UK Must Converge with ISSB to Avoid “Overlapping” Rules

UKSIF backs “phased approach to sustainability disclosures for SMEs to reduce compliance burden of UK’s proposed non-financial reporting requirements.

The UK Sustainable Investment and Finance Association (UKSIF) said the UK government’s consultation on non-financial reporting requirements must set a clear path for convergence with the International Sustainability Standards Board’s (ISSB) common baseline of reporting standards.

As part of the review, the government is seeking views on the best way to integrate standards introduced by the ISSB into the UK’s reporting framework, as well as the potential role for other reporting initiatives that are designed with sustainability-related goals in mind.   

Oscar Warwick Thompson, Head of Policy and Communications at UKSIF, told ESG Investor that investors want the government to “clearly outline” its approach to delivery on the ISSB’s standards, as well as how these standards may “complement existing reporting initiatives”, such as the Task Force for Climate-related Financial Disclosures (TCFD), the Sustainability Disclosure Requirements (SDRs) and the work of the Transition Plan Taskforce (TPT). 

In 2023, the TPT aims to finalise its disclosure framework and implementation guidance and will develop sectoral guidance. It also plans to increase its engagement with other jurisdictions and standard setters, including the ISSB to support global convergence on transition plans.   

“A coherent policy environment continues to be an absolutely critical consideration for our members, and avoiding as far as possible overlapping rules,” said Warwick Thompson, noting that questions remain on how companies and investors will transition from TCFD to ISSB reporting without “duplicative” requirements emerging.  

“We expect that the process for many issuers reporting against ISSB’s standards will be iterative, and highly effective disclosures may not be achieved at the initial stage from all groups,” he said.  

“Ongoing support from policymakers and wider stakeholders to assist companies in reporting against ISSB will be necessary we believe, particularly for smaller companies.” 

The Financial Conduct Authority’s (FCA) SDRs aim to bring clarity on how the regulator will approach greenwashing, while also increasing transparency and trust in sustainable investment products. The FCA’s consultation on SDR closed on 25 January, with the regulator intending to publish a policy statement in Q3 this year.  

Balanced approach 

The Department for Business and Trade (DBT), in collaboration with the Financial Reporting Council (FRC), the regulatory body responsible for corporate governance, reporting, and audit, is conducting the review. 

“We need non-financial reporting regulation to provide the market and, in particular, investors with transparency and comparability, but we also need it to be applicable and focused,” said Anne-Marie Vincent, Vice-President at Sweep, which helps businesses track and act on their carbon emissions. 

As part of the consultation, the DBT and FRC will evaluate the effectiveness of the existing company size thresholds, which determine specific non-financial reporting obligations, as well as the preparation and filing of accounts with Companies House. 

UKSIF welcomes a “phased approach” to disclosures for different types of issuers, particularly for small- and medium-sized businesses, said Warwick Thompson, adding that the ISSB’s recent confirmation on relief measures to support companies in effectively applying the upcoming S1 (general requirements) and S2 standards (climate) is positive.   

“Our expectation is that delivery of the ISSB’s standards will go some way to minimise costs for all issuers and the risks of a fragmented approach to corporate reporting, where companies operating internationally will often produce multiple reports that can result in a higher regulatory burden,” said Warwick Thompson.  

“The ISSB’s common baseline will be invaluable in this respect.” 

Quantitative over qualitative 

Sweep’s Vincent said that the new UK non-financial reporting framework should prioritise quantitative over qualitative disclosures to encourage adoption and tackle climate change. 

Europe and the UK need to be very ambitious, at least in reducing greenhouse gas (GHG) emissions,” she said, noting that both jurisdictions should avoid weakening non-financial reporting requirements by “removing what is essential”. 

“The new UK framework must be ambitious and make sure it has the right metrics being reported because we need companies to report Scope 1-3 emissions, as more than 80% of GHG emissions come from Scope 3.” 

Her comments come after some sources reported that the EC is contemplating removing mandatory sustainability reporting requirements, with disclosures subject to materiality assessments, representing major departure from EFRAG’s proposal. 

“In the case of the Corporate Sustainability Reporting Directive (CSRD), about three-quarters of the information required is qualitative, which is beneficial but time-consuming and less precise,” said Vincent.  

“While having information on a company’s strategy is good, we must ensure that quantifiable metrics are consistent across regions like the UK, Europe, and the US.” 

Swift adoption of ISSB 

Following the much-anticipated publication of the ISSB’s finalised reporting standards, expected this month, UKSIF hopes to see the UK government “swiftly reiterate its intention to commit to full implementation of the ISSB’s sustainability-related and climate-related standards across the UK’s economy”, said Warwick Thompson.  

Clear timeframes for delivery should be set out to the market as soon as possible by policymakers, alongside appropriate sequencing of corporate and investor disclosures and requirements, he said. 

“With the UK having been the first in the G20 to enshrine in law mandatory TCFD-aligned requirements for the largest businesses, swift adoption of ISSB’s standards would be a natural next step in our climate leadership,” he added. “The UK should also seek to play a leadership role, actively encouraging other jurisdictions to take steps to adopt the ISSB’s standards.”   

TCFD was introduced on 4 December 4, 2015, by the G20 finance ministers and the central bank governors within the Financial Stability Board (FSB). The TCFD’s aim is to provide financial institutions, investors and other stakeholders with consistent, reliable, and comparable information about the financial risks and opportunities associated with climate change.  

The TCFD’s recommendations were published in June 2017 and have since gained widespread recognition and adoption by companies, investors, and governments globally. 

Warwick Thompson also said the UK government should 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. 

“We very much welcome the focus within the FCA’s SDRs which is more centred seemingly on double materiality,” he said, adding that the regulator’s approach, and how it may interact with the upcoming approach by government to the UK’s corporate disclosure regime may need “further exploration”.    

Warick Thompson also said that he hopes to see the consideration of environmental and social impacts expanded on in the UK’s upcoming approach to corporate reporting.  

There is often overlap between a company’s impact and enterprise value, which is being increasingly recognised we think among stakeholders, and it can be difficult to separate, we would argue, financial risks from impacts,” he said.  

“The overlaps between enterprise value and impacts necessitates the need for deep co-operation between ISSB, EFRAG, GRI and other standard-setting bodies and authorities going forward.” 

Sweep’s Vincent agreed, adding that measuring companies’ social impact is vital in achieving a just transition.  

The UK government has issued a call for evidence, which invites feedback and insights on existing non-financial reporting requirements. The review builds upon the government’s Smarter Regulation to Grow the Economy policy paper, which outlines strategies to reduce regulatory burdens and promote economic growth following the UK’s departure from the EU.

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