Final UK Sustainability Reporting Standards: What boards need to know

IFRS S1 includes a transition relief that allows reporting entities to publish sustainability-related disclosures later than their financial statements in the first year of applying ISSB standards.

Proposed removal of this relief has been adopted in the final version of UK SRS S1, on the grounds that it would undermine the principle of connectivity between financial and sustainability reporting.

As result, reporting entities will need to publish sustainability and financial disclosures at the same time, incorporating sustainability-related disclosures as part of their general purpose financial reports.

IFRS S1 includes a transition relief that permits entities to report on climate-related matters only in their first year of applying ISSB standards. Disclosure of sustainability-related risks and opportunities beyond those associated with climate change may be deferred by a year.

UK SRS exposure drafts proposed extension of this relief to two years, together with a one-year relief (retained from IFRS S2) on disclosing Scope 3 greenhouse gas (GHG) emissions. However, final versions of the standards have removed all fixed time periods. Instead, for entities required to report in accordance with UK SRS, application of reliefs will be determined by the Companies Act, Financial Conduct Authority (FCA) Listing Rules, and/or other regulation.

Meanwhile, voluntary users of the standards can use reliefs indefinitely. However, they may only assert compliance with UK SRS S2 if use of the Scope 3 relief is disclosed, and they may not claim compliance with UK SRS S1, if using the relief to only report on climate-related risk and opportunities.

Both ISSB standards include a statement on their effective date: "An entity shall apply this Standard for annual reporting periods beginning on or after 1 January 2024. Earlier application is permitted."

Proposed removal of these clauses has been adopted in final versions of the UK standards, on the basis that they are freely available for any entity to use on a voluntary basis. Should mandatory reporting requirements be introduced, the effective date will be set out in the relevant regulation or legislation.

IFRS S1 and IFRS S2 include requirements that entities "shall refer to and consider the applicability of" the standards published by the Sustainability Accounting Standards Board (SASB) and the "Industry-based Guidance on Implementing IFRS S2" (which is based on the SASB Standards).

With the exception of UK SRS S2 paragraph 37 (which refers to industry-based metrics in general), final versions of the UK standards change "shall" to "may", making it clear that while entities can refer to SASB materials if they wish, they are not required to do so.

Not part of the consultation on UK SRS exposure drafts, but included following in light of responses, a new disclosure requirement (B59A) has been added to UK SRS S2. Where financial market participants are unable to provide required additional disclosures on financed emissions, they must explain why, and how they plan to be able to meet the requirements in full.

Also consistent with ISSB standards, and Taskforce on Climate-related Financial Disclosures (TCFD) and Taskforce on Nature-related Financial Disclosures (TNFD) recommendations, both the UK SRS and ESRS frameworks are structured around broadly equivalent reporting areas:

• Governance: the governance processes, controls and procedures used to monitor and manage sustainability-related risks and opportunities;
• Strategy: the approach used to manage those risks and opportunities;
• Risk management: the processes used to identify, assess, prioritise and monitor sustainability-related (impacts,) risks and opportunities; and
• Metrics and targets: performance in relation to sustainability-related risks and opportunities, including progress towards any targets set or required by law or regulation.

Bracketed text above alludes to differences in the detail, arising from different approaches to materiality assessment (see points of divergence below). Where UK standards adopt a single materiality approach, requiring only assessment of financially significant risks and opportunities, ESRS' double materiality approach also requires analysis of a business's impacts and dependencies on people and planet.

These differences aside, broad structural convergence is significant for groups operating in both the UK and the EU. The common four-pillar architecture means that the data-gathering and governance processes that underpin disclosure can be substantially shared, even if specific requirements diverge.

Both frameworks extend the scope of required disclosures beyond an entity's own operations to encompass the upstream and downstream value chain (subject to materiality and proportionality constraints).

UK standards require disclosure of the current and anticipated effects of sustainability-related risks and opportunities on the entity's business model and value chain, including where in the value chain those effects are concentrated (e.g., geographical areas, facilities, and types of assets or liabilities).

ESRS likewise require that reported information be extended beyond an entity's own operations to cover material impacts, risks and opportunities connected through direct and indirect business relationships in the upstream and downstream value chain, but notes that reporting entities need not report on every actor in the value chain – only where material.

Both frameworks impose substantively similar requirements for governance disclosure, covering board-level responsibility, skills and competencies, the frequency and content of information flows, oversight of strategy and major transactions, and the link to remuneration.

UK SRS require disclosure of the governance body or individual responsible for oversight. This includes: how responsibilities are reflected in mandates and policies; how appropriate skills and competencies are determined; how and how often that body is informed; how it takes into account sustainability risks and opportunities when overseeing strategy and major transactions (including consideration of trade-offs); and how it oversees the setting of targets and monitors progress (including whether performance metrics are included in remuneration policies).

