The UK’s new sustainability reporting regime is taking shape
The UK’s upcoming sustainability disclosures regime has taken much clearer shape in recent weeks.
Last month, just as most British firms were winding down for the Christmas break, government advisors issued their formal recommendations on the national adoption of International Sustainability Standards Board (ISSB) criteria.
Representatives from drinks giant Diageo and a slew of UK banks are among 15 members of the technical committee, known as the TAC.
In May, they were tasked with deciding how suitable ISSB’s first two standards – on general disclosures and specific climate information – were for use in the UK.
Government should adopt ISSB with tweaks
For the most part, the TAC told the government to adopt both standards.
It did, however, recommend a few changes.
Firstly, it wants to push back the deadline for companies to report on their broader sustainability risks.
In line with ISSB, the TAC suggests the UK’s regime mandates Scope 1 and 2 disclosures in the first year, followed by Scope 3 in the second.
But it recommends other disclosures – for which there are currently no ISSB standards – are delayed until year three.
ISSB requires them in year two, alongside Scope 3.
Committee member Paul Lee tells REP this recommendation was about being “measured and practical”, given ISSB hasn’t published further standards yet.
It is in the process of looking at human capital and biodiversity criteria, and is planning to update the SASB sector standards, but Lee stresses that none of this will be completed any time soon.
He says the TAC decided it was advisable to wait for more clarity “before we expect companies to make that leap”.
Other tweaks the group recommended include the removal of the ISSB’s requirement to use the Global Industry Classification Standard (GICS) as the basis for disclosures.
Invented by MSCI and S&P, GICS is a widely-adopted way of organising companies into different categories, but it’s not the only option. TAC member FTSE, for example, uses the Industry Classification Benchmark instead.
TAC’s chair, Sally Duckworth, told REP that the committee “felt it was wrong to mandate one system” and wants companies to have the freedom to choose under the UK rules.
The recommendations also call on the government to provide more guidance than the ISSB about how financial institutions are permitted to calculate their financed emissions under the disclosure requirements.
Transition plans
Mention of the Transition Plan Taskforce (TPT) was notably absent from the TAC’s final recommendations, despite the group being set up by the UK government in 2022 to offer advice on what companies should be expected to disclose about their climate strategies.
When TPT’s mandate ended, its guidance was absorbed into ISSB’s parent body, the IFRS Foundation, so it can be incorporated into the standards in coming years. It’s currently not clear if the guidance will be amended in the process.
Lee tells REP the hesitancy around referencing TPT should not be seen as a rejection of its guidance, but as a response to the lack of clarity about how the guidance might develop under IFRS.
“In the technical legal jargon, it’s called an ‘ambulatory provision’,” he explains. “Adopting something that then starts moving without your having influence on it.”
TAC called for ISSB “to move quickly” to adopt TPT’s output, and to strengthen its own guidance on how companies should report their transition plans under its existing climate standard.
Big step for ISSB
The near wholesale backing of the standards by the TAC is a significant boon for the ISSB, given the UK’s role as a major capital market with established climate risk reporting rules already.
“All the feedback I have had, including from the ISSB, is that no other country has gone through as detailed a process as we have in terms of the technical evaluation of the standards,” says Duckworth, whose roles include audit chair at JPMorgan Japanese Investment Trust.
She describes the passing of TAC’s recommendation to the UK Secretary of State for Business and Trade as a “very significant step”.
Going forward
Now the government must decide whether to accept the advice as the basis for the UK’s sustainability disclosure standards, which it is expected to do by the end of March.
The proposed standards will then be subject to two consultations: one by the Financial Conduct Authority, covering the rules for listed companies, and the other by the Department for Business and Trade, in relation to changing to the UK Companies Act.