Many US-based multinationals are required to comply with current UK climate disclosure requirements. Last month during London Climate Action Week, the UK launched three consultations on sustainability reporting, which are open until mid-September. This post is focused on what US-based multinationals doing business in the UK need to know about the consultations.
What are the consultations?
The UK Government is conducting three consultations, as described below. The consultations are intended as the first step in developing a UK sustainability reporting framework that is fit for the long term.
- Exposure drafts of UK Sustainability Reporting Standards (UK SRS): This consultation seeks input on the exposure drafts of the UK SRS, which are based on the International Sustainability Standards Board (ISSB) Standards. The UK SRS will serve as the foundation for the UK’s future sustainability disclosures regime and the consultation is the culmination of the UK’s process to assess the suitability of the ISSB standards for use in the UK. The consultation also seeks input on the costs and benefits of UK SRS, which will inform future government decisions on whether to require economically-significant companies to disclose information in accordance with UK SRS.
- Assurance over sustainability reporting: This consultation focuses on providers of assurance over sustainability-related financial disclosures. Specifically, the Government is seeking views on a proposal to create a registration regime for providers of assurance services for sustainability-related financial disclosures in the UK. Following this consultation, the Government will continue to consider whether further measures should be pursued.
- Transition plans: The UK Government has committed to mandating that UK-regulated financial institutions (including banks, asset managers, pension funds and insurers) and FTSE 100 companies develop and implement credible transition plans aligned with the 1.5°C goal of the Paris Agreement. This consultation seeks views on how the Government could take forward the manifesto commitment. In particular, the Government is seeking input on the role of transition plans alongside UK SRS. The consultation is divided into three sections:
- The benefits and use cases of transition plans;
- Implementation of transition plan requirements (including a mandatory versus comply or explain approach); and
- Related policy and frameworks.
How do the UK SRS differ from the ISSB standards?
First, a bit of background: technical assessment of IFRS S1 and IFRS S2 was undertaken by the UK Sustainability Disclosure Technical Advisory Committee (TAC) and the UK Sustainability Disclosure Policy and Implementation Committee (PIC). The TAC is an independent committee of experts with relevant professional backgrounds. It analyzed the ISSB Standards and provided recommendations to the Secretary of State for Business and Trade in December 2024.
The PIC members are from UK Government departments, UK financial regulators and UK standard setters. Its remit is to assess public policy implications of the standards and to consider the implementation of UK SRS.
Throughout this process, international comparability has been a priority of the UK Government. Accordingly, it has aimed to limit divergence from the ISSB Standards. The UK Government is proposing six amendments that it characterized as minor – to reflect the use of the ISSB Standards in a UK context. These include four amendments based on the TAC’s recommendations and two amendments based on PIC discussion:
- Removal of the transition relief in IFRS S1 that permits delayed reporting in the first year: IFRS S1 contains a transition relief (paragraph E4) that permits reporting entities to publish disclosures made in accordance with the ISSB Standards at a later time than their financial statements for the first year of applying the ISSB Standards. This relief is intended to give entities more time to prepare to align their reporting of sustainability-related financial disclosures with their financial statements.
- Extension of the transition relief in IFRS S1 that permits a “climate-first” approach: IFRS S1 includes a transition relief (paragraph E5) that permits reporting entities to defer disclosure of sustainability-related risks and opportunities beyond those relating to climate by an additional year, meaning that entities only are required to report on climate-related matters in their first year of applying the ISSB Standards, before extending reporting to additional sustainability-related matters in the second and subsequent years. The TAC recommended extending this relief by an additional year, to make it available for two years.
- Removal of the IFRS S2 requirement to use the Global Industry Classification Standard (GICS): IFRS S2 includes disclosure requirements relating to financed emissions. One element of this disclosure is the requirement to use the GICS 6-digit industry-level code. The TAC recommended that entities should be able to use any appropriate classification standard, which could be GICS or an alternative standard that they use within existing reporting practices.
The ISSB also is currently consulting on an amendment to the requirement to use the GICS in IFRS S2, as discussed in this Ropes & Gray post.
The consultation document notes that the TAC had an extensive discussion on financed emissions. Although those discussions did not result in a recommended amendment, the TAC concluded that ISSB clarification on the application of the financed emission requirements is necessary. The UK government supports the request.
- Removal of the effective date clauses in IFRS S1 and IFRS S2: The TAC has not recommended a specific effective date, concluding that this was a matter for the PIC to consider. The PIC concluded that the effective date should be removed from the standards since the UK SRS will be freely available for any entity to use on a voluntary basis at a time of their choosing. A clarifying sentence will be added to explain that the timetable for applying the standards depends on subsequent rules or regulations put in place by the UK government or the Financial Conduct Authority.
- Clarification of the application of the SASB materials: IFRS S1 and IFRS S2 include requirements that reporting entities refer to and consider the applicability of the standards published by the Sustainability Accounting Standards Board (SASB) and the Industry-based Guidance on Implementing IFRS S2 (which is based on the SASB Standards). Both the TAC and the PIC concluded that the relevant wording in the ISSB standards would not require a reporting entity to disclose information using these materials and that an entity would be free to decide that the SASB materials are not relevant in the context of its particular business, sector or operations. The consultation notes that the current wording could however result in entities being required by an assurance provider to prove – with evidence – how they have considered the SASB materials. The government proposes to clarify that the consideration of the applicability of these materials is voluntary, although it notes that it will review this amendment following the conclusion of the ISSB’s project to enhance the SASB standards.
