New and Upcoming EU and UK Regulatory Reporting Mandates

Claire Smith
June 16, 2022
5 min read

Corporate reporting involves disclosing any material fact or change by an organization and provides financial performance of the organization during a period, including information about the operations, how the organization utilized economic resources, details of the transactions, and claims to those resources and transactions.

This helps provide useful information to regulatory authorities, banks, investors, and others in making rational investment, credit, and similar decisions.

Nowadays regulators and investors are looking at organizations’ sustainability performance and strategies to address environmental and societal challenges. Organizations have started integrating sustainability into their business strategy to provide insightful, holistic, and trusted information.

This evolution of corporate reporting has pressed regulators across the globe to focus on sustainability or non-financial information and introduce legislation requiring organizations to disclose against the Environment, Social, and Governance (ESG) reporting metrics. In this article, we examine some of the new and upcoming regulatory mandates in UK and EU that every organization needs to keep a close eye on…

UK Task Force on Climate-Related Financial Disclosures (TCFD)

The Task Force on Climate-Related Financial Disclosures (TCFD) was incorporated in December 2015. Its goal is for organizations to disclose climate-related financial risk information to stakeholders with utmost transparency.

The TCFD framework has recommendations focused on four thematic areas. These are Governance, Strategy, Risk Management, Metrics & Targets. This framework facilitates decision-useful disclosures among companies. Companies can then evaluate and manage financial risks and move towards a sustainable economy.

From 6 April 2022, large registered companies in the UK-regulated market are required to provide mandatory disclosures. These disclosures must align with the TCFD requirements.

This includes 1,300 UK-registered companies, banks, or insurers with more than 500 employees. These companies must also have a turnover of more than £500 million.

The current focus is on governance-related activities. Some flexibility has been provided for the ‘Strategy, Metrics, and Targets’ elements of the TCFD’s framework (materiality filter).

The first annual reports including mandatory TCFD disclosures are expected in March 2022.

Apart from UK, Switzerland and New Zealand are set to introduce the TCFD mandate in 2024 and 2025 respectively. Other nations with upcoming TCFD proposals are the USA, Canada, France, Germany, Italy, and Japan.

Sustainable Finance Disclosure Regulation (SFDR) Level 2 Disclosures

The EU Sustainable Finance Disclosure Regulation (SFDR) was introduced in 2019. It aims to enhance visibility in the financial market for sustainable investment.

The SFDR provides a roadmap to financial market participants (FMPs) to disclose their sustainability risks. It also encourages them to shift capital towards sustainable activities.

Since March 2021, certain FMPs are required to report how they implement Principal Adverse Impact (PAI) indicators. These FMPs include investment firms, asset managers, banks, venture capital funds, insurance companies, pension providers, and applicable credit institutions. This requirement applies to those with more than 500 employees.

Reporting entities are already adhering to the Level 1 disclosure requirements. Here, they report information on identification and description of the PAIs. They also provide the appropriate action plan on a ‘comply or explain’ basis.

Then Level 2 disclosure requirements will be applicable from January 2023. Here, FMPs will have to provide ESG reporting disclosures in addition to the Level 1 reporting.

The Level 2 disclosures will bring in 13 Regulatory Technical Standards (RTS). They will also bring in taxonomy-related obligations.

The first Level 2 disclosure reports are expected by July 2023. This is for the reporting period of 1 January 2022 to 31 December 2022.

International Sustainability Standards Board (ISSB)

The IFRS Foundation established the International Sustainability Standards Board (ISSB) in the fall of 2021, and the ISSB will operate under the oversight of the International Financial Reporting Standards (IFRS).

ISSB aims to develop a global comprehensive baseline for sustainability and ESG reporting-related standards and provide transparent, comparable, and quality information to investors for informed decision-making.

The IFRS Foundation will build ISSB upon the foundation of global bodies like the Sustainability Accounting Standards Board (SASB), TCFD, Climate Disclosure Standards Board (CDSB), and the International Integrated Reporting Framework (IIRC).

This will ease the adoption of the new standards by organizations that have already adopted TCFD or SASB disclosure standards.

To digitize ESG reporting, IFRS will shortly publish an initial proposal for the IFRS Sustainability Disclosure Taxonomy.

Regulators expect the ISSB to become fully functional and issue new standards by the end of 2022. They also expect jurisdictions to use the ISSB standards across the globe.

Corporate Sustainability Reporting Directive (CSRD)

To bridge the gap between the EU and global ESG reporting standards, the European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI) are working together to establish the Corporate Sustainability Reporting Directive (CSRD). The new legislation will apply to approximately 49,000 EU companies.

Both GRI and EFRAG will co-construct a framework wherein ESG reporting and financial disclosure are interconnected and comparable. Regulators expect to adopt the first set of CSRD standards by October 2022.

As regulators prepare globally-accepted standards for ESG reporting, it is important for every organization to start preparing themselves for providing non-financial information and demonstrate that they are responsible and socially conscious.