What do the IFRS Sustainability Disclosure Standards mean for entities in the Channel Islands?

The UK’s approach is important because Channel Islands entities can often be caught by UK requirements, and our local regulators often look to follow the UK.

The UK Government has confirmed its commitment to endorse the IFRS Sustainability Disclosure Standards and in August last year published guidance on its framework for endorsement through the creation of the UK Sustainability Disclosure Standards (UK SDS). The UK SDS will only differ from the IFRS Sustainability Disclosure Standards for UK-specific matters and only where absolutely necessary.

The UK SDS are expected to fold into the UK Sustainability Disclosure Requirements (SDR) regime, which is expected to be finalised by July 2024. The SDR regime, which is applicable to FCA-authorised UK firms and their UK-domiciled products marketed in the UK, currently includes policies on anti-greenwashing, investment labels, disclosures and naming/ marketing rules. However, the FCA has confirmed its intent to work on an approach to extending the regime to apply to overseas funds marketed in the UK in the future.

For listed entities, the FCA intends to consult on implementing the UK SDS by expanding the current TCFD disclosure rules, and expects to finalise its approach by the end of 2024. The new reporting requirements would then be applicable for listed entities for financial years beginning on or after 1 January 2025.

We think it is likely that the first Channel Islands entities to be directly captured by the UK SDS will be corporates with UK listings. The specifics of the FCA’s listing rules scope will be important, as closed-ended investment funds are currently exempt from TCFD climate reporting requirements. Whether or not this exemption extends to the IFRS Sustainability Disclosure Standards remains to be seen, and will determine the impact for UK-listed financial products in the Channel Islands.

We can also expect the fold-in of IFRS Sustainability Disclosure Standards into the UK SDR regime to impact local funds and companies indirectly because it will redefine what best practice sustainability disclosures for the sector look like and raise the bar on minimum expectations.

The UK is of course not the only jurisdiction signalling intent to adopt the Standards, with many of the Channel Islands’ other main markets and competitor jurisdictions also expected to do so.

The Standards introduce a value chain consideration, which means that in-scope asset owners, suppliers, clients and lenders will ultimately be requesting data to prepare their own reporting over their upstream and downstream value chain. We therefore think it is likely Channel Islands businesses could be in the value chain of other entities required to report under the Standards, and may therefore be requested to provide data to in-scope stakeholders even if not directly in-scope themselves.

The key message is that, directly or indirectly, the IFRS Sustainability Disclosure Standards are raising expectations about the scope, approach, quality and level of trust in sustainability disclosures for Channel Islands entities, and setting the direction of travel towards future financial-grade sustainability reporting alongside financial performance reporting.

More broadly there is an opportunity for Channel Islands regulators to take an appropriate and proportionate approach to endorsing and supporting the Standards. In doing so they can further position the islands as centres for sustainable finance in which the finance industry’s exposure to sustainability risks and opportunities is well understood and managed. In Guernsey, the GFSC has expressed an intention to consult on an appropriate and proportionate approach to adopting the IFRS Sustainability Disclosure Standards. Meanwhile, in Jersey, the JFSC will consider in due course what, if any, local adoption or equivalence is appropriate and in what circumstances - which may further expand application to certain local entities.