As the global focus on sustainability intensifies, businesses are recognising the importance of incorporating environmental, social, and governance (ESG) considerations into their business strategy and operations.
However, the constant development in ESG regulation and awareness has led to a rapidly changing landscape of disclosures, which can be difficult to navigate, especially considering the overlap between some standards. Incorporating sustainability disclosures within financial accounts not only meets mandatory reporting requirements, but also aligns with growing stakeholder expectations for increased transparency and more responsible business practices.
We explore the various disclosure requirements which could be mandatory for your business, as well as how you can get ahead of the curve of ESG reporting by implementing voluntary disclosures.
Mandatory disclosures
Companies Act 2006
The Companies Act 2006 is applicable to all UK companies. While this may not be the first piece of legislation that springs to mind regarding sustainability and ESG, all medium and large companies are required to provide a description of the principal risks and uncertainties facing the company within the directors’ report.
This may include environmental and social factors if they are considered material to the business and will be particularly applicable for organisations operating in carbon-intensive industries, or those that are more impacted by the physical and transition risks associated with climate change.
Section 172 of the Companies Act requires large companies to prepare a section 172 statement; this focuses on stakeholder engagement and ensuring stakeholders are considered within relevant decision-making. A section 172 statement should consider the impact of the business on the surrounding environment as well as considering relationships with suppliers and the impact of a company’s supply chain, making it additionally relevant.
Streamlined Energy & Carbon Reporting (SECR)
This is required for quoted companies, large * unquoted companies and large limited liability partnerships (LLPs). Under the SECR requirements, unquoted companies and LLPs must report their UK energy use (if over 40 MWh) and the associated greenhouse gas emissions, and at least one relevant intensity ratio. Comparative figures are also required to be disclosed. In addition, in scope entities must disclose information about energy efficiency action taken in the organisation’s financial year and the methodologies used to calculate the amounts disclosed.
The requirements for quoted companies differ to those for unquoted companies and LLPs; please get in touch with Richard Collis or Yi Zheng if you would like more information on the requirements for quoted companies.
The SECR disclosures must be presented within the directors’ report.
*Satisfies for two consecutive years at least two of the following net thresholds: Turnover £36 million+, Balance sheet total assets £18 million+, Employees 250+
Task Force on Climate-related Financial Disclosures
The Task Force on Climate-related Financial Disclosures (TCFD) recommend that companies should make disclosures across four key areas, covering governance , strategy, risk management, and metric and targets in relation to managing climate-related risks and opportunities.
The FCA Listing Rule require premium listed and standard listed companies to make disclosures under the TCFD framework on a comply or explain basis.
Climate-related Financial Disclosure Regulations 2022
For accounting periods commencing on or after 6 April 2022, the Climate-related Financial Disclosure (CRFD) Regulations came into effect for certain companies. These regulations are based on the recommendations issued by the TCFD, however there are some differences between the two sets of requirements. The most significant difference is the omission of the disclosure of greenhouse gas (GHG) emissions from the CRFD regulations due to the overlap of this information with the UK legislation for SECR.
The CRFD requirements are mandatory for:
- Public interest entities,
- UK registered AIM listed companies with more than 500 employees,
- UK registered companies with more than 500 employees and turnover exceeding £500 million, and
- Traded or banking LLPs with more than 500 employees or LLPs with more than 500 employees and turnover exceeding £500 million.
Entities in scope are required to include climate-related information across four key areas: governance, strategy, risk management and metrics and targets. The reporting aims to encourage more detailed analysis of the climate-related risks and opportunities faced by entities to help support investment decisions as we transition to a lower carbon economy.
Companies must include the climate-related financial disclosures in the non-financial and sustainability information (NFSI) statement within their strategic report. For LLPs not required to prepare a strategic report, the disclosures should be included in the Energy and Carbon Report instead.
