guidance for UK-listed companies in relation to transition plan disclosures. This consultation is expected to happen alongside its consultation on the new disclosure rules, it said.
The transition plan disclosures guidance will be informed by the output from the work of the UK Transition Plan Taskforce (TPT), the FCA said. The TPT was launched by the Treasury in April 2022 and is comprised of representatives from across business, academia, civil society, government and regulators. It is tasked with developing standards in relation to net zero transition plans under the government’s broader green finance roadmap and is expected to finalise its sector-neutral disclosure framework in October 2023. It provided a status update on its work (30-page / 5.2MB PDF) last month in which it confirmed its plans to follow publication of the new framework with new implementation guidance.
The FCA said: “The ISSB standards and enhanced transition plan guidance won’t replace the TCFD disclosure framework immediately. But we strongly encourage listed companies and their advisers to start considering the standards now, and to build them into their plans for future reporting.”
According to the regulator, actions firms can take include improving their reporting in line with existing climate-related disclosure rules; engaging early on the new S1 and S2 standards and associated guidance, and with the TPT’s output when it is published and consider reporting on a voluntary basis; and engage with the process for the endorsement and implementation of the ISSB standards in the UK.
McVicar said companies that are familiar with TCFD-style reporting will face having to make smaller adjustments to their practices than those that will need to become accustomed to the new ISSB-based standards from scratch.
“It seems sensible to encourage companies to engage sooner than later and to use a voluntary period to implement to the best they can, with gaps in implementation being explained,” McVicar said. “Encouraging those who may be affected to start to build on their TCFD reporting would be sensible, as would encouraging those who have not yet got to grips with TCFD. TCFD is the perfect foundation on which to prepare for ISSB disclosures.”
“Even if companies may not be initially affected by ISSB requirements, they are likely to feature in the value chains of those who are. Being able to show alignment with, and understanding of, the standards is likely to confer some degree of competitive advantage,” he said.
Hayden Morgan, specialist in sustainable finance consulting at Pinsent Masons, said: “The ISSB standards are designed to establish a minimum baseline of sustainability disclosures. Firms are advised to consider the operational implications of the maelstrom of incoming regimes. Consideration should be given, not only from the perspective of the more-stringent disclosure requirements of EU CSRD, but also the operational interface with the TPT proposals, in particular.”
“Prudent firms will assess how stakeholders, such as regulators, lenders and investors, will apply additional scrutiny on disclosures and start to make plans accordingly. For some firms this could require potentially significant governance enhancement across organisational strategy, internal control, risk management, financial forecasting, scenario analysis, stress testing, and defining sustainability-related metrics. Firms are now waking up to the full implications of this which are unprecedented, and yet will require a fulsome strategic and operational response,” he said.
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