ESG regulations in the UK: what businesses need to know

Implications for businesses

1) Regulations relating to climate resilience

There are two key regulations to note:

• The Taskforce for Climate Related Financial Disclosure
• The Transition Plan Taskforce

The Task Force on Climate-related Financial Disclosures (TCFD) and the Transition Plan Taskforce (TPT) both play crucial roles in the UK’s efforts to enhance corporate transparency and accountability in relation to climate change, but they have different focuses and frameworks.

Task Force on Climate-Related Financial Disclosures (TCFD)

The Financial Conduct Authority (FCA) has mandated climate-related financial disclosures for a range of UK registered companies. These include publicly traded companies, banks, insurers and large private firms. It aims to help investors understand how climate change impacts businesses, encouraging firms to disclose information on their climate-related risks and opportunities. Companies must report on 11 specific climate-related questions covering governance, strategy, risk management and metric and targets. The disclosures need to be on both an entity level and product or portfolio level.

• The entity level disclosure needs to cover the climate-related risks and opportunities associated with managing or administering investments for clients and consumers.
• The product or portfolio level disclosure needs to include a baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics.

In addition to TCFD, the newly established Department for Energy Security and Net Zero (ESNZ) continues the climate disclosure mandates previously overseen by Department for Business, Energy & Industrial Strategy (BEIS). These requirements are aligned with TCFD standards and apply to companies with over £500 million in annual turnover or more than 500 employees. Disclosures must include detailed governance arrangements, risk assessments and impact analyses related to climate change.

Transition Plan Taskforce (TPT)

The Transition Plan Taskforce (TPT)’s Disclosure Framework was launched in 2023. The framework will provide companies with comprehensive and prescriptive guidance for developing ‘gold standard’ climate transition plans to support with their net zero ambitions. It aims to standardise how companies plan and report on their transition to a low carbon economy, providing clarity on their strategies to achieve net zero targets.

The framework covers five key areas: foundations, implementation strategy, engagement strategy, metrics & targets and governance. TPT’s Disclosure Framework complements TCFD as it provides additional recommendations to support organisations to report more effectively on transition-plan aspects of TCFD. The current Disclosure Framework does not align with TNFD, however TPT published a paper in April 2024 ‘The Future for Nature in Transition Planning’ which looks to incorporate nature into transition planning.

Additionally, TPT’s Disclosure Framework is expected to be included with the upcoming UK Sustainability Reporting Standards (UK SRS). The UK SRS will require companies to disclose their transition plans, and the requirements of transition plans detailed in the legislation will reference the TPT Disclosure Framework.

2) Taskforce on Nature-related Financial Disclosures (TNFD)

The Taskforce on Nature-related Financial Disclosures (TNFD) is a global initiative designed to guide organisations in identifying, assessing, managing and reporting nature-related risks and opportunities. The TNFD was developed to drive better understanding of nature-related risks and opportunities and to ultimately help organisations shift toward nature-positive outcomes. It was also developed in response to market demand for a better understanding of nature-related risk and opportunity and how to assess this. It draws parallels with the established Task Force on Climate-related Financial Disclosures (TCFD), but focuses on the broader spectrum of nature, encompassing biodiversity, ecosystems and natural resources.

While the TNFD framework is initially voluntary, it is anticipated that over the next few years, regulatory and market pressures will drive businesses towards compliance. It is expected to follow the trajectory of its sister disclosure framework, TCFD, which was made mandatory for Phase 1 organisations within five years of establishment.

The TNFD framework (published in September 2023) enables financial institutions and corporations to:

• Measure and manage nature-related risks: Understanding dependencies on and impacts on nature and integrating these insights into business strategies and risk management processes.
• Disclose nature-related information: Providing clear and consistent information to stakeholders, including investors, regulators and the public, about nature-related risks and actions taken to mitigate them.

