The New Era of ESG Reporting: ISSB Standards and UK Businesses (2025 Update)

Written By Qingxiao Ma

I. Core Policy Shifts

1. ISSB Standards Take Effect
From January 2025, the UK has officially endorsed the ISSB’s IFRS S1 (general disclosure) and IFRS S2 (climate disclosure) standards. Large listed companies must now include climate-related and sustainability information in annual reports, with SMEs likely to be brought in scope through supply chain requirements.

2. Integration with UK Regulatory Framework
The Financial Conduct Authority (FCA) requires alignment with ISSB standards for premium listed entities. UK businesses are therefore expected to integrate ESG data with financial reporting, moving beyond voluntary sustainability reports.

II. Key Risk Scenarios

1. Data Gaps and Inconsistent Reporting
Companies struggle to collect accurate Scope 3 emissions data across complex supply chains. Inconsistent methodologies may lead to investor scepticism or regulatory challenge.

2. Greenwashing Risks
With mandatory disclosure, overstated or unverifiable ESG claims can result not only in reputational damage but also financial penalties from regulators.

III. Different Groups, Different Impacts

1. Large Corporates
Immediate obligation to comply with ISSB-aligned reporting, requiring significant investment in data systems, assurance processes, and cross-department collaboration.

2. SMEs
While not directly mandated, SMEs face indirect pressure as larger clients demand audited sustainability data from suppliers to maintain compliance across the value chain.

IV. Strategic Responses

Governance
Establish ESG oversight at board level, with clear accountability for sustainability reporting.

Technology & Data
Adopt integrated reporting systems capable of tracking emissions, energy usage, and diversity metrics alongside financial KPIs.

Risk Management
Perform gap analyses to identify areas of weak ESG data and prepare corrective actions before formal audits.

V. Regulatory Outlook (2025–2027)

  • 2025 Q4: FCA to release guidance on assurance requirements for climate data.

  • 2026: Mandatory assurance of Scope 1 and Scope 2 emissions expected.

  • 2027: Scope 3 emissions and broader sustainability metrics likely to be required for large corporates, with SMEs indirectly impacted.

Qingxiao Ma
Previous

The 2025 Reform of R&D Tax Relief: What It Means for UK SMEs