From SECR to SRS: The UK’s Sustainability Shift

UK Sustainability Reporting Standards — Saif Hameed

Transcript:

SAIF: Welcome back to another episode of the State of Sustainability. This episode is a little different — we're trialling content bites where we share short-form insights on what's new and topical in the sustainability space.

We're going to talk about regulation, which as anyone who knows me knows is one of my least favourite topics in the world — despite being in a software company that focuses on making regulation easier to comply with. Specifically, we're going to talk about the UK's shift from SECR — Streamlined Energy and Carbon Reporting — towards the new UK Sustainability Reporting Standards. This story has been in the making for a few years. The new UK SRS is not yet in force — it's expected next year — but it is out for consultation now.

What we're going to focus on is not simply a summary of what's in the new standards or the old ones — you can get that online more easily. Instead, we're going to focus on the interesting shifts this will catalyse, what it means, and where it's heading. A qualitative take rather than a SparkNotes version of the regulation.

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Background: From SECR to UK SRS

SECR has its origins in the UK's early attempts to measure carbon usage. Going back to the early 2010s, the UK essentially assumed that carbon usage for businesses was really Scope 1 and 2 type stuff — utility use. So SECR is primarily oriented around energy use, with carbon as a side item. The goal was to make it easier for the UK to meet its own emissions targets as a country by passing the buck down to businesses in a reasonably simple, straightforward standard, with a set of thresholds for which companies should be on the hook.

What changed was at the Glasgow COP, where there was a movement to create a global standard for measuring and reporting climate-related risks and exposure — specifically IFRS S1 and S2, which look at both the impact your business has on the world from a climate perspective and the impact the world has on your business. The UK hosted that COP and was a big backer of the new standards. But the UK then decided it wanted its own version — very closely aligned with IFRS, but with some adjustments incorporated into UK legislation.

There are two logics behind this. The first is sovereignty. For those familiar with UK public law, there's a long-standing tradition where the UK doesn't want to be governed by other people's rules — even rules it helped shape. The UK typically will not take an external legal system and apply it directly. It wants to set the rule itself, even if it largely matches the external one. The UK did exactly this with human rights law — it took European standards on a near one-for-one basis but passed them locally as its own. It's doing the same here: we like the global standard, we're going to largely do the same thing, we'll make some small tweaks so it feels like our own rules, and we won't look beholden to an external body.

The second reason is more interesting: the UK has for several years cherished the idea of becoming a powerhouse for the green economy. This is less talked about now, but legislation takes several years to reach the public consultation stage — so these standards have been in the works since back when the Boris Johnson and Theresa May governments were talking seriously about net zero creating a new world of jobs and export industries for the UK. What the UK does best as an export industry is not cars — it's services: professional services, banking, law, accountancy, audit. And the real catalyst for services is a whole new standard that creates a lot of service work for everyone to do. By defining this new standard and trying to take the lead in making IFRS standards applicable in practice, the UK believes it is helping to shape the terrain for the services economy to operate. UK law firms, accountancy firms, and banks all get a head start in helping shape the standard, bring it into practice, and position themselves as global experts. I'm sounding more cynical than I intend — this is simply my read from observing the space for a few years. But I do think there's a lot of truth in it, and I think it's actually a good thing for the sustainability transition. We need service providers who know what they're talking about, and the best way to ensure that is to play a role in shaping the rules.

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Key Shifts from SECR to UK SRS

Forward-looking versus historical. SECR is mostly about historical usage and intensity — how much energy did you use, how much carbon was emitted, here's what it looked like over previous years. It's not a super qualitative standard. The new standards are significantly about the future: tell me about risks going forward, what opportunities do you see, what are your transition plans?

Alignment with financial reporting. The new UK standards require climate disclosures and financial reporting to be produced together — removing the grace period that allowed companies to defer climate reporting relative to their financial reporting cadence. The UK believes joining these together will make it easier for businesses, and I think it also makes it easier for auditors and accountancy firms to collaborate with clients on getting both financial and non-financial reporting out together. This feeds into my thesis that the standards are partly intended to catalyse the professional services industry.

Governance and management structures. The new standards place a much heavier emphasis on what your governance mechanisms are, and what you're doing organisationally to manage the risks and capitalise on the opportunities being discussed.

Data and disclosure. The data systems and KPIs that were good enough for SECR are unlikely to be sufficient for the new standards. There's a much heavier burden on data disclosure.

Scope 3. SECR largely ignored Scope 3 — it was encouraged but not required. The new standards expect Scope 3 to be phased in and reported on by all companies in scope.

Assurance requirements. There is a big new emphasis on assurance for disclosures — which creates demand for assurance services. I don't mean to suggest the only goal is to create jobs for PwC and the like, but there is a nice synergy between what the UK wants to achieve and what the professional services sector stands to gain.

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What This Means for Business

For most companies used to reporting against SECR, it's been absorbed into the regular course of business — someone is on the hook for it, they compile the report, get it over the fence, and forget about it. Whereas when you start getting into risk, opportunity, and materiality, you're forcing businesses to actually think strategically about what climate impact means for them. Everyone tends to be careful when providing something to their regulator. They want it to be reasonably true because they're afraid of legal liability. Which means businesses will start scrutinising these topics in ways they haven't before. Maybe at a superficial level initially — a templatised approach — but I think a great number of businesses will start engaging with these topics meaningfully for the first time.

The joining together of financial and non-financial disclosure is going to accelerate a trend that was already under way. Finance teams are most likely going to be entrenched as the lead on disclosure reporting, because it will increasingly make sense to use one set of assurance partners, the same data systems, and the same data controllers — and those will most likely sit within the finance function. This puts a lot of gas on the momentum that was already there towards finance leading on sustainability disclosure.

And Scope 3 coming much more to the fore is genuinely exciting. Three years ago, even a large UK business of a few hundred million pounds in revenue probably wouldn't have known what Scope 3 was. As it becomes common practice, it will catalyse better mechanisms to measure it, manage it, and drive collaboration with other companies.

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Overall, I'm quite bullish on the impact these standards might have. It's generally a good thing to start aligning standards together — even if you're calling them different things and wrapping them in domestic legislation. As long as there is good alignment and businesses aren't doing many different things for many different masters, this is a positive development. I'm particularly excited to see what it does from a green economy perspective and how professional services firms and software companies like ours at Altruistiq rise to the opportunity the UK is providing.

Thanks very much for listening to this edition of the State of Sustainability podcast. Please hit follow or subscribe so you get notified as soon as our next episode drops.

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