Environmental, social, and governance reporting (“ESG”) is of increasing focus for statutory financial reporting worldwide, and in particular within the UK.
Current ESG requirements for large entities
Quoted UK companies and Public Interest Entities (“PIEs”) with over 500 employees are already required to report on environmental matters within their financial statements, as well as covering issues such as employee interests, community and human rights issues. Events like the recent COP 26 conference in Glasgow demonstrate the significance of this to stakeholders of all types.
Large companies, quoted companies, and large LLPs are also required to comply with streamlined carbon and energy reporting requirements, with the associated disclosures for companies requiring to be included in the directors’ report.
The gradual expansion of ESG reporting
As with most financial reporting, requirements initially impacting large commercial entities gradually filter down to smaller organisations and this will in time affect charities of all sizes to some degree; what might previously have been voluntarily disclosed in multiple different ways is now being replaced with a harmonised mandated approach.
Key stakeholders within the voluntary sector often see the way a charity carries out its objectives to be as important as the objectives themselves; the impacts on the environment and society of charitable activities will be high up the list of priorities and there will be expectations around transparency.
Following the “Green Finance Strategy” paper published by the UK Government in 2019 a task force on Climate-related Financial Disclosures (TCFD). This is leading to a global set of principles which the UK Government intends to apply to all large UK companies from April 2022. The resulting regulations will include a number of different requirements for new climate related disclosures. Further details can be found here.
Current Position Under the Charity SORP
The current Charity SORP does not specifically mention sustainability, but that’s not to say it cannot be included as additional disclosure in the trustees’ annual report (“TAR”); for larger charities the requirement to disclose principal risks and uncertainties may lead to environmental considerations needing to be referred to. In the financial section, environmental or ethical restrictions that form part of the charity’s investment policy must be noted. There is also the requirement to disclose both positive and negative significant factors within/outwith the charity’s control that affect its ability to achieve its objectives. There are, therefore, some existing opportunities to cover environmental reporting, albeit no specific requirement.
Future of Sustainability in Charity Reporting
So what does this mean for future charity financial reporting? Well, it is certainly very clearly on the radar. With the next major change in charity accounting rules coming in 2024 with the revised SORP, one of the specific areas being looked at is sustainability reporting. The latest briefing on this envisages a number of options. These comprise:
- no change to the SORP on this topic, albeit charitable companies may be impacted by company
- reporting changes
- making certain reporting on sustainability mandatory for charities
- a “blended approach” that could include some mandatory but alongside other advisory guidance
These could lead to a variety of additional disclosures to be included in charity accounts in some form, so it is important that a watching brief is kept on potential developments in order that gathering any necessary information can be planned for.
Get in touch
If you have any questions about ESG reporting, please contact mail@ct.me.
