In recent years, sustainability and environmental, social, and governance (ESG) factors have become crucial components of corporate strategy, driven by both regulation and growing investor demand. One of the key developments in this field is the creation of the UK Sustainability Reporting Standards (SRS), which aim to align the UK with global sustainability reporting practices. These standards will provide UK companies with clear guidelines on how to report sustainability-related risks and opportunities. This article explores the background, impact, requirements, timeline, and the role of ESG reporting tools in the implementation of the UK SRS.
What is the background to the UK SRS scheme?
The creation of the International Sustainability Standards Board (ISSB) was a pivotal moment in global sustainability reporting. Announced at the COP26 conference in 2021, the ISSB was formed under the International Financial Reporting Standards (IFRS) Foundation with the purpose of creating a global baseline for sustainability reporting. The goal of the ISSB is to provide standards that deliver comparable and decision-useful information for investors, helping them make informed decisions about capital allocation. These standards are designed to include comprehensive details that ensure precise and thorough sustainability reporting.
In June 2023, the ISSB published two key standards:
- IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information
- IFRS S2: Climate-related Disclosures
The UK government has supported the ISSB’s mission, and in its 2023 green finance strategy, it laid the groundwork for adopting the ISSB standards within the UK. If the assessment process concludes positively, it will lead to the establishment of the first two UK SRS, which will be based on IFRS S1 and IFRS S2. These standards will form part of a wider Sustainability Disclosure Reporting (SDR) framework led by HM Treasury. The UK government aims to begin consultations on the exposure drafts of UK SRS in Q1 2025, with an official implementation expected shortly thereafter.
Which organizations will be impacted?
The UK SRS will impact a wide range of companies, particularly those listed on the UK stock exchange. Initially, the disclosure requirements are likely to apply to UK-listed companies, but the scope may expand to include other economically significant entities. This means that companies in sectors like finance, manufacturing, energy, and retail could be required to disclose detailed sustainability-related information, particularly around climate change and environmental impact.
It is important to note that companies subject to other reporting requirements, such as the Streamlined Energy and Carbon Reporting (SECR) mandate, will likely need to integrate the new standards into their existing processes. Large businesses, whether publicly listed or private, will need to align with the new standards to ensure they remain compliant with UK regulations. Understanding the various users involved in the reporting process, including primary and secondary users, is crucial for drafting effective reports that meet the expectations of all stakeholders. This shift towards excellence in sustainability reporting is an essential part of the UK’s long-term strategy to drive green investment and secure a sustainable future.
What are the SRS requirements?
The UK SRS will require companies to disclose a variety of sustainability-related information to help investors assess the risks and opportunities related to environmental and social factors. These disclosures will cover both climate-related issues (as defined under IFRS S2) and broader sustainability topics (under IFRS S1). It is crucial to identify potential areas where the product might fail by clearly stating assumptions and dependencies in the project.
Some of the key reporting areas are expected to include:
- Climate-related risks and opportunities: Companies will need to report on their exposure to climate-related risks, including both physical risks (e.g., extreme weather events) and transitional risks (e.g., policy changes related to decarbonization). They will also need to outline how these risks are managed.
- Emissions data: Companies will be required to disclose their greenhouse gas emissions, including direct (Scope 1), indirect (Scope 2), and value chain emissions (Scope 3), in line with the ISSB guidelines.
- Governance and strategy: Organizations will need to outline how sustainability and climate-related risks are integrated into their governance structures and overall business strategy.
- Metrics and targets: Companies will be asked to report on specific sustainability metrics, including targets for emissions reduction and progress toward achieving these goals.
These requirements will provide investors with consistent and comparable sustainability data, facilitating better decision-making and more informed investments. Companies must be prepared to document and disclose their sustainability efforts in a manner that reflects the new order of global reporting practices.
What is the timeline for project implementation?
The UK government has indicated that the UK SRS will be finalized and published in early 2025. However, the timeline has experienced delays, initially due to changes in government leadership. The latest guidance suggests that the SRS will be published no later than March 2025, with a consultation process likely to begin in Q1 2025. The government will aim to make decisions about the mandatory reporting requirements in Q2 2025.
Companies will be given a grace period of at least six months to one year to prepare for the new reporting standards. This means that companies will likely start reporting under the new SRS for financial years beginning on or after July 1, 2025. While the specifics of the regulations are still being finalized, the SRS will likely align closely with existing frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and the SECR requirements.
As these developments unfold, businesses should ensure that they stay updated on new guidance and take proactive steps to align their reporting practices with the emerging SRS standards.
How can ESG reporting tools help?
As companies prepare to meet the UK SRS requirements, ESG reporting tools will play a crucial role in streamlining the reporting process. These tools can assist organizations in several ways:
- Data collection: ESG reporting tools help companies collect and manage the necessary data for reporting, including emissions data, energy consumption, and other environmental metrics. They can also help track progress toward sustainability goals.
- Compliance management: With evolving regulations like the UK SRS, ESG tools can help companies stay up-to-date with changing requirements. These tools often come with built-in features to ensure that reports are in compliance with the latest standards, such as IFRS S1 and IFRS S2.
- Transparency and audit readiness: ESG tools make it easier for companies to maintain transparency in their reporting and ensure their data is audit-ready. This is crucial, as companies will need to provide accurate and reliable data to satisfy both internal and external stakeholders.
- Integration: Many ESG reporting tools are designed to integrate with existing systems, allowing businesses to combine their financial and sustainability data into one unified report. This can save time and reduce the risk of errors.
Given that many companies are still in the process of preparing for these new requirements, today is the time to start evaluating ESG reporting tools. By investing in these services, businesses can ensure they have the experience and infrastructure to meet the evolving expectations for sustainability disclosures.
In conclusion, as the UK works toward implementing the SRS, companies must start preparing for the new reporting landscape. With the right ESG reporting tools, businesses can efficiently manage their sustainability data, stay compliant with new requirements, and make informed decisions about their sustainability strategies.
By embracing the UK SRS, companies will not only meet regulatory expectations but also demonstrate their commitment to sustainability and attract investors who prioritize ESG considerations. As the landscape of corporate reporting evolves, those who are proactive in preparing for the changes will be better positioned for success in an increasingly sustainability-conscious market. For businesses with questions about the specifics of the UK SRS, it is crucial to stay updated with the latest guidance and consult with experts to ensure they are ready for the new standards when they are officially rolled out.
