A new set of sustainability reporting standards for UK businesses is coming next year. What are they and who will be affected?
Transparency is key for greening finance
The government’s 2023 Green Finance Strategy (an update on the 2019 original) sets out the ambition to make the UK a global leader in green finance. It believes that climate change is a serious risk to global financial stability and that private investment is key to delivering net zero. But sustainably-minded investors and consumers can’t make decisions in line with their values without clear information. So the government has been working on regulatory routes to greater transparency.
From April 2022, UK-registered large companies and financial institutions have been required to do climate-related reporting as well as their usual financial reports. The original standard for this reporting was set by the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD has now been wound down and its work is being continued by the International Sustainability Standards Board (ISSB).
Timescales
The ISSB issued its inaugural standards in June 2023. The next task for the UK government is to endorse these standards so they can be implemented in the UK. Our version will be known as the UK Sustainability Reporting Standards. There is already a framework for how these will be developed. A spring 2024 update on this work says that the government aims to make the new standards available in Q1 of 2025.
But this doesn’t mean that UK businesses will have to comply with a new set of rules immediately. The standards will form the basis for future regulatory requirements, but the requirements themselves (known as the Sustainability Disclosure Requirements, or SDR) will still need to be developed.
There are two bodies at work here: the government and the Financial Conduct Authority (FCA), which regulates the financial services sector.
The FCA operates independently of the government and does its own work to promote transparency in sustainability reporting. But the FCA has to wait for the government to publish the UK Sustainability Reporting Standards before it can use them to finalise its own Sustainability Disclosure Requirements.
Both the government and the FCA will also need to carry out consultations at this point. New legislation also requires parliamentary approval. So the latest update says that any changes would apply to accounting periods beginning on or after 1 January 2026 – at the very earliest.
Who will the rules apply to?
- Certain categories of FCA-regulated businesses will be subject to the FCA regulations (to be based on the UK Sustainability Reporting Standards)
- Other businesses (in scope but not FCA-regulated) will be subject to government regulations (based on the same standards)
This may sound vague, but it’s because many decisions have not been made. The FCA has been working on a package of SDR rules and other anti-greenwashing measures for funds based in the UK. The most recent is the anti-greenwashing rule, which came into force on 31 May 2024 and applies to all FCA-authorised firms. The next to come in, on 31 July 2024, will be a rule regarding “green” labels for investment funds.
The SDR currently applies to UK-based alternative investment funds (AIFs). In June 2024 the FCA closed a consultation on expanding the scope of the SDR to portfolio management services. The government may decide to broaden the SDR further to include overseas funds, but this would not be the decision of the FCA. So there is plenty of discussion to be had and no certainty yet over which businesses will be in scope of future disclosure rules.
Taxonomy: still waiting
We reported in June 2023 that the development of a Green Taxonomy was a roadblock to the development and implementation of the SDR. This unfortunately still seems to be the case, although the latest official update says that the government “continues to work at pace” on it. There will be a consultation on the draft taxonomy, then a testing period for voluntary disclosures based on it, then probably more consultation, before the government considers mandating disclosures in line with it. This is likely to take several years. So either the SDR will have to be brought in without including disclosures against a green taxonomy, or the implementation of the SDR will be delayed beyond 2026.
To conclude: UK businesses need not expect SDR compliance requirements in the next year or so. But progress is happening, albeit slowly, and these rules are definitely on their way. For expert help with your compliance issues, get in touch with Sustainable Energy First.
We will continue to update the Hub as reporting and compliance deadlines approach in 2025 and 2026.