The Government is pursuing ambitious growth plans, as reflected in its newly launched Industrial Strategy, which aims to target eight key industries with the maximum potential for growth over the next ten years. Sustainable finance is an integral part of that strategy, helping to mobilise finance to support the transition to Net zero and create cleaner energy. To achieve that, stakeholders need a sustainability reporting framework that offers robust, comparable and transparent information about organisations’ sustainability goals, progress and achievements.
It has consequently announced three consultation papers to establish UK sustainability reporting standards, strengthen transition planning, and improve the integrity of the related assurance market.
UK Sustainability Reporting Standards
The Government plans to adopt the International Sustainability Standards Board (ISSB) standards (IFRS S1 and S2), as UK Sustainability Reporting Standards 1 and 2 (UK SRS S1 and S2). Initially published in 2023, the ISSB’s standards subsumed other frameworks, including the Task Force on Climate-related Financial Disclosures (TCFD), and has now become the global baseline.
The UK Sustainability Disclosure Technical Advisory Committee (TAC) and the UK Sustainability Disclosure Policy and Implementation Committee (PIC) reviewed the standards and provided their recommendations to the Government. Incorporating this feedback, the Department for Business and Trade (DBT) is proposing six minor amendments, which it views as essential to application in a UK context, namely:
- In IFRS S1, removing transition relief to allow delayed reporting in the first year. This is in light of the current sustainability reporting requirements in the UK.
- In IFRS S1, extending transition relief to two years for disclosure of non-climate related risks. This ‘climate-first’ approach gives organisations more time to update their underlying reporting practices.
- In IFRS S2, removing the need to use the Global Industry Classification Standard (GICS) to inform finance emission requirements. This is to reduce unnecessary cost, particularly where existing reporting processes use an alternative classification system, and echoes the ongoing exposure draft consultation by the ISSB on IFRS S2.
- In IFRS S1 and S2, removing ‘effective date’ clauses to allow for future Government rules or FCA regulation. This also enables organisations to adopt it voluntarily, to their own timescales.
- In IFRS S1 and S2, regarding the standards issued by the Sustainability Accounting Standards Board (SASB), amending references to “shall refer to and consider the applicability of…” to “may refer to and consider the applicability of…” the SASB standards. This amendment will be reviewed following the ISSB’s work to enhance SASB standards.6. In IFRS S1 and S2, updating transition relief options to apply from the point at which reporting becomes mandatory. This is to make sure mandatory reporters can make use of the relief, without penalising organisations that have voluntarily adopted it early.
With little significant divergence from IFRS S1 and IFRS S2, the Government will assess the feedback and expect to publish final UK SRS S1 and S2 in Autumn 2025.
At this stage, the Government isn’t consulting on the entities to be in scope of these standards. The FCA will consult separately on proposals to require the use of UK SRS within FCA listing rules. In addition, the Government is considering how to build on existing UK climate-related disclosure requirements to create an enhanced regime for sustainability-related financial disclosures that’s fit for the future. This will likely focus on economically significant entities where there’s expected to be strong public and investor interest.
Transition plans
The Government aims to support an orderly transition to meet climate-related goals, boost transparency for investors, and maximise opportunities for greater competitiveness and growth. To achieve this, the Department for Energy Security and Net Zero’s(DESNZ) consultation aims to establish a framework to improve accountability and maintain integrity across the market. The subsequent consultation puts forward a range of options to provide the market with credible and decision-useful climate-related information without introducing undue barriers to growth, or additional administrative burdens.
First off, there’s what a good transition plan should look like. The most fully-formed option is to adopt the Transition Plan Taskforce (TPT) Disclosure Framework, which aligns with transition plans in both IFRS S2 and the Glasgow Finance Alliance for Net Zero. With three guiding principles of ‘ambition, action and accountability’, it covers the five key disclosure elements: foundations, including strategic ambitions; implementation strategy; engagement strategy; metrics, and targets and governance.
Read more on the full details of the transition plan taskforce.
