Why UK SRS S2 Must Be Applied with UK SRS S1

Functional visual created for London Reporting Academy. The visual is illustrative and should be read with the article.

UK SRS S2 paragraph C2 is explicit: the entity applies S2 and S1 at the same time to the extent S1 relates to climate-related risks and opportunities. This is not merely implementation advice. It is part of the standard’s application provisions.

The FCA’s CP26/5 proposals reinforce the same architecture. The consultation notes that several foundations needed for climate reporting are in S1 rather than repeated in S2 and proposes that in-scope listed companies apply the relevant S1 sections when reporting under S2.

S1 paragraph 17 requires material information about sustainability-related risks and opportunities that could reasonably be expected to affect prospects. Paragraph 18 defines materiality by whether omitting, misstating or obscuring the information could reasonably be expected to influence primary-user decisions.

This materiality filter applies to S2. It does not eliminate specific S2 requirements automatically; rather, it determines the material information needed to meet them in the entity’s circumstances. The analysis must remain connected to prospects and to the information needs of investors, lenders and other creditors.

A climate report should retain a materiality decision record for each major disclosure area: risk or opportunity, horizon, nature and magnitude of possible effects, evidence, disclosure consequence, owner, reviewer and reassessment trigger.

S1 paragraph 20 requires sustainability-related financial disclosures to be for the same reporting entity as the related financial statements. For a consolidated group, that normally means the parent and consolidated subsidiaries.

That does not mean every metric uses the same technical boundary. S2 paragraph 29(a)(iv), for example, requires Scope 1 and Scope 2 emissions to be disaggregated between the consolidated accounting group and other investees. Scope 3 extends into the value chain. The report should reconcile the financial reporting entity, GHG organisational boundary, value-chain information and metric-specific exclusions rather than treating them as one undifferentiated perimeter.

Acquisitions, disposals, reorganisations and changes in control should trigger a boundary review, comparative assessment and evidence update.

S1 paragraphs 21-24 require information to be presented in a way that enables users to understand connections among the items disclosed and between sustainability-related financial disclosures and the related financial statements. The financial statements must be identified, data and assumptions should be consistent to the extent possible, and the same presentation currency is used where currency is specified.

For S2, this means a climate risk described in the strategy section should connect to the relevant scenario assumptions, financial effects, metrics, targets and risk-management response. Where the financial statements use different assumptions or a different boundary, the difference should be understandable rather than hidden.

A useful finance bridge records each material climate risk or opportunity, the affected revenue/cost/asset/liability/cash-flow/financing pathway, planning assumption, financial-statement line item, disclosure location, owner and review status.

S1 paragraph 60 requires disclosures required by UK Sustainability Reporting Standards to be part of general purpose financial reports. Paragraphs 61-63 permit flexibility in location subject to applicable regulation, provided the information is clearly identifiable and cross-references meet the conditions.

S1 paragraph 64 requires sustainability-related financial disclosures to be reported at the same time as the related financial statements and for the same reporting period. The delayed-publication relief in IFRS S1 was removed from UK SRS S1. A later sustainability report cannot be treated as satisfying the same-time requirement merely because it is cross-referenced.

Under B45-B47, cross-referenced information becomes part of the complete set. The cross-reference must identify the precise location, the information must be available on the same terms and at the same time, and its inclusion must not make the disclosures less understandable. The entity retains responsibility for authorisation and completeness.

S1 paragraph 70 requires comparative information for all amounts disclosed in the reporting period and for narrative information when useful for understanding the current period. S2 C1 removes the comparative requirement for the first annual reporting period in which S2 is applied.

The first-year relief does not remove the need to disclose the current-period basis, method, boundary and assumptions. It also does not justify omitting internally available historical information where that information is needed to explain a trend, target baseline or material change.

A transition register should identify each metric and narrative disclosure, the first reporting period, comparative availability, method changes, restatements and the year in which full comparatives will be required.

S1 paragraphs 74-76 require disclosure of significant judgements made in preparing sustainability-related financial disclosures, apart from judgements involving estimates. Paragraphs 77-82 address the most significant uncertainties affecting reported amounts and other information.

In an S2 report, significant judgements can include the classification of a risk as physical or transition, horizon definitions, materiality conclusions, scenario selection, financial-effect quantification, GHG boundary choices, Scope 3 category estimates, asset vulnerability definitions and target methodologies.

The goal is not to turn the report into a methodology manual. It is to give users enough information to understand where judgement or uncertainty materially affects the disclosure and how the entity has responded.

S1 paragraph 72 permits an explicit and unreserved statement of compliance only when the disclosures comply with all applicable UK SRS requirements. A report that uses selected S2 disclosures should not use the same wording as a complete compliance statement.

S1 paragraph 73A distinguishes the S1 climate-only relief from the S2 transition reliefs. Using S1 E3 to report only climate information prevents an S1 compliance claim. By contrast, using S2 C3 or C4 does not by itself prevent an S2 compliance assertion, provided the use of the relief is disclosed alongside the statement. Local rules can still change relief availability.

The approval paper should therefore show: reporting basis, applicable S1 and S2 requirements, reliefs used, unresolved gaps, cross-reference locations, reviewer conclusions and the exact proposed statement.

Illustrative scenario - a group publishes its annual report in March and a detailed climate report in June. The annual report contains short S2 headings and cross-references to the future June report. The climate report includes scenario analysis and Scope 3 methodology that were not available in March.

The cross-reference does not satisfy S1 merely because the later document is publicly accessible. The information was not available at the same time as the related financial statements. The group must either include the required material information in the March general purpose financial report or use a different reporting basis and wording that does not claim complete UK SRS compliance.

The example is illustrative. Applicable FCA, Companies Act or other rules may prescribe additional location requirements.