- Explicitly link transition reliefs to mandatory reporting: Both IFRS S1 and IFRS S2 include transition reliefs, with different lengths and objectives. The PIC discussed whether the reliefs should apply from the point of voluntary use of the UK SRS or the point at which mandatory requirements start to take effect. To facilitate use of the reliefs for any mandatory reporting while avoiding penalizing early voluntary reporters, the government proposes to amend the wording on reliefs so that they are explicitly linked to the introduction of any mandatory reporting requirements. These amendments are in paragraphs E3, E4 and E5 in draft UK SRS S1 and paragraphs C3 and C4 in draft UK SRS S2.
The proposed amendments would not preclude entities from using the reliefs if they report on a voluntary basis. The consultation indicates that, for voluntary reporters, the government believes it is a business choice to decide whether to report against some or all of the standards.
- Planned use of carbon credits: The PIC also discussed the requirement in IFRS S2 (paragraph 36 (e)) for reporting entities to disclose their planned use of carbon credits to meet any net GHG emissions reduction target. The discussions did not result in a recommended amendment, but the government is seeking views on this topic from market participants, including regarding the usefulness of disclosures about the purchase and use of credits in the current reporting period and any challenges that such disclosures might pose for reporting entities.
Is the UK government seeking feedback on other matters relating to the proposed UK SRS?
In addition to seeking feedback on the proposed amendments to the ISSB Standards, as part of that consultation, the Government is seeking feedback on, among other things:
- Benefits offered by the use of UK SRS compared to current reporting requirements.
- The costs expected to be incurred when first reporting against UK SRS and on an ongoing basis. In particular, the Government is interested in evidence on the costs associated with the requirements in draft UK SRS S1 and draft UK SRS 2 relating to value chain reporting.
- The merits of private entities (namely companies and limited liability partnerships) reporting against UK SRS, considering the differences in structure between listed and private entities.
- The potential opportunities for streamlining the UK’s existing non-financial reporting framework if the Government introduces UK SRS reporting requirements for economically-significant private companies.
- The degree of legal risk associated with the publication of forward-looking information and information that relies on third-party data, and whether there should be protection from liability for this information.
What are the main features of the assurance proposal?
There are three main features of the assurance proposal:
- The Government proposes to create a new category of “sustainability assurance provider” that is qualified to provide third-party assurance over sustainability-related financial disclosures. The category will be profession agnostic, allowing for both audit and non-audit professionals and firms to be registered providers.
- Sustainability assurance providers would be overseen by the proposed Audit, Reporting and Governance Authority, which will replace the Financial Reporting Council. ARGA would be responsible for registering providers, setting eligibility criteria for registration, monitoring performance and, where necessary, taking enforcement action.
- An assurance provider would be able to conduct assurance of disclosures under UK SRS, the Task Force on Climate-related Financial Disclosures (TCFD) framework, the EU’s European Sustainability Reporting Standards (under the Corporate Sustainability Reporting Directive) and any other domestic standards based on ISSB disclosures.
At this time, the Government anticipates that the proposed registration regime will operate on a voluntary basis, with market participants opting in to registration rather than registration being a precondition to offering assurance services. However, the consultation indicates that, in the long term, the Government will consider the need for mandatory assurance of company disclosures against UK SRS, subject to government endorsement of the standards.
How long are the consultations open?
The consultations are open until September 17. They began on June 25.
How can responses be submitted?
Companies (and others) can respond online via the following links: UK SRS consultation, Assurance of sustainability reporting consultation and Transition plan requirements consultation.
When will the UK SRS be finalized?
Following its analysis of the responses to the UK SRS consultation, the Secretary of State for Business and Trade will make a final decision on whether to endorse the UK SRS S1 and UK SRS S2 drafts and make final versions available for use on a voluntary basis. If endorsed, the UK Government is aiming to publish the final UK SRS S1 and UK SRS S2 standards this fall.
When will new reporting requirements take effect?
The decision on whether to introduce legal or regulatory requirements in relation to UK SRS will be assessed separately from endorsement of the UK SRS. However, adoption of new requirements is not imminent. Consultation on this phase of work will take place following the conclusion of the endorsement phase.
There will be further phases of consultation that cover sustainability reporting and assurance proposals. This work will be complemented by a consultation focused on streamlining the UK’s current non-financial reporting framework under the Companies Act. The UK Government intends to provide a roadmap of any future regulatory changes as part of subsequent phases of consultation.
Should US-based multinationals participate in the consultations?
US-based multinationals that are likely to be captured by expanded sustainability reporting and transition plan requirements should consider whether to participate in the consultations either directly or through their trade associations, to the same extent they would consider participating in other consultations on significant sustainability-related requirements. Even though new requirements are not imminent, the feedback received by the UK Government in connection with the consultations is likely to inform future legislative and regulatory proposals.
