FRC issues recommendations on UK endorsement of IFRS sustainability disclosure standards 

Overview

On 18 December 2024, the Financial Reporting Council (FRC), as the secretariat to the UK Sustainability Disclosure Technical Advisory Committee (TAC), published the Committee’s recommendations to the Secretary of State (SoS) for Business and Trade, recommending endorsement of the first two IFRS Sustainability Disclosure Standards (SDSs) (S1 and S2) that were published in 2023 by the International Sustainability Standards Board (ISSB). This is a key milestone in the UK's endorsement of the IFRS SDSs.

For more information on IFRS S1 (General Requirements) and S2 (Climate-related disclosures), see Disclosures required under the IFRS's Sustainability Disclosure Standards (ISSB S1 and S2). 

Key takeaways

• Publication of the TAC's recommendations on the ISSB's sustainability disclosure standards (SDSs) is the next key step towards UK endorsement of the IFRS's standards.
• TAC has concluded that endorsement of S1 and S2 with its proposed amendments would be conducive to the long-term public good in the UK.
• TAC's proposed amendments relate to technical requirements relating to financed emissions, reliefs and operative dates.
• The next step is for the Secretary of State (SoS) to consult on and make a decision on endorsing the IFRS SDSs to produce UK Sustainability Reporting Standards (UK SRS). After this, the SoS will consult on disclosure requirements against the UK SRS for certain UK registered companies.
• Companies should familiarise themselves with the changes that TAC are proposing to prepare themselves for the UK SRS, which are expected to be available on a voluntary basis during 2025 and for the forthcoming mandatory disclosure requirements.

Criteria for TAC's review of the IFRS SDS and recommendations

TAC's recommendations follow the FRC's July 2023 Call for Evidence on the use of the ISSB standards in the UK and a review of the IFRS SDS and their suitability for use in a UK context. 

TAC's review has been based on six endorsement criteria including whether use of the IFRS SDSs is likely to: (i) improve the international comparability of sustainability-related reporting in the UK; (ii) support companies in making disclosures that are understandable, relevant, reliable and comparable; and (iii) improve the quality of corporate reporting within the UK in the long-term. TAC have also considered whether companies can provide the required disclosures within normal reporting timeframes and without undue cost or effort.

Changes to the IFRS SDS have only been recommended by TAC if: (i) they are necessary for the effective application of the IFRS SDS within a UK context; (ii) failing to do so would be of detriment to the long-term public good in the UK; or (iii) they are desirable, to build upon the material provided within the global baseline provided by the IFRS SDS.

TAC recommendations

TAC has concluded that endorsement of S1 and S2 with its proposed amendments would be conducive to the long-term public good in the UK.

The proposed amendments are to:

• Allow entities providing finance to use an internationally recognised industry classification system (e.g. a classification system used by the entity for other regulatory or financial reporting purposes) instead of the Global Industry Classification Standard (GICS) when reporting on Scopes 1, 2 and 3 gross financed emissions of the counterparties the entity finances. Alternatively, these requirements in IFRS S2 would be retained but TAC recommends that the ISSB provides written clarification to acknowledge that the current industry practice of reporting financed emissions using the latest available reliable information for a previous period, clearly labelled as such, is not inconsistent with the requirements of IFRS S1 and IFRS S2. In the absence of this written acknowledgement from the ISSB, TAC recommends that the Policy and Implementation Committee (PIC) considers the need for such an acknowledgement for UK entities to avoid undue cost and effort as regards reporting.
• Remove the transition relief in IFRS S1 that permits delayed reporting in the first year (IFRS S1 paragraph E4) and extend the ‘climate-first’ reporting relief in IFRS S1, which allows entities to delay reporting sustainability-related information, to up to two years.
• Change the effective date of the IFRS SDS to remove the IFRS' date which has now passed and to rename this section ‘Initial application’. TAC noted that a decision on the effective date (i.e. when UK companies are obliged to make disclosures using the UK versions of IFRS S1 and S2 (UK SRS)) should be a matter for PIC to advise on.

The rationale for the recommendations and the amendments are set out in Appendix 4 of the Recommendations document. The areas where TAC members held differing views are also highlighted (for example, in relation to the application of materiality, the requirements relating to transition plans, financed emissions and transition reliefs). Draft wording for the proposed amendments is provided in Appendix 5.

