UK Sustainability Disclosure Requirements: how can you prepare?

What is the UK SDR regime? 

Whilst there are many unknowns around how and when the regime will apply, here is what we know so far about what the requirements will cover: 

1. Corporate disclosures about how businesses manage their sustainability-related risks and opportunities, comprising UK Sustainability Disclosure Standards based on the International Sustainability Standards Board (ISSB) Standards and transition planning disclosure requirements. These will be introduced by the Financial Conduct Authority (FCA) for listed companies and the Department for Business and Trade for private companies. 
2. Asset manager and asset owner disclosures about how firms take sustainability into account when managing investments on behalf of clients. These will be designed by sectoral regulators including the DWP and the FCA. 
3. Additional product-level disclosures for asset managers about the sustainability credentials and sustainability performance of their investments. These will be designed by the FCA, and the information disclosed will determine whether a product can qualify for one of the FCA’s proposed sustainable investment labels. 

There is uncertainty around what transition planning disclosure requirements are likely to look like as part of the corporate component of SDR. The FCA has confirmed its intention to develop guidance with reference to the UK Transition Plan Taskforce Disclosure Framework. Meanwhile, for UK-registered companies, the Government has committed  to consulting on transition plan disclosure requirements that align with the FCA's current requirements for listed companies, which are based on the TCFD recommendations. The Government is expected to launch its consultation in Q4 2023, after the release of the finalised TPT Disclosure Framework. 

SDR may also, in time, require businesses to disclose their alignment with the UK Green Taxonomy currently being developed by the Government. Reporting against the UK Green Taxonomy, which will set out the criteria that specific economic activities must meet to qualify as being ‘green’, will be voluntary for at least two years, following which the Government will explore mandatory reporting requirements. The Government is expected to consult on its Taxonomy proposals in autumn 2023. 

Businesses should note that they may be captured by more than one component of SDR. For example asset managers will have to produce the asset management and investment product disclosures, and may additionally be captured by the corporate disclosure requirements. 

Stepping up to the challenge

Here are three no-regret actions businesses can take to mitigate key challenges and prepare for incoming regulatory requirements: 

1. Prepare to disclose in line with voluntary initiatives: We know that the corporate component of SDR will be heavily based on the ISSB standards so, until formal requirements are introduced, businesses should get on the front foot by considering how to implement the first two ISSB standards. Businesses should also look to the draft TPT Disclosure Framework and Implementation Guidance, due to be finalised in October 2023, which is also expected to form the basis for SDR requirements. Just as they did with the Task Force on Climate-related Financial disclosures (TCFD) recommendations, organisations that voluntarily align with these standards early are likely to find compliance with eventual UK regulatory requirements and timelines much less challenging. Aligning with the ISSB standards will also help support standardised reporting that aligns with international best practice, facilitating access to sustainable finance globally. When considering how to approach implementation, businesses should look to build on existing practices relating to governance, risk management, strategy, and metrics and targets. 
2. Identify the changes you will need to make: Businesses should assess their current practices against what is likely to be required under SDR and identify any changes that will need to be made to their governance and underlying data processes to generate their reporting. To address data gaps and mitigate the data availability challenges posed by the lack of corporate disclosure requirements, businesses should consider exploring technological solutions such as AI to scrape data from publicly available sources and should engage with ESG data providers where appropriate. Where third party data providers are relied upon, businesses should carry out due diligence on that data and the providers’ methodologies, ensuring that any gaps and shortcomings are documented and appropriately mitigated, and that the data collected remains fit for purpose on an ongoing basis. This will help to protect against allegations of greenwashing. 
3. Look for the opportunity: Compliance with SDR will require whole-of-business transformation encompassing changes to multiple areas including strategy, risk management, data, value chain coordination and reporting. Businesses should take a holistic approach and use SDR as a lever to set their organisation’s ambitions around sustainability. When developing a strategy for embedding sustainability risks and opportunities across their organisation, businesses should adopt a value creation mindset and capitalise on the opportunities presented by their transformation.

Taking these steps will place your business in a strong position to quickly align with formal regulatory requirements when they are introduced, and will mitigate key data availability challenges. Acting now will also position you to take advantage of opportunities for value creation presented by the drive towards a more sustainable economy.