Navigating the UK's ESG regulatory framework: A strategic guide to climate and sustainability reporting

This article focuses on key aspects of the UK’s climate and sustainability reporting regime. Namely:

• Energy Savings Opportunity Scheme (ESOS): Mandatory energy efficiency assessments;
• Streamlined Energy and Carbon Reporting (SECR): Annual greenhouse gas emissions reporting through Companies House filings; and
• Sustainability Reporting Standards (SRS): Comprehensive sustainability disclosure requirements currently under consultation.

Understanding how these regimes interact - and preparing strategically - can transform compliance obligations into competitive advantages. As the ESG regulatory landscape shifts, we can help you determine applicability, achieve regulatory compliance and manage relationships with regulators. With market leading legal and regulatory expertise, we provide creative, timely and pragmatic advice.  

While the article focuses specifically on the three reporting regimes, organisations may also need to consider the Financial Disclosure Regulation (for financial services firms), the UK Emissions Trading Scheme (ETS) (for high-emission sectors), and sector-specific requirements. 

This article will be updated following consolidation of the UK SRS to act as a guide to that framework as enacted, and to cover the Financial Disclosure Regulation and UK ETS. 

Part 1 – ESOS

Introduction to ESOS

ESOS is an energy assessment scheme introduced as part of the UK’s implementation of the EU Energy Efficiency Directive. ESOS aims to increase the energy efficiency of large organisations and reduce their carbon emissions by requiring them to conduct comprehensive assessments of their energy use and identify cost-effective energy-saving measures. ESOS commenced in 2014 and operates over four-year compliance periods (known as ‘Phases’).

Its broad applicability criteria means that it applies to a large pool of organisations, both domestic and international (including those with smaller scale UK operations). It can be particularly challenging to apply these criteria to multinationals with complex group structures, which can create unexpected or uncertain regulatory risk. 

ESOS was back in the spotlight recently, with the Environment Agency serving enforcement notices on businesses over the summer for alleged non-compliance with Phase 3. With Phase 3 closing, now is a good time for organisations to start preparing for Phase 4. 

Is my organisation subject to ESOS?

ESOS applies to ‘large undertakings’ in the UK. A UK company or other legal entity is a ‘large undertaking’ for the purposes of ESOS if it meets one or both of the following thresholds:

• Employee Count Threshold: The organisation employs 250 or more people; or
• Financial Thresholds: The organisation has an annual turnover exceeding £44 million and an annual balance sheet total exceeding £38 million.

Additionally, while certain public bodies and non-profit organisations are exempt, it is crucial that they verify their status to ensure compliance.

My organisation is in-scope of ESOS - what do I need to do?

Compliance with ESOS involves several key steps:

• Energy Audits: in-scope organisations must conduct energy audits to assess their total energy consumption, including buildings, industrial processes, and transport. These audits should identify areas where energy efficiency improvements can be made;
• Lead Assessor: A qualified lead assessor must be appointed to oversee the energy audits and ensure compliance with ESOS requirements. The lead assessor can be an internal employee or an external consultant, but they must be registered with an approved professional body;
• Reporting: Once the energy audits have been completed, in-scope organisations must compile a report detailing their energy consumption and identified savings opportunities. This report must be submitted to the Environment Agency by the compliance deadline;
• Board-Level Sign-Off: The ESOS report must be reviewed and signed off by a director or equivalent senior manager within the in-scope organisation; and
• Record Keeping: in-scope organisations are required to maintain records of their energy audits and compliance activities for at least six years.

As an alternative to – or in addition to – an ESOS audit, in-scope organisations can rely on a certified ISO 50001 energy management system covering all or part of their organisation. In-scope organisations seeking to rely on this alternative compliance route are required to undertake additional actions to comply with ESOS, though their overall compliance burden will be reduced.

While the time and cost expenditure required to comply with ESOS may seem onerous, the purpose of the scheme is to identify – as its name indicates – energy savings opportunities. ESOS compliance can serve as an endorsement of ESG credentials and certain organisations have also reported overall net costs savings because of ESOS compliance.

Application to corporate groups

As for assessing applicability criteria, the thresholds apply to each company or other legal entity within a corporate group individually. They are not assessed on an aggregated basis (whether UK-wide or group-wide).

If a company or other legal entity within a corporate group is a ‘large undertaking’, then all the group’s UK operations will be subject to compliance requirements. The ‘highest-level UK parent’ takes ultimate responsibility for compliance across the corporate group.

Impact on multinationals with a UK presence

For multinational corporations with operations in the UK, ESOS presents a unique challenge.

Multinationals must assess their UK subsidiaries and UK operations to determine ESOS applicability. This can give rise to considerable complexity. 

The specific legal entity (or entities) that are responsible for complying with ESOS obligations will be the ‘highest-level UK parent(s)’, i.e. the company (or companies) within the corporate group that do not themselves have a UK parent. An international corporate group headed by an ultimate parent company outside the UK may find that it has more than one company within its group which is a highest-level UK parent and therefore subject to ESOS compliance obligations. This may even catch companies that are not themselves a parent of any ‘large undertaking’, provided that the multinational corporate group as a whole includes a ‘large undertaking’.

As Alan Bates, a barrister at Monckton Chambers explains, “Working out how the ESOS Regulations apply to a corporate group can be complex and produce results that might be thought surprising. For example, a small UK holding company or LLP, with little turnover or assets, not itself involved in any trading activity and not having any subsidiary that qualifies as a ‘large undertaking’, may nevertheless find itself subject to ESOS compliance obligations just because it is part of an international corporate group that includes a UK entity that is a ‘large undertaking’.”

