A UK CSRD? Incoming UK Sustainability Disclosure Standards

The European Union's Corporate Sustainability Reporting Directive ("EU CSRD") does not apply in the UK although it can, under certain circumstances, impact UK-incorporated companies.  However, the UK Government intends to create UK Sustainability Disclosure Standards ("UK SDS") which will require corporate disclosures on sustainability related risks and opportunities.

The UK SDS, which are anticipated to be in place by July 2024, will form the basis of future UK legislative and regulatory requirements for the UK's independent corporate sustainability reporting regime.  

The current plan is for the UK SDS to be based on the IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board ("IFRS SDS").   As set out in the UK 2023 Green Finance Strategy, the UK is assessing the suitability of the two existing IFRS SDS – IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures – for endorsement in the UK and the creation of the first two UK SDS.  

By using the IFRS SDS as a baseline, the aim is for the information companies disclose under UK SDS to be globally comparable.  While the UK SDS may depart from the IFRS SDS, this will only be done if necessary to address a UK specific need (an approach other countries are also expected to adopt).

It is important to note that the IFRS SDS diverge from the EU CSRD (and the European Sustainability Reporting Standards that lie behind it) in significant respects, for example in relation to materiality.  This, along with any country-specific adjustments to the incorporation of the IFRS SDS into national regimes, will pose a challenge for interoperability and the ability of businesses to adopt a wholly unified approach to disclosures. 

In broad terms, IFRS S1 sets out overall requirements for an entity to disclose sustainability-related financial information about its sustainability-related risks and opportunities. It is designed to underpin all other IFRS SDS in terms of setting scope, objective, core content, and presentation requirements.  The objective of IFRS S1 is to provide information that is material to meeting the information needs of existing and potential investors, lenders and other creditors.

IFRS S2 replicates the content requirements of IFRS S1 but supplements those core disclosure requirements with specific climate-related risk management disclosures and reporting metrics such as qualitative disclosures regarding the risks and opportunities of lower-carbon transition plans, scenario analysis, and quantitative data measuring the entity's greenhouse gas emissions.

Following the development of the UK SDS, the UK Government will develop the precise disclosure requirements that UK registered companies and limited liability partnerships (LLPs) will be subject to. The UK's Financial Conduct Authority ("FCA") regulator will do the same for UK listed companies.

Although it is expected that listed companies will be required to follow UK SDS once endorsed by the UK government and in accordance with Listing Rules developed by the FCA, it is not yet clear whether all other companies and LLPs will also be required to follow the UK SDS through amendments to company law.  For example, it is possible that only the largest private businesses will be brought into scope initially, with mandatory application possibly falling on smaller businesses over time. 

Existing UK disclosure obligations

Companies can be subject to existing environmental and climate-related disclosure requirements in the UK.  The UK Companies Act 2006 and related regulations, Listing Rules, Disclosure Guidance and Transparency Rules (DTR) and Taskforce on Climate-related Financial Disclosure (TCFD) recommendations require certain companies to report annually on environmental matters and climate-related matters in their directors' reports, strategic reports and elsewhere in their annual reports.  Similarly, LLPs’ annual reports should include disclosures on greenhouse gas emissions, intensity merit energy efficiency steps and total energy use.

Please contact Jessica Gardner or Aonghus Heatley if you require any assistance in connection with any of the matters outlined above.