UK consults on using ISSB sustainability disclosure standards

The Financial Reporting Council (FRC) has published a call for evidence to inform the proposed endorsement of the IFRS Sustainability Disclosure Standards in the UK.

The call for evidence seeks views from corporates and their shareholders on whether application of the ISSB standards in the UK will result in disclosures that are understandable, relevant, reliable and comparable for investors – as well as whether the disclosures are technically feasible to prepare, whether they can be prepared in timely basis and at the same time as financial reports, and whether they are expected to generate benefits that are proportionate to the costs. 

The call for evidence closes on 11 October 2023 and other stakeholders with an interest in sustainability-related disclosure in the UK are also welcome to respond.

Background and process

The International Sustainability Standards Board (ISSB) published the final versions of the first two global sustainability disclosure standards - IFRS S1 on General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 on Climate-related Disclosures - in June 2023 (see our previous blog post). The ISSB standards are voluntary but a number of countries - including the UK, Canada, Japan, Singapore, Malaysia, Nigeria, Chile, Brazil and Egypt - have said they plan to implement them in their national regimes.

The UK government has committed to deciding whether to endorse the ISSB standards for use in the UK. The Department for Business and Trade is responsible for making the final decision, based on recommendations from two advisory committees, one of which is the UK Sustainability Disclosure Technical Advisory Committee (TAC). The FRC acts as the Secretariat to the TAC. 

The responses to this call for evidence will inform the TAC’s recommendations to the government on the suitability of the ISSB standards for the UK and considerations of whether any amendments are needed to the ISSB standards to ensure effective application in a UK context.

Application of the standards

The call for evidence document makes it clear that IFRS S1 and IFRS S2 are designed to be applicable to any reporting entity and do not depend on the entity applying UK-adopted international accounting standards in its financial statements. 

It also states that any future decisions about the scope of mandatory reporting against UK-endorsed versions of IFRS S1 and S2 will be subject to consultation by the FCA for UK listed companies, and by the government for UK registered companies. Respondents are invited to consider how the ISSB standards might be applied by both economically significant entities and other entities.

Insights sought

Respondents are asked to provide opinions and evidence on a range of topics, and, in particular on any challenges and benefits that might arise when preparing and disclosing information in compliance with the two ISSB standards, including the scale of the challenge and any proposed solutions.

The call for evidence (which includes a template for responses) asks a number of specific questions, including:

• How easy or difficult is it to interpret the requirements described in IFRS S1 and IFRS S2?
• To what extent will the requirements in the standards improve upon existing reporting in the context of the UK? (For more information on this, see our guides to UK climate reporting rules.)
• Is it clear how the concept of materiality (IFRS S1 paragraphs 17–19) applies to the identification and disclosure of sustainability-related risks and opportunities?
• What, if any, are the challenges in preparing sustainability-related disclosures at the same entity level used in the preparation of financial statements (e.g. consolidated reporting or entity-level reporting)?
• Is there sufficient guidance on how to identify the value chain and on how to prepare and present information about sustainability-related risks and opportunities in the value chain? If not, what would you need to be able to comply with this requirement?
• What are your estimates of the benefits or costs in relation to reporting sustainability-related information at the same time and in the same location as general purpose financial reports for companies in the UK?
• If UK companies were to include this information in the Strategic Report, how will they be able to ensure that this information is presented in a manner such that it is clearly identifiable and is not obscured by other information?
• What additional steps would your company need to take to comply with the requirements of IFRS S1 and IFRS S2 (e.g. staff, time, production, IT, etc) and which of those steps is the most costly/challenging?
• Do the reliefs provided in IFRS S1 and IFRS S2 give appropriate transitional relief as preparers develop their reporting in this area?

Interoperability with other disclosure regimes

One of the main benefits of the ISSB standards is that they bring together the SASB sector-specific sustainability disclosures standards and the TCFD recommendations on climate disclosures into a single, global framework. 

But the ISSB disclosure standards are not the only game in town. The EU is also in the process of rolling out its Corporate Sustainability Reporting Directive (CSRD), which will apply not only to EU entities but also to some non-EU entities doing business in the EU (see our CSRD Demystified series). And the US is also in the process of finalising its own rules on climate disclosures (see our client briefing). The final US rules were expected to be published in April but they are now expected in October.

For multinationals operating in various regions of the globe, this raises some serious questions about the interoperability of the various sustainability disclosure regimes. 

The Chair of the ISSB, Emmanuel Faber, has said that companies applying the ISSB standards will be compliant with the TCFD recommendations. But if you comply with the ISSB standards, would you also be compliant with the EU’s CSRD or the US’ forthcoming climate disclosure rules? And how do you reconcile the ISSB’s approach to materiality with the EU’s concept of “double materiality”? In addition, when countries such as the UK and others implement the ISSB standards into their national regimes, if they decide to make any changes to the ISSB disclosure requirements to cater for national circumstances, will this add yet another layer of complexity?

The IFRS’ and ISSB’s mission to develop a global baseline for sustainability reporting and do away with much of the “ESG alphabet soup” is laudable and has been welcomed by many but the path to a simpler global ESG disclosure landscape is, sadly, still not as smooth as many of us had hoped for.

If you would like to discuss any aspect of this consultation, please reach out to the contacts on this post or your usual Linklaters contact.