UK ESG Legislation Update: What's Coming & How to Prepare
Whilst It might seem like new ESG (Environmental, social and governance) disclosure legislation is announced every week, the UK is one the last countries to formalise requirements.
But that’s about to change (in early 2025) as the UK looks to endorse their own Sustainability Reporting Standards (UK SRS). While it is not yet confirmed exactly when these requirements will be made mandatory, the direction of travel is clear; disclosure on ESG matters will become a core reporting requirement for UK businesses.
As with any new requirements, it will take time at the outset to understand exactly how this fits into your annual reporting cycle but starting to prepare now will make it a much easier task and will ultimately foster trust among investors and stakeholders about the resilience of your business.
Good news
The UK SRS are set to align with the International Sustainability Standards Board (ISSB) guidelines, for those entities already reporting in other jurisdictions, this will feel like a walk in the park. They also align with TCFD (Task Force on Climate-related Financial Disclosures) which larger organisations are already disclosing against.
Who needs to know?
The UK SRS will apply primarily to UK-listed companies, but there are plans to extend these requirements to non-listed companies as well.
Key Components of the Standards
The UK SRS will include two main standards:
IFRS S1 – General Sustainability Disclosures: This standard mandates comprehensive reporting on a company's sustainability impacts, covering sustainability-related risks and opportunities that are material to the entity.
IFRS S2 – Climate-Related Disclosures: This focuses specifically on climate-related risks, requiring companies to detail how climate change affects their operations and financial performance
Additionally, the Transition Plan Taskforce (TPT) framework will guide companies in developing their strategies for achieving net-zero emissions
What exactly will companies be required to report?
As dictated by the ISSB, IFRS S1 focuses on general sustainability disclosures.
Companies will need to disclose information about ‘all sustainability-related risks and opportunities, across the whole value chain, that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term’ —think social issues, environmental concerns, and governance practices.
IFRS S2 zeroes in on climate-related disclosures. This standard requires companies to assess how climate change could impact their financial health over various timeframes.
It’s all about understanding both immediate and long-term risks.
Preparing for UK SRS
While the specifics are still being finalised, we do know enough to start preparing now.
The more you can do now, the smoother the transition to compliant disclosure.
Materiality Assessment: Companies should evaluate their sustainability impacts and identify significant risks and opportunities related to environmental, social, and governance (ESG) factors. This assessment will help prioritise issues that need to be reported under the new standards
Conduct a Gap Analysis against SRS requirements: Organisations should assess their current sustainability practices to determine alignment with the anticipated requirements of the UK SRS and identify where gaps exist. This includes evaluating data collection processes and overall reporting accuracy
Enhance Governance and Data Processes: Companies should ensure their governance structures are robust enough to support enhanced reporting requirements. This may involve integrating new technologies, providing staff training, and establishing clearer communication channels for sustainability data management
Begin Reporting Voluntarily: Firms should start aligning their disclosures with the IFRS S1 and S2 standards. Even partial disclosure and alignment will help companies familiarise themselves with the reporting process.
Increase Supply Chain Transparency: Organisations should enhance transparency throughout their supply chains by adopting new business practices that align with sustainable operations, preparing them for potential future requirements
Timeline for Announcement and Implementation
December 2024: The committee set up by the Department of Business and Trade finalised its endorsement recommendations to the UK Government for UK sustainability reporting standards (SRS), based on those from the International Sustainability Standards Board (ISSB)
Q1 2025: The UK government plans to finalise the UK SRS by Q1 2025, following consultations, including with the FCA for implementation for listed companies.
Q2 2025: The Government expects a decision regarding future requirements to be taken with regard to applicability beyond listed companies.
1 January 2026: Earliest reporting obligations would take effect based on accounting periods beginning on or after 1 January 2026.
Our advice
Speaking from experience, companies have everything to gain by taking a proactive approach to compliance with this legislation.
Getting ahead with planning reaps rewards in the form of resource efficiencies as well as enabling them to position themselves favourably in a competitive marketplace which is increasingly driven by sustainability considerations.