If the Government adopts the TPT’s approach, it could potentially incorporate key topics from IFRS S2, which is being amended and adopted as UK SRS S2. The primary focus of the standard is to disclose information on climate-related risks and opportunities for more informed decision making. While the standard isn’t a transition plan in its own right, nor does it require one, it does feature elements that would potentially overlap with a transition plan, and could be considered for inclusion, namely:
- a high-level overview of governance processes, controls and procedures around climate-risk management. This includes management responsibilities, monitoring plans, remuneration and governance structures, among others
- current and anticipated activities to mitigate risks and adapt across operations and the broader value chain
- the impact of climate-related risks and opportunities on the financial position and cash flows
- details on resilience of the organisation’s strategy in the face of climate-related risk
- disclosures to highlight risk management approaches
- inclusion of metrics and targets around: greenhouse gas emissions; assets that are vulnerable to climate-related risk or present greater opportunities; targets and methodologies; use of carbon credits.
The consultation encourages firms to look for synergies between the TPT transition plan framework and UK SRS S2. It’s particularly important to note that the two approaches share the same materiality filter, which is a key starting block when looking at disclosures or transition plans more broadly.
Is ‘comply or explain’ the best approach?
The next consideration is around the frequently used ‘comply or explain’ approach. The Government is considering whether mandating entities to develop and disclose transition plans would duplicate existing requirements in the annual report. This would be contrary to its ambition to reduce the administrative burden, while promoting sustainable finance. However, it does note that the TPT disclosure, published at least every three years, would go into greater depth and be more informative for firms.
Alternatively, organisations that don’t publish a transition plan or disclose related transition information against UK SRS S2 could be asked to explain why. This will improve transparency for organisations that have opted out, highlighting key barriers to adoption and giving stakeholders greater insight into the organisation. However, it could mean a lower uptake, with less information available and less comparability for stakeholders.
There’s also the question of what type of organisations should be in scope of the transition plan requirements. The proposed scope is currently FTSE 100 companies and financial institutions, mirroring the 2024 Labour manifesto. Considering the FCA’s planned consultation on applying UK SRS, the Government is considering whether to redefine the scope of entities under any future transition plan requirement.
Mandating plan implementation
The Government is also considering whether it should mandate organisations to deliver against their transition plans. On the one hand, this could increase accountability and ensure that plans are more realistic. However, it could also potentially limit ambition, and it raises the question of how to account for poor performance against targets due to external factors.
Scope and topics for inclusion
With a focus on alignment with pre-existing approaches, the consultation considers key topics for inclusion:
- The transition to net zero by 2050, climate adaptation and resilience, and alignment with the Paris Agreement to maintain a maximum rise in temperature of 1.5°C above pre-industrial levels
- A ‘nature positive’ approach, including improving understanding of the key concepts, what an effective transition could look like and use of existing frameworks such as the Taskforce on Nature-Related Financial Disclosures (TNFD).
- The impact across the wider supply chain to make sure they actively support an organisation’s transition plan, recognising that while this could encourage positive change, it could put additional pressure on small or medium enterprises. The consultation also considers the legal implications of transition planning, recognising potential liabilities for future-facing disclosures, should agreed plans, or elements of these, not come to fruition.
Assurance of sustainability reporting
Alongside the above, the DBT has issued a consultation to boost confidence in third-party assurance over sustainability-related disclosures. This follows the Financial Reporting Council’s (FRC) market study on Assurance of Sustainability Reporting, which found a need for greater regulatory oversight in this space. Study respondents were concerned that, although there was a broad choice of providers, there was limited consistency in the quality of assurance available, with future implications for competition and choice. As such, the market highlighted the need for greater regulatory support to encourage investment, develop skills, and deepen knowledge of sustainability reporting and assurance.
