Over the past 10 years or so, the quality of non-financial reporting by UK companies has improved significantly. The underlying legislative framework, however, has become increasingly complex in that time. New requirements have been added in a piecemeal way rather than being integrated effectively, and scoping requirements have become extremely difficult to navigate. As a result, there are now numerous duplicative and overlapping requirements. 

ICAEW has long highlighted the need for a major review of the UK non-financial reporting framework. In our view, a number of changes are necessary, both in the short and long term, to ensure the framework is fit for purpose and also sufficiently clear and robust to allow for future developments such as the introduction of the International Sustainability Standards Board (ISSB) standards. When the Department for Business and Trade (DBT) issued its Smarter regulation non-financial reporting review: call for evidence in May 2023, ICAEW therefore welcomed the opportunity to provide feedback on this important topic. Some of the key recommendations from our full response are highlighted below. 

Streamline

ICAEW believes there are a number of issues that should be pursued by DBT in the short term in order for the current legislative framework to function as intended. These include:

• Scope and thresholds: the existing thresholds for non-financial reporting should be simplified and streamlined. In addition, the size categories used to determine the type of accounts that need to be prepared and filed with Companies House need to be reviewed. ICAEW has suggested a simplified model that would require just four categories of company (as opposed to the numerous different categories and thresholds that exist under the current framework). 

• Duplication of non-financial reporting requirements: changes are required to eliminate the duplication and overlap of non-financial reporting requirements that has built up over time across the different components of the annual report. There is also a need to rationalise reporting requirements, particularly for the directors’ report and the directors’ remuneration report.

• Group reporting: there is an urgent need to review how non-financial reporting requirements apply within groups of companies. While ICAEW highlighted several specific issues in its response to DBT, it also urged a more holistic review to ensure that reporting requirements are matched to the appropriate level within a group. 

Align

ICAEW outlined a number of recommendations with regards to how the ISSB’s new standards might be integrated into the UK framework for non-financial reporting:

• Align with ISSB standards: ICAEW encouraged the UK government to move swiftly to endorse the ISSB standards for use in the UK. We believe there should be one source of sustainability disclosure requirements in the UK, ie, UK-adopted ISSB standards. Companies that are, in time, required to report under the ISSB standards can then refer to the disclosure requirements as set out in those standards in preparation. The legislation for companies not required to apply ISSB standards should, as soon as practicable and in a proportionate manner, be aligned to the ISSB baseline unless there are strong reasons to deviate. 

• An ISSB for SMEs: in the longer term, we recommend DBT discuss with the ISSB the possibility of an “ISSB for SMEs” type of framework being developed in the UK, perhaps by the future Audit, Reporting and Governance Authority (ARGA). This would not only simplify the underlying legislation, but also enable reporting requirements for companies not in scope of the full ISSB standards to remain updated to reflect changes in reporting best practice while also remaining proportionate.

Refine

As well as addressing the short-term urgent issues outlined above, ICAEW believes there is a strong case for DBT carrying out a broader review of the non-financial reporting legislative framework. Such a review might usefully consider the following matters:

• Purpose-led regulation: ICAEW supports the view that the purpose of the annual report is to provide material information about a reporting entity that is useful to existing and potential investors, creditors and other lenders in making decisions relating to the provision of resources to the entity. Clarifying the purpose of the annual report provides an organising principle, which can be applied when taking decisions over the need for and subsequent location of non-financial information, and the associated scoping requirements. 

• Information outside of the annual report: where the purpose of requiring information is to meet a broader public policy objective, rather than providing material information to primary users, we think the information should be presented outside of the annual report. ICAEW believes that there is a real opportunity for innovative thinking around how information can be presented outside of the annual report, with a particular focus on the role that technology might play in this regard.

• Principles for requiring non-financial information: linked with the above, ICAEW would like to see DBT develop a clear set of principles to help determine whether, and how, non-financial reporting requirements are introduced into the regulatory framework. Clearly identifying the purpose of information at the outset is critical. Agreeing a set of principles would provide DBT with a helpful framework when reviewing UK non-financial reporting requirements.

• High-level regulatory framework: ICAEW is a longstanding advocate of a legislative framework, which contains minimal, or very high-level, non-financial reporting requirements. The majority – if not all – detailed reporting requirements could be located outside the legislative framework and be delegated to standard setters and regulatory bodies such as ARGA. We believe there are many benefits of adopting such an approach, including greater flexibility in making amendments on a timely basis to reflect developments and best practice. It would also facilitate greater alignment of other legislative regimes, for example those applying to charities, LLPs and qualifying partnerships, all of which are in need of updating. 

Next steps

This recent call for evidence has been a welcome start, but there is much work ahead for DBT. The information collected from this initial stage will now need to be carefully analysed to identify potential areas for change and to formulate possible policy options. Any proposals will then be subject to further public consultation, the earliest of which would be in 2024. ICAEW will be monitoring developments carefully and will consult members at each stage.

Sarah Dunn, Senior Technical Manager, Corporate Reporting, ICAEW