ESRS similarly require disclosure of the roles and responsibilities of administrative, management and supervisory bodies for overseeing material impacts, risks and opportunities. This includes the skills and expertise available to fulfil those responsibilities, the identification of responsible individuals or committees, oversight of target setting and monitoring, and consideration in strategy, major transactions and risk management (including trade-offs).

Both frameworks place a premium on the connectivity between sustainability disclosures and the financial statements, and on coherence within the sustainability disclosure itself.

UK SRS require an entity to provide information in a manner that enables users to understand the connections between items within the sustainability disclosures (such as the connections between governance, strategy, risk management and metrics and targets), and across sustainability disclosures and other general purpose financial reports, such as the related financial statements.

ESRS similarly require information that enables users to understand connections within the sustainability statement, and between it and other corporate reporting (including financial statements), including cross-references and consistency of assumptions where possible.

Both frameworks require disclosure of absolute gross GHG emissions across all three Scopes, providing a common quantitative foundation for climate disclosures.

UK SRS S2 requires disclosure of absolute gross GHG emissions generated during the reporting period, expressed as metric tonnes of CO₂ equivalent, classified as Scope 1, Scope 2 and Scope 3 emissions.

ESRS E1 requires disclosure of absolute gross GHG emissions for the reporting period: Scope 1, Scope 2 (both location-based and market-based), and Scope 3 by significant categories, framed as direct and indirect impacts from activities in the entity's own operations and in the upstream and downstream value chain.

Both frameworks require entities to assess and disclose the resilience of their strategy and business model in light of climate-related risks and opportunities, using climate scenario analysis.

UK SRS S2 requires an entity to disclose information that enables users to understand the resilience of its strategy and business model to climate-related changes, developments and uncertainties, taking into consideration its identified climate-related risks and opportunities, and to use climate-related scenario analysis to assess its climate resilience using an approach that is commensurate with the entity's circumstances.

ESRS E1 requires disclosure of the resilience of the entity's strategy and business model with respect to climate change, including results of its assessment of climate resilience, and if and how this is informed by climate-related scenario analysis.

Both frameworks require transition plan-related disclosures as part of the strategy pillar.

UK SRS S2 requires an entity to disclose information about the effects of climate-related risks and opportunities on its strategy and decision-making, including information about any climate-related transition plan it has.

Where reporting entities have a climate-related transition plan, ESRS E1 requires them to disclose information about it, including targets and actions to reduce GHG emissions and to achieve net zero, the role of carbon credits in the plan, alignment with limiting global warming to 1.5°C, and the financial resources allocated to implement the plan. Where they don't have a plan, reporting entities are required to disclose this, and to indicate if/when they expect to adopt one.

This is the most fundamental conceptual divergence between the two frameworks, which has significant consequences for the scope and content of disclosures.

UK standards focus exclusively on sustainability-related risks and opportunities that could reasonably be expected to affect the entity's cash flows, access to finance or cost of capital over the short, medium or long term. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that primary users of general purpose financial reports make on the basis of those reports.

ESRS requires disclosure of actual and potential impacts of business activities on people and the environment, as well as financially material sustainability-related risks and opportunities. Sustainability matters may be material purely from an impact perspective, irrespective of whether it is financially material to the reporting entity.

The practical consequences in terms of reporting are significant, for example:

• Under UK SRS, an entity's supply chain labour practices would only require disclosure if they could affect the entity's own financial prospects, for example, through regulatory risk, reputational risk affecting revenue, or supply chain disruption.
• Under ESRS, those same labour practices may require disclosure because of the likelihood and severity of actual or potential impacts on workers, regardless of any financial consequence for the reporting entity.
• Under ESRS, the scope of disclosures is therefore structurally broader, and the assessment process is more complex, requiring a two-dimensional materiality test.

Additionally, there are even more important strategic consequences to consider:

• The essential shortcoming of a single materiality approach is that it only recognises an issue once it has a direct financial impact.
• But by the time a sustainability issue shows up in the numbers, it may already be too late and/or far more costly to fix.
• Analysing impacts and dependencies on people and planet, and how these may circle back as financially significant risks, is therefore vital to developing a more complete picture of where a business is exposed to risk, lacks resilience and needs to transform.

This is why we continue to recommend that clients adopt a double materiality approach, even if they are no longer (or never were) in scope of regulations that require it. Done right, it's not only part of the reporting process. It is a critical tool in strategy development and anticipatory risk management.

Both frameworks target investors and creditors, but ESRS casts its net significantly wider.

The UK SRS objective is to provide information useful to primary users of general purpose financial reports in decisions about providing resources to the entity, meaning existing and potential investors, lenders and other creditors.

