UK commits to new ISSB sustainability disclosure standards for capital markets – are you prepared?

November 2023 | SPOTLIGHT | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

November 2023 Issue

On 26 June 2023, the International Sustainability Standards Board (ISSB) published its inaugural standards. The standards are a major milestone, having received strong support from both investors and policymakers including the International Organisation of Securities Commissions and the Financial Stability Board. The standards focus exclusively on capital markets and are intended to streamline sustainability disclosures by building on and consolidating the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), the Sustainability Accounting Standard Board (SASB) standards, the Climate Disclosure Standards Board framework, the Integrated Reporting Framework and World Economic Forum metrics.

The standards, which are designed to be provided alongside financial statements as part of the same reporting package, are International Financial Reporting Standards S1 (IFRS S1) which provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term, and IFRS S2 which requires an entity to disclose information about its climate-related risks and opportunities that is useful to users of general-purpose financial reports in making decisions relating to providing resources to the entity. Application of IFRS S2 is permitted if IFRS S1 is also applied.

IFRS S1 requires companies to make disclosures on the following: (i) governance – the governance processes, controls, and procedures used to monitor and manage sustainability-related risks and opportunities; (ii) strategy – approaches to manage sustainability-related risks and opportunities; (iii) risk-management – processes to identify, assess, prioritise and monitor sustainability-related risks and opportunities; and (iv) metrics and targets – performance relative to its sustainability-related risks and opportunities, including progress toward any targets the company has set or any targets it is required to meet by law or regulation.

IFRS S1 is effective for annual reporting periods beginning on or after 1 January 2024, with earlier application permitted if IFRS S2 is also applied.

IFRS S2 requires companies to disclose information about the same four areas as IFRS S1 but applies these areas to companies’ climate-related risks and opportunities. It requires companies to disclose their scope 1, scope 2, and scope 3 greenhouse gas emissions.

The standards become effective on 1 January 2024. There is a one-year transition relief in relation to the implementation of IFRS S1. Individual jurisdictions will decide whether and when to adopt them.

What next for the ISSB?

In May 2023, the ISSB issued a consultation on its priorities for its next two-year work plan and published a Request for Information Consultation on Agenda Priorities. The ISSB sought feedback on three research projects on sustainability-related risks and opportunities associated with biodiversity, ecosystems and ecosystem services, human capital and human rights. It also sought feedback on a research project concerning how to integrate information in financial reporting beyond the requirements related to connected information in IFRS S1 and IFRS S2. The deadline for comments on the Request for Information Consultation on Agenda Priorities was 1 September 2023.

UK approach to the ISSB standards

Many jurisdictions will now be considering their approach to the ISSB standards. In Europe, the European Commission adopted the European Sustainability Reporting Standards (ESRS) in July 2023, but in its Q&As on the ESRS it stated that “companies that are required to report in accordance with ESRS on climate change will to a very large extent report the same information as companies that will use the ISSB standard on climate-related disclosures”. In the US, the Securities and Exchange Commission (SEC) is yet to finalise proposed rule changes that would require companies to include certain climate-related disclosures in their registration statements and periodic reports.

From a UK perspective, the government is committed to introducing mandatory reporting against the ISSB standards, subject to a formal assessment and endorsement process. The endorsement process started in August with the Department for Business and Trade issuing guidance on the UK government’s framework to create UK sustainability disclosure standards by assessing and endorsing the ISSB’s standards. The secretary of state for business and trade will be responsible for the endorsement decision. The department aims to complete this assessment and endorsement process within 12 months of the final standards being published. Two advisory committees will be established to support the secretary of state’s decision making on endorsement and to coordinate the implementation of reporting requirements by the UK government and the Financial Conduct Authority (FCA). One committee will focus on public policy and implementation – the UK Sustainability Disclosure Policy and Implementation Committee, and the second committee – the UK Sustainability Disclosure Technical Advisory Committee – will focus on the technical aspects of the standards for endorsement.

To help inform the work of the UK Sustainability Disclosure Technical Advisory Committee, the UK Financial Reporting Council (FRC) has issued a call for evidence seeking views on whether the application of the ISSB standards in a UK context will result in disclosures that are understandable, relevant, reliable and comparable for investors. The deadline for responding to the call for evidence is 11 October 2023.

The FCA has also issued a Primary Market Bulletin on the ISSB standards (Primary Market Bulletin 45) in which it outlines the key features of the FCA’s process for implementing the standards and plans for consultation, how the FCA will continue to supervise existing disclosures under the TCFD framework, until any new requirements are implemented, and advice for issuers on what they can do now to prepare for any future obligations relating to reporting on the ISSB standards.

The FCA expects to consult in the first half of 2024 on proposals to implement disclosure rules referencing UK-endorsed IFRS S1 and IFRS S2 for listed companies. It will consider inputs to the UK government’s endorsement process and its own cost-benefit analysis. Assuming the UK government’s endorsement process is completed in the timeframe envisaged, the FCA’s aim is to finalise its policy position by the end of 2024, with a view to bringing the new requirements into force for accounting periods beginning on or after 1 January 2025. The first reporting would begin from 2026. The FCA will also consult on the scope and design of the new regime. At the same time as consulting on its policy approach in relation to the ISSB standards, it will consult on guidance that will set out its expectations for listed companies’ transition plan disclosures.

Next steps

The question that many chief executives in UK financial services firms will be asking themselves is: what should they be doing now? They may also be considering whether this significantly alters their current strategy. These proposals may lead to either a calibration, refocus or enhancement of existing thinking. However, even small changes can be impactful, and many firms will want to respond to the FRC’s call for evidence.

Also, financial services firms are preparing themselves for the FCA to publish its Policy Statement introducing sustainability disclosure rules and investment labels, plus a general anti-greenwashing rule. In its Consultation Paper, the FCA stated that it intends to develop its rules and guidance over time in line with the ISSB standards. The FCA added in the Consultation Paper that it remains “committed to consulting on amending our TCFD-aligned disclosure rules for listed companies to reference the ISSB standards, once finalised and available for use in the UK”.

The Policy Statement will presumably include further discussion on the UK’s approach to the ISSB standards once they have been endorsed in 2024. The FCA also said in its Consultation Paper that it recognised that firms might need additional specificity on what to disclose in relation to different sustainability-related topics, other than climate change which is covered by its TCFD-aligned disclosure rules. The FCA noted that the ISSB’s proposed general sustainability-related disclosure requirements (IFRS S1) already build from the TCFD’s four pillars, setting out requirements for disclosures on sustainability-related matters. The FCA suggested that firms may therefore find it helpful to refer to those standards to consider the types of disclosures to be made in relation to sustainability-related risks and opportunities more broadly. It also suggested that firms may also find it helpful to refer to the SASB’s sector-specific standards in developing their disclosures. The FCA intends to build on the proposals in its Consultation Paper, adding specific disclosure requirements on other sustainability-related topics in a manner consistent with future international reporting standards.

Simon Lovegrove is global director of financial services knowledge, innovation and product and Haney Saadah is managing director of risk consulting, EMEA at Norton Rose Fulbright LLP. Mr Lovegrove can be contacted on +44 (0)20 7444 3110 or by email: simon.lovegrove@nortonrosefulbright.com. Mr Saadah can be contacted on +44 (0)20 7444 2519 or by email: haney.saadah@nortonrosefulbright.com.

Simon Lovegrove and Haney Saadah

Norton Rose Fulbright LLP