A look at the new Sustainability Disclosure Requirements

On 1 July 2021, Chancellor of the Exchequer Rishi Sunak announced plans to introduce new Sustainability Disclosure Requirements (SDRs). These represent additional disclosure requirements to those required by the Task Force on Climate-Related Financial Disclosures (TCFD) framework.

What are SDRs?

The government's announcement indicates that the new SDR regime would apply to companies, pension schemes and financial services firms, requiring them to report on their impact (and the impact, where relevant, of their financial products) on the climate and environment. The proposed SDRs also aim to consolidate and streamline existing climate reporting requirements and are intended to be more comprehensive than the TCFD framework (see our post on UK climate-related disclosures).

How do SDRs work?

Broadly speaking, the TCFD framework requires firms to disclose the impacts of climate change (insofar as they are financially material) on their organisation. The proposed SDR regime goes further by requiring the entities to which it applies to also report on the ways in which their activities could contribute to climate change. This is known as “double materiality” and there are a number of other frameworks that already adopt this approach (e.g. the Global Reporting Initiative).

Another area in which the proposed SDR regime is likely to go further than the TCFD framework is by expanding the scope of disclosures to include impacts on nature and the environment.

A number of UK regulators and government departments are involved in these developments, including the Financial Conduct Authority (FCA,) Prudential Regulatory Authority, the Department of Work and Pensions, the Pensions Regulator and the Department of Business, Energy and Industrial Strategy. Although different rules will apply to different sectors, the approach to the TCFD framework currently adopted by the FCA is likely to serve as a template for the SDR disclosures. This includes annual reports with entity-level disclosures relating to governance, strategy (including regarding scenario analysis), risk management and targets and metrics, and annual product and portfolio-level disclosures covering emissions and weighted average carbon intensity.

What's the proposed timeline?

The government plans to publish an implementation timetable ahead of the COP26 Conference this November. In the meantime, many are looking to the government's staged rollout of TCFD reporting as an indication of the likely approach. This would entail the SDR regime being implemented over the next five years on a phased basis, beginning with premium listed companies and the largest asset owners before being rolled-out more broadly.

Why is the government imposing SDRs?

The government intends the financial system to play a key role in contributing to the UK’s goal of achieving a net zero economy by 2050 and, in the run up to COP26, the UK is particularly keen to demonstrate its leadership in green finance. Adopting and setting new disclosure standards will be key to achieving this.

The proposed SDR regime is designed to enhance transparency and improve the comparability of information provided in sustainability reporting. The government is also planning to introduce a new sustainable investment label for retail investments using information provided through the SDRs.

Conclusion

The SDR regime is the latest in a series of disclosure requirements announced by the government. And it is unlikely to be the last, as the UK continues to expand the depth and breadth of sustainability-related disclosures as a core part of its green finance strategy.

There are currently few details on the new regime. However, we will continue to monitor developments, and encourage you to subscribe to be kept informed of the latest developments. Please contact the authors for more information.