UK formally adopts ISSB sustainability standards

ISSB - the sustainability arm of the IFRS - published two standards in June 2023, IFRS S1 on general sustainability disclosures and IFRS S2 on climate disclosures. The UK has adopted the same labels: UK SRS S1 and UK SRS S2. Both standards use a four pillar structure that will be familiar to users of TCFD (governance, strategy, risk management and metrics and targets) and indeed the S2 climate standard is very similar to TCFD, though goes further in some respects. S1, on the other hand, requires the organisation to identify for itself the sustainability-related risks and opportunities which should be disclosed to primary users of general purpose financial reports, namely those that can reasonably be expected to affect its financial prospects over the short, medium and long term. This is quite different to the highly prescriptive sustainability reporting standards required for use by preparers under the EU Corporate Sustainability Reporting Directive.

Perhaps the most significant change in the final standards compared to the draft versions published by the UK Government last year is in the S1 transitional provisions. The ISSB intends that S1 and S2 are used together, but – recognising that climate reporting is more widespread than general sustainability reporting – permits preparers to disclose on a "climate first" basis in the first year of reporting. The Government originally proposed to extend the option to omit general (i.e. non-climate-related) sustainability disclosures in year one for a second year, with S1 disclosures being required only in year three. However, the final version of S1 extends that option indefinitely – it provides that entities are permitted to exclusively disclose information on climate-related risks and opportunities, and in that case must only apply S1 (the general standard) to the extent that it relates to the disclosure of information on climate-related risks and opportunities.

In practice, S2 can be used on a largely standalone basis. It contains a full complement of governance, strategy, risk management and metrics/targets disclosures, some of which replicate the S1 general disclosures. Preparers will need to review some other sections of S1 however, including practical requirements around the location of disclosure or the statement of compliance, the qualitative characteristics of information and, critically, materiality of information.

This shift from "climate-first" to "climate-only" may necessitate some adjustments to the FCA's plan for phasing in UK SRS reporting for listed companies, given that its phase-in depended on the two year transitional relief provided for in the draft version of S1.

A notable difference between the TCFD framework and the ISSB's S2 climate standard was the approach to scope 3 emissions. Whereas TCFD requires disclosure of scope 3 "if appropriate", IFRS S2 requires disclosure of scope 3 emissions in every case, subject to a one-year transitional phase-in period.

In the final version of UK SRS S2, the Government decided to make scope 3 emissions disclosures optional, by extending the ISSB's proposed one year transitional relief indefinitely. Its consultation response notes that the Companies Act, FCA Listing Rules or other regulatory requirement may take a different approach by time-limiting the relief, or removing it entirely. The FCA has proposed a comply-or-explain approach to scope 3 emissions disclosures, and the changes to the final version of S2 are consistent with that approach.

A large proportion of TCFD reporters have evolved their approach to scope 3 emissions reporting over the last several years of mandatory reporting, building data collection and verification systems to allow them to confidently disclose. It has certainly been one of the more difficult aspects of climate reporting and remains optional for non-listed companies under "SECR" energy and carbon reporting in the annual report. Some argue that scope 3 reports are so heavily reliant on estimates and assumptions as to make them meaningless and potentially misleading.  However, it seems like a regressive step for the Government to make scope 3 disclosures the exception rather than the rule, especially as reliability is improving and many investors argue that the information is directionally useful and shows a company is making efforts to understand its wider impact.

A further change between the draft and final versions of the standards relates to the ability for entities to state their compliance with the UK SRS. Whether an entity will be required to make a statement of compliance will be determined in accordance with rules mandating disclosures.

The final version of S1 provides a more nuanced explanation of the requirement for preparers to make "an explicit and unreserved statement of compliance". This requirement is part of S1 but may be refined, disapplied or reinforced by implementing legislation. The FCA proposes that listed companies abide by this provision, though continues to consider how its "comply or explain" approach may impact the ability of companies to make the compliance statement where they have elected to explain rather than comply.

Both the draft and the final UK S1 standards provide that a full compliance statement can still be made where a statement has omissions on account of legal restrictions on disclosure or for reasons of commercial sensitivity. On the other hand, an entity making use of the S2 reliefs, for example from disclosure of scope 3 emissions, or from omitting any S1 general sustainability disclosures, must disclose its use of these reliefs and may only state compliance with S2, not with S1 (nor with the UK SRS as a whole).

At present, non-financial information in a company report is not subject to full assurance. An auditor is required to state whether (i) the information contained in it is consistent with a company's accounts; (ii) whether the report has been prepared in accordance with applicable legal requirements; and (iii) whether, in light of the "knowledge and understanding of the company and its environment" the auditor has obtained in the course of the audit, they have identified material misstatements. That remains true for the new wave of sustainability disclosures, until FCA rules or government laws or regulations say otherwise.

Assurance is certainly a possibility – the Government consulted on the creation of a sustainability assurance framework in June 2025, concurrently with the sustainability reporting consultation. In January 2026, it confirmed that it would establish an assurance regime. It declined, however, to give a view on whether assurance over sustainability reports would be a legal requirement.

The Government consulted on the potential introduction of a requirement for the disclosure and/or adoption of climate transition plans at the same time as consulting on the draft UK SRS and sustainability assurance framework, last June. The climate transition planning consultation was the broadest, and the adoption of a related requirement very likely to be the most controversial; therefore, it is not surprising that the Government continues to consider its options. At the time of writing, it had not yet analysed responses to the consultation, meaning that the introduction of mandatory transition planning remains – if it happens at all – a medium rather than short term prospect.

As noted above, it is very likely that listed companies will be the first to be required to disclose in line with the UK SRS, for financial years beginning on or after 1 January 2027, with the first reports therefore due in 2028. The FCA has not yet indicated any timing for a shift from TCFD reporting by asset managers to S2 reporting, though this would be a logical next step.   

The UK Department for Business and Trade ("DBT") said that it would consult on the introduction of mandatory reporting for "economically significant companies" once the standards were endorsed, and while we still expect that to happen, it may not be immediate. We know that DBT is working on a review of how companies have implemented the Companies Act requirements for climate-related financial disclosures ("CFD") and the outcomes for companies, investors and other stakeholders. The review will also consider how accurate the government was in forecasting the "real-world effects" of implementing the regulations. The scope and timing of this review may be a sign that the government has learned from the EU's hard lessons and is looking to avoid regulations which introduce regulatory burden without clear benefits. The project is to be completed by the end of April and as we can expect the Government to take some time to process its findings, we may not see any further proposal on mandatory reporting for companies before the summer.