ESRS 1 defines users of general purpose sustainability statements as encompassing not only primary users of general purpose financial reports, but also other affected stakeholders including business partners, trade unions and social partners, civil society and non-governmental organisations.

The broader audience definition under ESRS is a direct corollary of double materiality. Because ESRS require impact disclosures as well as financial risk disclosures, those disclosures are relevant to a wider set of stakeholders than the capital allocation audience that UK SRS serve.

While the UK SRS currently consist of two standards, the ESRS comprise a far broader suite. Beyond climate mitigation and adaptation, topical standards span additional environmental topics (pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy), social topics (own workforce, workers in the value chain, affected communities, consumers and end-users), and governance (business conduct).

The current breadth differential means that an entity complying with the full ESRS suite will produce substantially more disclosures than one applying UK SRS S1 and S2 alone. The convergence in architecture (the four pillars reference above) makes interoperability possible in principle, but the content difference remains marked.

ESRS place far greater emphasis on stakeholder engagement as part of the materiality assessment and the disclosure process itself.

ESRS 1 requires that materiality assessment take into account the perspectives of stakeholders whose interests are or could be affected by the entity's activities and business relationships in its upstream and downstream value chain. This stakeholder engagement process is integral to identifying material impacts, which can be identified as material from a purely impact perspective, irrespective of the views of financial stakeholders.

UK SRS S1 does not impose an equivalent stakeholder engagement requirement. Materiality is assessed against the information needs of primary users of general purpose financial reports, not against the views or interests of affected stakeholders.

The FCA proposes to delete its current TCFD-aligned climate disclosure rules and replace them with rules that require companies with a listing in the commercial companies, non-equity shares and non-voting equity shares, and transition categories to make climate-related disclosures in line with UK SRS S2 on a mandatory basis.

Certain elements that underpin the reporting of climate information are outlined in UK SRS S1, and the FCA proposes to include a rule requiring companies, when reporting climate-related disclosures under UK SRS S2, to apply the relevant sections of UK SRS S1 to such climate-related disclosures.

To account for the perceived challenges with collecting data about upstream and downstream GHG emissions, the FCA proposes to implement Scope 3 emissions reporting under UK SRS S2 on a "comply or explain" basis.

Where a listed company chooses to explain, it would be required to identify the specific paragraphs of UK SRS S2 where it has not produced Scope 3 disclosures, explain the reasons for not making those disclosures, and explain any steps being taken or planned to make those disclosures in the future (including timeframe).

While the FCA has had rules on climate reporting against TCFD since 2021, it has not previously had specific rules for reporting of sustainability-related risks and opportunities beyond climate. Recognising these challenges, and to give listed companies time to adjust, it proposes introducing a requirement for companies to report on non-climate sustainability matters on a "comply or explain" basis.

The proposals would require listed companies either to comply with UK SRS S1 or to explain their approach to reporting any sustainability-related risks or opportunities they have identified that could reasonably be expected to affect their prospects.

Where an issuer chooses to explain instead of comply, draft rules would require disclosure of the relevant risks or opportunities for which disclosures have not been made, the reasons for not including those disclosures, and any steps being taken or planned to make those disclosures in the future (including timeframe).

If a listed company has not identified any wider sustainability-related risks and opportunities that could reasonably be expected to affect its prospects, this must be disclosed in its annual financial report.

Given the Government's ongoing consultation on transition plans, the FCA considers it inappropriate to set requirements for listed companies to have transition plans. Instead, it proposes to require listed companies to include a statement in their annual financial report, either a) explaining that they have disclosed a climate-related transition plan, and where it can be found, or b) stating why they have not published one.

To encourage listed companies to disclose material information about their plans in a consistent way, the FCA proposes introducing FCA Handbook Guidance that listed companies may wish to use IFRS Educational Material (which builds on the disclosure-specific materials developed by the Transition Plan Taskforce, for which the IFRS Foundation took responsibility in 2024).

As the Government is considering the longer-term approach to the operation and oversight of the sustainability assurance market, the FCA is not currently proposing to set mandatory requirements for the assurance of sustainability reporting.

Instead, it proposes to require listed companies in scope to specify, in their annual financial report, whether or not they have obtained third-party sustainability assurance over their UK SRS disclosures.

Where third-party assurance has been obtained, companies would be required to state the name of the assurance provider, which disclosures have been assured and to what level (e.g., reasonable or limited assurance), which assurance standards were used, and where the assurance report can be accessed.

The FCA aims for its proposed rules to come into force from 1 January 2027, with implementation for reporting against UK SRS for accounting periods beginning on or after that date.

For listed companies with an accounting period beginning before 1 January 2027, the FCA proposes a transitional provision to allow them either to continue to use the rules and guidance in place immediately before 1 January 2027 (i.e., TCFD-aligned rules and guidance), or to voluntarily comply with the proposed new UK SRS-related reporting requirements.