Aligning UK Businesses with Global Sustainability Standards

The UK Financial Reporting Council (FRC) has emphasized the significance of adopting the International Sustainability Standards Board (ISSB) reporting standards, IFRS S1 and IFRS S2. These standards are pivotal in aligning UK businesses with global sustainability practices, enhancing transparency, accountability, and environmental stewardship.

Bridging Corporate and Environmental Responsibilities

IFRS S1, titled General Requirements for Disclosure of Sustainability-related Financial Information, establishes a comprehensive framework for sustainability disclosures. It covers emissions reporting (Scopes 1, 2, and 3), waste management, and environmental risks that could materially impact a company’s financial performance. IFRS S2, focused on Climate-related Disclosures, builds on the Task Force on Climate-related Financial Disclosures (TCFD) framework, emphasizing climate risks and opportunities.

Scope 3 emissions reporting—a critical aspect often overlooked in traditional reporting—is a key focus, as it accounts for up to 80% of total greenhouse gas emissions for many businesses and encompasses indirect emissions across value chains.

Sally Duckworth, Chair of the UK Sustainability Disclosure Technical Advisory Committee (TAC), highlighted the initiative’s significance: “This represents a crucial step in aligning UK businesses with global reporting practices, promoting transparency, and supporting the transition to a sustainable economy.”

Driving ESG Goals Through Comprehensive Reporting

The UK TAC's technical assessment underscores the alignment of IFRS S1 and S2 with the country’s long-term public good. Key benefits include:

• Improved International Comparability: Adoption ensures that UK companies align their reporting practices with global benchmarks, enhancing investor trust and facilitating cross-border capital flows.
• Quality of Reporting: Enhanced transparency through detailed environmental, social, and governance (ESG) data empowers stakeholders to make informed decisions.
• Efficiency Gains: By integrating sustainability data with financial disclosures, companies reduce redundancy and streamline reporting processes.

These standards also address stakeholder concerns, including the need to clarify definitions for sustainability-related risks and opportunities and tailored guidance to integrate with existing UK legal frameworks, such as the Companies Act 2006.

Gradual Implementation for Sustainable Growth

The FRC recommends a phased implementation approach to support the transition, particularly for complex elements like Scope 3 emissions reporting and financed emissions calculations. For instance, the TAC has proposed a two-year extension for climate-first reporting relief under IFRS S1 to accommodate the development of robust reporting infrastructure and expertise.

Additional recommendations from the TAC include:

• Clear Guidance: Jurisdictional guidance is advised to ensure consistent application of the standards alongside existing UK-specific requirements.
• Assurance Mechanisms: Strengthening the credibility of disclosures through reliable assurance methods.
• Post-Implementation Review: Monitoring the real-world application to identify and address any challenges.

Strengthening the UK’s Global Leadership in Sustainability

The standards offer a competitive advantage by providing investors and stakeholders with actionable insights into companies’ ESG commitments and long-term viability.

Furthermore, the endorsement aligns with the UK’s broader climate goals, including achieving net-zero carbon emissions by 2050. The TAC’s report underscores the potential for improved access to capital, reduced cost of capital, and strengthened stakeholder confidence through high-quality, comparable reporting.

Data Highlights

• Scope 3 Reporting: According to the TAC, implementing reliable Scope 3 reporting is feasible but requires additional infrastructure and support. Many UK companies lack the data systems to quantify value chain emissions accurately.
• Economic Impact: The TAC anticipates that improved ESG disclosures will bolster economic competitiveness by attracting sustainable investments and fostering innovation.
• Stakeholder Engagement: The report reflects feedback from over 100 stakeholders, emphasizing the importance of interoperability between IFRS and the EU’s Corporate Sustainability Reporting Directive (CSRD).