Latest developments in the sustainability reporting landscape
2023 was a bumper year for sustainability reporting, as long-awaited new standards at international and European levels were released, and other frameworks became available.
As the dust settles, it is important to take stock… what are UK companies now expected to report on when it comes to sustainability, and what changes are looming?
This ICAS overview and guide covers three aspects under two headings:
What is mandatory
1) Compliance requirements - UK requirements today, UK changes looming and extra-territorial compliance factors
What is not mandatory
2) Other stakeholders driving sustainability disclosures
3) Voluntary disclosures
Compliance requirements
UK requirements today
Requirements for businesses to report on sustainability comes from various sources. Their applicability is determined by thresholds like revenue and total assets - in essence the larger the company, the more reporting is expected.
If certain size thresholds are triggered, UK reporting requirements may include some or all of the following:
- The Companies Act 2006 states that all UK companies, other than small companies1 must produce a Strategic Report2 that includes a non-financial information statement. This must contain certain information as a minimum, including on environmental matters, social matters, and anti-corruption and anti-bribery matters.
- Additional disclosures, the Streamlined Energy and Carbon Reporting3 requirements, are required to be made in the Directors Report of certain companies (namely all quoted companies as well as large unquoted companies and limited liability partnerships).
- The Financial Conduct Authority listing rules4 applicable from July 2024 require a listed company incorporated in the UK to include a statement in their annual report stating whether they have made disclosures consistent with the TCFD framework on a 'comply or explain' basis. Different requirements apply to companies incorporated outside of the UK.
The Financial Reporting Council provides support on interpreting the above, and more, in its Guidance on the Strategic Report.
UK changes looming
It is anticipated that in Q1 2025, the UK government will make endorsement decisions on the first two standards released by the IFRS Foundation: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. IFRS standards apply financial materiality – this means the financial impact of people and planet matters on a company. While we support this concept, we believe sustainability reporting is better if it goes further, and also includes the impact of businesses on people and planet, so called double materiality.
We also note that according to the 2023 Green Finance Strategy (Chapter 2, para 43): “The government remains committed to introducing mandatory reporting against the UK endorsed standards, subject to the conclusion of the assessment process”. We hope that the new government mandates sustainability reporting on a proportional basis, so as not to overly burden SMEs.
Extra-territorial compliance factors
Compliance requirements from other jurisdictions are arising at state (eg California), national (eg US) and regional levels (eg Europe). It’s important to track global developments to ensure requirements in a company’s markets where it has operations/entities or has significant business are met.
The European Sustainability Reporting Standards (ESRS), comprise two cross-cutting and ten topic specific standards. All bar one standard are applicable based on an assessment of what is material, through applying a double materiality lens.
While the application of the ESRS to non-EU entities will not come into effect until 20265 , some UK companies may need to comply with the ESRS requirements now by virtue of the company’s size, activity in the EU and or whether its securities are traded on an EU-regulated market6.
Other stakeholders driving sustainability disclosures
While compliance is a given for responsible operators, reporting demands from other stakeholders are requiring businesses to disclose potentially more than what is required by regulation, rules and law.
So, while these disclosures are not driven by mandatory compliance sources, it would be a bold operator that would disregard these asks and not measure and provide these details.
In this category, we highlight two stakeholder groups:
- Investors – many research findings point to investors being more inquisitive about ESG factors in addition to financial returns. Investor relations teams can expect more enquiries from investors about ESG plans, progress and achievements. Some types of investors will engage with their investees to set targets and collaborate with them to achieve certain ESG goals, for example decarbonisation. Making more sustainability disclosures can help trigger access to more finance, and potentially at a favourable cost.
- Supply chain partners – more enterprises want to know the carbon footprint of their business, and work with upstream and downstream supply chain partners to obtain their carbon details. So regardless of what a company chooses to measure and disclose, their trading partners may require new data to be measured and reported so that they can comply with their disclosure demands or track their transition to net zero, or similar.
Sometimes these stakeholders will request to receive sustainability information through the submission of responses to a third-party questionnaire like CDP or EcoVadis. We would advise companies to get organised and offer disclosures in way that suits them. This could avoid the need to have to report similar information through multiple platforms.
Voluntary disclosures
Even though sustainability reporting isn’t mandatory for all businesses, many organisations choose to do so voluntarily. There are many references and frameworks that they can choose to follow, in addition to those mentioned above. Some of the more important ones for UK businesses are:
- The Global Reporting Initiative (GRI) is widely recognised as a leader on sustainability reporting. The GRI standards facilitate sustainability reporting per the impact of an entity. We believe that sustainability reporting that combines GRI and the IFRS Standards would work well and provide a rounded account of an organisation’s plans and progress according to double materiality.
- Transition Pathway Taskforce (TPT) Disclosure Framework was launched in late 2023 and includes transition disclosure recommendations. The framework helps organisations set out a credible and robust climate transition plan as part of annual reporting on business strategy. This is most relevant for companies that have direct operations or supply chains that have high carbon emissions and need to communicate their decarbonisation plans and achievements.
- The Taskforce on Nature-related Financial Disclosures has developed a set of disclosure recommendations and guidance that encourage and enable business and finance to assess, report and act on their nature-related dependencies, impacts, risks and opportunities. This is most relevant for companies that directly or indirectly have a significant interaction with water/land/air/species. While voluntary at this stage, some believe that TNFD-aligned disclosures will become mandatory in the UK.
- London Stock Exchange has guidance for issuers on the integration of ESG into investor reporting and communication. Entities listed on the London markets do not have to publish a sustainability report, but as one of the world’s leading stock exchanges there is an expectation that issuers would, as expected in many other global markets.
This is a high-level overview of sustainability reporting requirements that have broad application, for information only. The sustainability reporting landscape is quickly evolving. Specific advice should be sought for any particular situation and before any action is taken or not taken.
[1] Thresholds for small companies - GOV.UK (www.gov.uk)
[4] PS24/6: Primary Markets Effectiveness Review: Feedback to CP23/31 and final UK Listing Rules (fca.org.uk) – see 6.6.6 R (8)
[6] Frequently asked questions on the implementation of the EU corporate sustainability reporting rules (europa.eu) – see pdf page 12
