Businesses need to get ready for mandatory environmental reporting standards

The report focuses on the first step of the government’s Green Finance strategy – developing high-quality, reliable, and most importantly globally comparable information on material risk factors along the value chain.

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Pranav Nadkarni
Published: 24 Nov 2021 Updated: 13 Jun 2022

The UK government recently released its roadmap (HM Treasury’s ‘Greening Finance’ report) for Sustainability Disclosure Requirements (SDR), following the Chancellor’s Mansion House speech in July 2021. This came just weeks prior to COP26 conference in Glasgow. While SDR currently focuses on climate risks, this is expected to expand to wider sustainability issues over time. The SDR roadmap is expected to support UK’s transition to a net zero economy by 2050 and help firms and investors identify opportunities and manage the risks.

UK SDR Article 1920X1080 Nov 21

The report focuses on the first step of the government’s Green Finance strategy – developing high-quality, reliable, and most importantly globally comparable information on material risk factors along the value chain.

Consistent global sustainability metrics are coming soon

To date, there is a lack of consistent, global metrics and standards that can be used by investors to assess risks and make decisions. Voluntary sustainability disclosures are helpful; however, a lack of comparability does not help in the decision-making process. However, this is expected to change in the coming years.

  • The Task Force on Climate-Related Financial Disclosures (TCFD) was created in 2015 by the Financial Stability Board. TCFD-aligned disclosure rules have already been in place for UK premium-listed companies, and this is expected to extend to certain publicly quoted companies, large private companies, and Limited Liability Partnerships (consultation closed in May 2021).
  • The IFRS Foundation announced formation of the International Sustainability Standards Board (ISSB) last week at the COP26 and is expected to issue a consultation on climate-related standards in early 2022, which are expected to form a core component of the government’s SDR framework.
  • The ISSB standards are expected to build upon the TCFD framework and will focus on corporate disclosures, asset manager and owner disclosures and investment product disclosures. These standards will focus on information which is material to investors.
  • The government is also implementing the ‘UK Green Taxonomy’ which will clearly set out the criteria which specific economic activities need to meet to be considered environmentally sustainable. Reporting against the Taxonomy will form part of the SDR. A draft consultation on these is expected in Q1 2022, ahead of legislations by the end of 2022.
  • SDR disclosures will also require companies to publish concrete transition plans supporting commitments to net zero emissions as part of regular financial reporting. TCFD has now finalised guidance on transition plans.

The scope of the disclosure and the timing differs based on whether you are a UK registered company (including financial services firms), or asset managers/life insurers providing investment products and pension schemes or financial advisors.

According to the report, all UK-registered companies that are ‘economically significant’ will required mandatory disclosures in annual reports incorporating the UK Green taxonomy and ISSB-issued standards in the next one to two years. All other companies will be subject to these disclosures in the following two to three years, subject to consultation.

Businesses should start reviewing their operating models and data capabilities

The government’s SDR roadmap will act as a catalyst for companies to review their internal reporting processes and data capabilities. However, we believe that businesses that treat these requirements as just an added cost of doing business will miss the opportunity to transform and align their business to evolving consumer trends. There has been an increasing trend in consumer support for environmentally conscious businesses. At the same time, businesses should use this opportunity to review their core operational processes, supply chains and physical and technology footprint to reduce unnecessary costs and negative impact on the environment. Profit and purpose co-existing is the need of the hour!

What can S&W do to help?

At S&W, we can support businesses identify the impact of their operations on the environment and develop a sustainable transformation strategy to reduce their carbon footprint, while also maximising value for stakeholders. We combine bottom-up cost reviews, segmental data analytics and business understanding to put the spotlight on processes and costs that have the biggest impact and then work with businesses to achieve targeted improvements, while providing tools to monitor ongoing performance. Please get in touch with us to discuss how we can help you in this journey!

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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.