The Government’s subsequent proposal aims to give all stakeholders high-quality, consistent and reliable assurance over sustainability disclosures to support decision-making processes and promote sustainable finance. It has proposed a voluntary registration regime headed by the Audit, Reporting and Governance Authority (ARGA), which (once formed) will replace the FRC. The regime will demonstrate that registered firms have the appropriate skills and approach to give robust assurance over all sustainability-related financial disclosures that align to: the European Sustainability Reporting Standards (ESRS) and the ISSB or aligned regional variants. This includes both the newly created UK SRS S1 and S2, and the TCFD framework.
Taking an international approach
An international view is crucial here due to the Corporate Sustainability Reporting Directive (CSRD) which aims to increase transparency and accountability over sustainability reporting. Applying to EU-listed companies, large non-listed EU companies and EU parent companies of large non-listed groups, firms must seek limited third-party assurance over their CSRD reporting. Crucially, this assurance needs to be provided by an accredited independent assurance services provider. With no UK sustainability assurance benchmark in place, this can preclude UK firms from delivering CSRD-related assurance. Supporting an international approach also promotes the Industrial Strategy, which aims to position and grow the UK’s professional and business services as a key export.
Addressing the non-audit services cap
The Government is also weighing up whether to include sustainability assurance within the non-audit services fee-cap calculation. Introduced to reduce statutory auditors’ conflicts of interest for public interest entities, fees from non-audit services are capped at 70% of the value of audit services over the previous three years. The Government notes that the cap wouldn’t apply to instances where assurance is a legal requirement, but it’s considering whether to apply it for broader sustainability assurance.
Recognising the breadth of skills required for sustainability reporting, the proposed assurance regime doesn’t limit registered providers to statutory auditors. As such, any assurance provider can join, provided they meet ARGA’s requirements, which the new regulatory body will consult on in due course.
Next steps
The Government’s proposed sustainability reporting framework will offer robust opportunities for organisations to demonstrate and showcase their sustainability credentials. Most importantly, it will give stakeholders, including investors, regulators, and the Government greater assurance that organisations are managing the associated risks effectively and maximising all available opportunities. This will improve trust in the market, encourage sustainable finance and support the Government’s ambitious growth agenda.
But implementing the changes will take time and it’s important to recognise the early adopter advantage, using sustainability compliance as a competitive edge. As such, organisations can start by looking at synergies with existing good practice and current frameworks.
Assessing readiness to adopt UK SRS S1 and S2
Many UK firms, including listed organisations, must currently make TCFD disclosures. Given the structure of IFRS S1 and S2, which focus on the same pillars as TCFD, there’s a high level of familiarity with the general requirements. The introduction of UK SRS S1 and S2, however, will entail a shift from a framework to a standard and will extend beyond climate-related issues. Organisations should conduct a gap analysis against both standards, with a materiality assessment to determine the necessary compliance work ahead.
Given that the FCA is consulting separately on applying UK SRS S1 and SRS S2 to the UK listing rules, it’s likely that listed entities will be among the first required to comply. As such, it’s essential for these organisations to monitor the FCA’s output and update their processes and operations accordingly.
Transition plans
The final transition plan framework is likely to include elements of TPT, to which some organisations already align, as the leading global standard. Organisations need to monitor the Government’s output in this space, making iterative changes to address gaps in current reporting as new developments emerge. This will inform next steps, which may include changes in governance arrangements, accountability, scenario planning and the wider value chain, among others. It’s also essential to remember that transition plans are a means to an end – they must be realistic, practical, and more than a compliance exercise.
Assurance
Organisations should consider what their assurance needs are likely to be, and who can deliver it, particularly with a view to international requirements such as the CSRD. Organisations seeking to deliver sustainability assurance should consider what good looks like and register with ARGA, once established.
How can organisations respond to these proposals?
It’s important to note that these proposals for the sustainability reporting framework are at various stages of development and readiness. Industry feedback is vital to make sure the ensuing framework is proportionate, fit for purpose and continues to promote growth. As such, it’s important to help shape the future disclosure and reporting landscape by getting involved with the consultations, which are open for feedback until 17 September 2025.
For more information on sustainable finance and the consultations above, contact Irina Velkova or Laura Gardner.
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