“Clearer Vision” Needed for UK Sustainability Disclosure Regime

Government statement leaves questions unanswered on how the UK Sustainability Disclosure Standards will complement existing and upcoming reporting requirements for issuers and investors. 

The UK’s recently unveiled Sustainability Disclosure Standards (SDS) offer investors “much-needed clarity” on the direction of travel of its sustainability disclosure regime, but a “clearer policy vision” is still required to optimise interoperability, James Alexander, CEO at UKSIF, told ESG Investor.  

Announced on 2 August, UK SDS will set out corporate disclosures requirements on sustainability-related risks and opportunities, leveraging the International Sustainability Standards Board’s (ISSB) inaugural climate and general sustainability standards.  

The government noted that UK SDS will only divert from the ISSB’s global baseline “if absolutely necessary”. 

UKSIF’s Alexander said that investors were “particularly pleased” the UK SDS announcement had reiterated it will be based on the ISSB standards. 

A consistent approach 

The ISSB’s inaugural standards, launched in June, aim to deliver a comprehensive accounting-based language for sustainability-related disclosures that provides global investors with consistent, verifiable and decision-useful information.   

Alexander said that the ISSB’s standards represent a “positive turning point” in the creation of more consistent and actionable sustainability-related disclosures, capable of delivering a “coherent, global baseline” urgently sought by investors. 

Sustainable Fitch’s ‘2Q23 ESG Trends’ report said the ISSB’s climate-related disclosure standards will result in “more consistent and higher-quality information coming to market as entities adopt the standards”.  

The UK’s Financial Conduct Authority (FCA) has announced that it will consult on proposals to implement sustainability disclosure rules incorporating the ISSB IFRS S1 and S2 standards for listed companies in Q1 2024. 

Given the UK government’s own endorsement process – official endorsement is expected in July 2024 – the FCA aims to finalise its policy position by the end of 2024, bringing new requirements into force for accounting periods beginning on or after 1 January 2025. 

The FCA also noted the ISSB’s recent consolidation of the Task Force on Climate-related Financial Disclosures (TCFD) framework, which is mandated in the UK, adding that it had “previously stated that we intend to consult on updating our TCFD-aligned disclosure rules for listed companies to refer to the UK-endorsed ISSB standards”. 

Alexander said that UKSIF expects the common baseline offered by the ISSB to facilitate a “more streamlined, consistent” approach to company reporting and “minimise the frequency of information requests from various stakeholders on sustainability”.  

The International Organization of Securities Commissions (IOSCO) has also endorsed the standards and called on its 130 member jurisdictions to adopt them into their respective regulatory frameworks. 

The ISSB standards have incorporated in the TCFD’s recommended focus on financial materiality and ‘four-pillar’ structure of governance, strategy, risk management, and metrics targets.  

The UK government has made TCFD-aligned disclosures a mandatory requirement for larger public and private companies. The TCFD’s requirements are the only currently mandatory sustainability regulations in place in the UK. 

Areas for improvement 

Sustainable Fitch’s report highlighted “persistent concerns” about the “interoperability of an ever-greater number of taxonomies introduced”. As corporate sustainability disclosure regimes provide information on the ESG risks of firms, they are used by investors to determine whether certain investments are aligned with taxonomies and thus can be regarded as sustainable. 

While the EU is currently extending its taxonomy to incorporate non-climate criteria and recently adopted reporting standards based on double materiality under its Corporate Sustainability Reporting Directive, the UK has yet to publish its green taxonomy.  

Similar concerns were expressed by Alexander, who said that UKSIF “still has questions over how the UK’s SDS may complement, and tie into, both existing and upcoming sustainability reporting requirements for issuers and investors.  

“It is difficult to envisage how a number of different requirements will fit together seamlessly in future,” he added. 

Alexander also said that UKSIF remains “hugely supportive” of the Taskforce on Nature-related Financial Disclosures (TNFD) and welcomed the UK government willingness to explore how the finalised framework can be incorporated into its Green Finance Strategy. 

The TNFD released its fourth and final beta framework for nature-related risk management and disclosure in March and is on track to publish its final recommendations in September.   

According to Alexander, all policymakers should “highlight clearer expectations” that biodiversity, nature and climate change are “inherently inter-connected” and should not be viewed and treated by regulated firms as “distinctly separate issues”. 

UKSIF would also welcome the FCA “actively contributing” to delivery of the final green finance strategy framework, and “evaluating how this could be integrated as far as possible with existing reporting requirements for regulated firms”.  

The ISSB is currently consulting on its priorities for its next two-year work plan, with respondents underscoring the importance of an increased focus on biodiversity and nature.   

Alexander also noted that UKSIF would like to see the UK be “much clearer” on its intentions towards the adoption of double materiality approaches, which was initially suggested in the ‘Greening Finance’ roadmap published ahead of COP26. 

“It would be positive to see consideration of environmental and social impacts brought out further in the UK’s upcoming approach to corporate reporting, given that we expect companies’ impacts in the long run to often ultimately impact enterprise value,” he added. 

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