3) Taskforce on Inequality and Social Related Financial Disclosure (TISFD)

The Taskforce on Inequality and Social Related Financial Disclosure (TISFD) is launching in September 2024. This newly developed global initiative will provide a framework and set of recommendations to support companies and investors to identify, assess and disclose their inequality and social risks, opportunities and impacts. TISFD will help to strengthen the development of financial disclosures related to inequality and social issues. It will also help to standardise disclosures related to inequality and social issues, reducing the reporting burden for companies. Additionally, TISFD will also advise companies on the links between climate change, biodiversity loss and social issues to support market actors in contributing to a just transition.

4) UK Sustainability Reporting Standards (UK SRS)

In May 2024, the UK Government released its framework for developing the UK Sustainability Reporting Standards (UK SRS). The UK SRS requirements are expected to be based upon the International Sustainability Standards Board (ISSB)’s International Financial Reporting Standard (IFRS) S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-Related Disclosure) standards.

IFRS S1 provides disclosure criteria designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S2 provides criteria to support companies reporting information on climate-related risks and opportunities. However, it builds upon the current TCFD reporting requirements by requiring more granular information such as reporting on financed emissions, planned use of carbon credits to reach net zero targets and industry-based metrics. It is important that organisations in the scope of TCFD aligned reporting review IFRS S1 and S2 standards, as UK SRS will only divert from these standards if absolutely necessary for UK specific matters.

5) Corporate Sustainability Reporting Directive

The Corporate Sustainability Reporting Directive (CSRD) was officially adopted in January 2023. The aim of CSRD is to facilitate accountability and transparency, as well as drive sustainability practices and investments. CSRD replaces the European Union (EU)’s Non-Financial Reporting Directive (NFRD) which only applied to the largest companies. The CSRD will apply to a broad range of companies including some non-EU companies (ranging from large to SMEs) operating within the EU.

UK companies subject to CSRD will have to disclose ESG information according to the European Sustainability Reporting Standards (ESRS). Therefore, the entity will be required to provide sustainability information covering strategy, implementation and performance. Furthermore, the entity will have to undertake a double materiality analysis to understand how their business impacts people and the planet and how climate change and sustainability affects their business. Additionally, CSRD requires companies to provide a third-party limited assurance for the disclosed sustainability information. The ESG information needs to be reported within as a part of its company management report and in a digital format that is easily accessible.

6) EU Nature Restoration Law

The EU Nature Restoration Law is a ground-breaking legislation adopted by the EU in June 2024. The legislation is the first to mandate the recovery of nature at a national level rather than merely mitigating the adverse impacts on nature. The legislation aims to put in actions to restore at least 20% of the EU’s land and seas by 2030 and all ecosystems in need of restoration by 2050. The EU Nature Restoration Law sets specific, legally binding targets and obligations for nature restoration in each of the listed ecosystems which are terrestrial, marine, freshwater and urban ecosystems. All EU member states are required to produce restoration plans demonstrating how they will restore nature and support the achievement of the targets under the new legislation.

There are specific requirements under the EU Nature Restoration Law covering urban ecosystems, which are the following:

• No net loss of urban green spaces in every EU city, town and suburb by 2030
• A minimum of 10% tree canopy cover in every EU city, town and suburb by 2030
• A 3% increase in the total area covered by green urban space by 2040
• A 5% increase in the total area covered by green urban space by 2050
• A net gain of urban green space that is integrated into existing and new buildings and infrastructure developments.

Many UK real estate companies and entities operating in the EU will be subject to the aforementioned legislation and will be expected to ensure their assets, existing and new developments are designed or managed to support with the achievement of targets listed above.

Conclusion

These new regulations necessitate that businesses take a proactive approach to sustainability reporting. Key actions include:

• Developing a comprehensive ESG strategy that integrates these new reporting requirements.
• Engaging stakeholders across the organisation to ensure accountability and transparency.
• Investing in systems and processes to collect, analyse and report on the required ESG data.

By preparing for these regulatory changes, businesses can not only ensure compliance but also enhance their sustainability credentials, build investor trust and unlock long-term value.

The upcoming ESG regulations in the UK represent a significant shift towards greater transparency and accountability in corporate sustainability practices. Companies that act now to align with these new standards will be better positioned to navigate the regulatory landscape and capitalise on the benefits of sustainable business practices.