TAC additional recommendations

On some issues where TAC is not recommending amendments to IFRS S1 and S2, it has made additional recommendations to reflect the differing views of the group. These include recommendations by TAC on the following:

• Interoperability: as an implementation issue, TAC recommends that the government should engage with the ISSB and the European Financial Reporting Advisory Group (EFRAG) on interoperability challenges for UK entities reporting against multiple frameworks and the potential for equivalence.
• Identifying sustainability-related risks and opportunities: PIC should develop jurisdictional guidance on applying IFRS S1 in conjunction with the sustainability-related information entities are required to disclose under the current UK legal framework, such as the definition of ‘sustainability-related matters' in section 416B(2) of the Financial Services and Markets Act 2000.
• Materiality of sustainability-related financial information: PIC should consider the difference between the requirements in IFRS S1 and S2 and the existing UK requirements for climate-related financial disclosures set out in the Companies Act 2006 and FCA's UK Listing Rules. Specifically, this should focus on disclosures about governance and risk management processes so that the current utility of UK disclosures is not compromised as entities transition from the existing requirements to those in line with the IFRS SDS.
• Sources of guidance: UK stakeholders should be made aware of the ISSB’s assertion that entities are not required to use the SASB materials, but only refer to and consider them. The FRC should consider developing further guidance on assurance expectations relating to the extent to which an entity has ‘referred to and considered’ the SASB materials. The UK should also engage with the ISSB on the enhancement of the SASB materials.
• Location of sustainability-related disclosures: PIC should consider how to streamline the existing rules in the Companies Act 2006 and FCA's UK Listing Rules relating to the location of sustainability-related disclosures. In particular, it should consider the possible implications of the location of disclosures for future assurance requirements.
• Commercially sensitive information: PIC should consider, as an implementation matter, inconsistencies between IFRS S1 and the UK’s legal framework. In addition, the UK should engage with ISSB on possible inconsistencies between IFRS S1 and IFRS Accounting Standards.
• Judgements, uncertainties and errors, including revising comparatives: the ISSB should develop guidance on the requirements to revise comparatives. In particular, PIC should consider, alongside other requirements in the Companies Act 2006, the Streamlined Energy and Carbon Reporting (SECR) requirement that the comparative information shall be ‘as disclosed in last year’s report’ because this might not meet the requirements for the disclosure of comparative information in IFRS S1.
• Reporting entity boundary and consolidated reporting: PIC should consider the interaction between the scope of application of IFRS S1 for reporting entities and the current UK legal framework, and the introduction of an exemption from compliance with UK SRS for certain subsidiaries when the parent company is reporting on an equivalent basis for the consolidated group. Entities should be strongly encouraged to report sustainability-related information using the same reporting boundary approach that is used for financial reporting as soon as practicable. Also, the ISSB should consider reporting entity boundaries when updating IFRS S1 and IFRS S2 or developing future topic-specific standards.
• Value chain: Given the challenges in collecting the data in the value chain, PIC should consider support for value chain disclosures (that is, disclosures relating to the range of interactions, resources and relationships related to a reporting entity's business model and the external environment in which it operates). This support could include establishing safe harbour protections for value chain disclosures in initial reporting periods, and allowing entities to update the extent of disclosures relating to their value chain (i.e. their value chain boundary) as underlying analysis and reporting capabilities mature.
• Current and anticipated financial effects: the ISSB should develop further guidance and worked examples on current and anticipated financial effects on a reporting entity's business model and value chain, including how to determine when information about the combined financial effects 'would not be useful’. Market practice on current and anticipated financial effects, including using mechanisms to support the application of the requirements, should be monitored and fed back to the ISSB during its post-implementation review of the standards.
• GHG emissions: GHG Protocol and measurement methods: the ISSB should provide further clarification and guidance on the requirement to disaggregate Scope 1 and Scope 2 emissions between the consolidated accounting group and other investees. TAC recommends engaging with both the ISSB and GHG Protocol to ensure a review of the GHG Protocol Corporate Standard and its governance is undertaken to assess its suitability as part of IFRS S2.
• Targets: the ISSB should clarify the term ‘targets’ and the way it differs from other terms, including ‘ambitions’, ‘commitments’ and ‘milestones’. TAC recommends that market practice related to targets (including the use and disclosure of carbon credits, and the connectivity between targets and identified risks and opportunities) is monitored and fed back to the ISSB during its post-implementation review of the standards.
• Transition Plans: TAC notes that there were different views regarding whether the requirements in IFRS S2 for the disclosure of transition plans, only if such plans exist, should be maintained without amendment. It also noted that the status of the Transition Plan Taskforce (TPT) materials will be considered as an implementation matter.
• Effective date: TAC notes that the effective date for mandatory reporting is for PIC to decide. TAC considers that if an entity makes an unequivocal statement of compliance with IFRS SDS (as issued by the ISSB), it would be inappropriate for the entity to apply the transition reliefs again when they are available in the UK SRS. Therefore, TAC recommends that PIC considers, as an implementation matter, the implications of voluntary reporting.