The Corporate Sustainability Reporting Directive (CSRD)
While this primarily affects EU companies from 1 January 2024, the scope of those falling under the CSRD is increasing over the next few years. Non-EU entities with significant EU activity (over €150 million turnover within the EU), such as a substantial EU subsidiary or EU branch, will also be impacted from 2026.
The CSRD will require various sustainability-related information and reporting will be largely data focused. CSRD reporting goes beyond just climate reporting and it will require a double materiality approach, with value chain consideration also being a crucial part of the directive. Additionally, limited assurance of ESG reporting is mandatory under CSRD requirements from the first year of application, so this will also need to be considered . Awareness of future reporting requirements in advance of it becoming mandated is important here as these may involve the collection of new types of ESG information to enable a business to adhere to this legislation.
Other mandatory disclosures
Focusing more on the ‘Social’ aspect of ESG-related disclosures, modern slavery statements and gender pay gap reports are also required by many companies. While these do not need to be included within the financial statements of a business, they still form an important aspect of ESG-related reporting.
The Modern Slavery Act 2015 requires businesses supplying goods or services with a turnover of £36 million or more to provide a modern slavery statement. This should focus on steps to deal with the risks of modern slavery both in the business and in the supply chain.
The Equality Act 2010 ((Specific Duties and Public Authorities) Regulations 2017) requires employers with over 250 employees in a year to calculate and publish average gender pay gap results annually.
Voluntary disclosures
While additional disclosures may not be mandatory, they allow a business to continue to build trust and transparency with stakeholders as well as demonstrating an increased commitment to sustainability and responsible business practices. With recent research showing a positive market response to increased ESG-based disclosures, there is more reason than ever to consider voluntary ESG reporting.
Unlike mandatory disclosure, voluntary disclosures can take several different forms. While they can be included in accounts, provided they are consistent with the financial information, there are also alternative options to present this information, such as in a separately published sustainability or impact report, or on a website. For each of these options a business can further enhance credibility by obtaining third party assurance.
International Sustainability Standards Board (ISSB) Disclosures
The ISSB issued their first two sustainability standards, IFRS S1 and IFRS S2 in June 2023, largely based on recommendations from the Task Force on Climate-Related Disclosures (TCFD).
These two standards are currently voluntary but are expected to be endorsed in the UK in early 2025, creating the first UK Sustainability Reporting Standards (SRS). It is unlikely that the UK endorsed version of these standards will differ materially from those currently published by ISSB, although the scope of entities required to report under these new standards is currently unknown at this time.
Take a look at our article on Sustainability reporting for more information on these two standards and the implications for SMEs.
Consideration and inclusion of these standards now may make your business more prepared and resilient to future changes in the reporting landscape, as well as aid more informed and sustainable decision-making . This may also be a consideration of financial institutions making investment decisions.
Global Reporting Initiative (GRI) disclosures
The GRI standards create a framework all business can use to identify and assess their impact, as well as to determine the material topics most relevant to the company. Once these have been determined, the standards specify information that should be collected and reported for these material issues, as well as providing a structure to go on and report this information.
Utilising the GRI disclosures benefits your business through allowing an understanding of material ESG impacts. Reports using the GRI disclosures can be published as a standalone report, within an annual report.
Taskforce on Nature-related Financial Disclosures (TNFD)
The TNFD is a science-based global initiative, providing a framework to identify, assess, and disclose material nature-related issues. There are four disclosure pillars , aligned to those of TCFD, which allow companies to focus on the most relevant risks and opportunities to be disclosed. The TNFD framework also supports the use of metrics to manage nature-related risks, allowing measurable goals to be set and reported on, again supporting more informed decision-making.
How we can help
At Saffery, we recognise that the sustainability reporting landscape is a complex and continually evolving area, featuring much overlap. Although some ESG frameworks and regulations are highly aligned, reporting to one set of standards may not necessarily meet all requirements by another. Given this, we recommend seeking professional advice before making public disclosures.
For further assistance on ESG reporting requirements in the UK or compliance and disclosure matters, please get in touch with Richard Collis or Yi Zheng.
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