TAC notes that the application of IFRS SDS will be an evolutionary process, and therefore companies can expect some changes over the coming years as the UK reporting system beds in and regulators consider the best ways in which to achieve the desired level of corporate transparency.

TAC's response to DTB issues

The Department for Trade and Business raised a number of issues for TAC to consider as part of its review. TACs conclusions are explained in Appendix 6. They include:

• Clarity of IFRS S1 and IFRS S2 definitions: TAC believes that the definitions in IFRS S1 and IFRS S2 are sufficiently clear. However, it made recommendations in relation to the definitions of ‘sustainability-related matters’ and 'commercially sensitive information' (see the 'TAC additional recommendations' section above).
• Transition Reliefs: TAC noted that the transition reliefs in IFRS S1 and IFRS S2 are proportionate and focused on the areas in the standards that are particularly challenging. However, as explained in the TAC recommendations section above, it suggested amendments to the available reliefs.
• Timescales for scope 3 disclosures by public interest entities (PIEs): TAC concluded that PIEs in the UK should already have the capacity, skills and systems to produce Scope 3 emissions disclosures. However, it notes that Scope 3 reporting is difficult to produce and that entities will need support, (e.g. guidance and data infrastructure) to be able to do so.
• Sufficient infrastructure for UK companies to meet the disclosure requirements in IFRS S2? Alongside its recommendation that the government review the process for updating the GHG conversion factors, TAC also recommends that the government considers making available certain government-level emissions data for usage by entities in their reporting processes, (e.g. data collected for national inventory reports, the UK Emissions Trading Scheme and, in future, the forthcoming Carbon Border Adjustment Mechanism). There may also be opportunities for international collaboration on this work.
• Assurance: TAC concluded that the disclosures made in accordance with IFRS S1 and IFRS S2 are technically capable of being assured. However, there are several barriers to the provision of assurance including the timing of reporting, the likely use of significant amounts of estimated data to be able to provide disclosures, and the forward-looking nature of certain disclosures (e.g. on resilience and financed emissions). TAC noted that assurance standards will have to develop and that the International Auditing and Assurance Standards Board published the International Standard on Sustainability Assurance 5000, General Requirements for Sustainability Assurance Engagements, in November 2024 and is expected to publish further guidance in early 2025. It also noted that the cost and effort to obtain reasonable, or even limited, assurance on sustainability information could divert resources away from a business in managing its sustainability-related risks and opportunities.

Next steps

The SoS is expected to consult on endorsing the IFRS SDS to produce UK SRS in Q1 of 2025 with a decision on endorsement being taken swiftly thereafter.

No decisions have been taken as to the scope of entities to which the UK SRS will apply. TAC's report noted that the implementation of IFRS S1 and IFRS S2 in the UK is an opportune time to simplify and streamline existing reporting rules in the UK which are considered unnecessarily complex and confusing. Following an endorsement decision on the UK SRS, the SoS is expected to consult on mandatory disclosure requirements for certain UK registered companies. 

The FCA is also expected to consult in 2025 on updating the disclosure rules in their UK Listing Rules so as to refer to the UK SRS.

Companies should familiarise themselves with the changes that TAC are proposing to prepare for themselves for the UK SRS, which are expected to be available on a voluntary basis during 2025 and for the forthcoming mandatory disclosure requirements.