Enforcement

The enforcement of ESOS is the remit of the Environment Agency. The agency has the authority to conduct audits and request evidence of compliance from organisations.

Non-compliance with ESOS can result in significant penalties, including:

• Financial Penalties: Organisations that fail to comply with ESOS requirements may face fines ranging from £5,000 to £50,000 depending on the nature of the breach, with additional daily penalties for continued non-compliance;
• Public Disclosure: The Environment Agency may publish details of non-compliant organisations, potentially damaging their reputation and stakeholder relationships; and/or
• Enforcement Notices: The agency can issue enforcement notices requiring organisations to take specific actions to achieve compliance, such as conducting additional energy audits or submitting revised reports.

Phase 4 

Timeframes

The key dates for Phase 4 are currently as follows: 

• 31 December 2026: The qualification date (i.e. the date at which organisations are determined to be in-scope or not for Phase 4); and
• 5 December 2027: The compliance date for Phase 4 auditing and reporting.

Changes to compliance requirements

In response to a consultation which took place in 2021, the small tweaks listed below are being made to the ESOS scheme in Phase 4, though its fundamentals will remain unchanged: 

• Display Energy Certificates (DECs) and Green Deal Assessments (GDAs) will no longer be valid compliance routes; and
• In-scope organisations will be required to include progress as against previously submitted action plan commitments in their assessments, and where action plan commitments have not been met, participants will have to provide an explanation. 

Part 2 – SECR

Introduction to SECR

Building on the energy efficiency focus of ESOS, another key UK climate reporting scheme is SECR, which requires in-scope organisations to report on their greenhouse gas (GHG) emissions and energy consumption. SECR came into force on 1 April 2019 and has effect in respect of financial years beginning on or after that date.

SECR mandates in-scope organisations to conduct a yearly GHG emissions and energy assessment and to report on this assessment through the company's annual report, as filed with UK Companies House.

Helpfully, SECR assessments cover similar emissions and energy consumption information to the ESOS regime such that companies may already be collecting much of the information required to comply with SECR through their participation in ESOS.

Is my organisation subject to SECR?

Companies are in scope if they fall within one of three UK incorporated company-types: 

• a UK incorporated quoted company; 
• a "Large" UK incorporated unquoted company; or
• a "Large" UK incorporated Limited Liability Partnership (LLP). 

UK Quoted Companies

SECR applies to all UK incorporated "quoted" companies that are required to prepare a Directors' Report under Companies Act 2006 (CA06) Part 15. According to the CA06, a company is "quoted" where its equity share capital is listed (or admitted to dealing) on the London Stock Exchange, a European Economic Area state, or the New York Stock Exchange or NASDAQ.

Large UK Unquoted Companies or LLPs

SECR also applies to UK incorporated "unquoted" companies that are required to prepare a Directors' Report under CA06 Part 15 or LLPs if they are “Large” - i.e. if they satisfy two or more of the below thresholds within a financial year (1 April to 31 March):

• turnover of £36 million or more; or
• balance sheet total of £18 million or more; or
• 250 or more employees.

Importantly, there are 'smoothing provisions' for companies that intermittently cross the above thresholds. Any ‘threshold crossing’ must persist for two financial years to affect a company's classification.

There are two very limited exemptions which may allow in-scope organisations from including certain information from their SECR reporting based on seriously prejudicial information or practicality. 

My organisation is in-scope of SECR - what do I need to do?

In-scope organisations are required to report on GHG emissions and energy information for the previous financial year as part of their annual filing obligations with Companies House. Specifically, in the "Directors' Report" in the case of UK Quoted Companies and Large UK Unquoted Companies or in the "Energy and Carbon Report" in the case of Large UK LLPs.

The scope of SECR reporting (including the type and location of energy use or GHG emission) varies depending on company-type. Please get in touch if you need tailored advice on the scope of SECR reporting applicable to your organisation. 

Application to corporate groups

Parent group reports must include information about subsidiaries, but in contrast to ESOS, they do not need to include information relating to a subsidiary that the subsidiary would not be obliged to include if reporting on its own account.  

Additionally, subsidiaries that qualify for SECR may not be required to report under SECR if they are adequately covered by a parent’s group report and: 

• the group report is prepared for a financial year that ends at the same time or before the end of the subsidiary’s financial year; and
• they are a subsidiary at the end of the financial year in which the group report is prepared.

Enforcement

Enforcement of SECR is carried out through the Conduct Committee of the FRC. The committee adopts a generally conciliatory approach and seek to work with businesses in breach of SECR. 

The FRC Conduct Committee has the power to enquire into cases where it appears disclosures have not been provided and can apply to the court for a declaration that a report is non-compliant, and/or for an order requiring directors to prepare a revised report or set of accounts. Formal investigations are infrequent and typically focus on serious accounting breaches rather than administrative matters.

Companies House may reject a report if inadequate information is provided, or if it is late, which can result in the imposition of a late filing penalty. If a report is non-compliant and the directors’ are aware that this is the case, or show reckless disregard as to the truth or falsity of the report, or if one is not filed at all, then action can be taken directly against directors (or members of an LLP) who could be liable for summary conviction.

Part 3 – SRS 

Introduction to SRS

In addition to ESOS and SECR, both of which are now well-established regimes in the UK, the government has recently consulted on the introduction of a more extensive sustainability disclosure regime in the UK. The SRS exposure draft outlines two core standards: 

• S1 covering general requirements for disclosure of sustainability-related financial information; and 
• S2 addressing climate-related disclosures. 

These draft standards are based on the International Sustainability Standards Board (ISSB) standards IFRS S1 and S2, with some key modifications.

Whereas ESOS requires that in-scope organisations measure energy consumption to help them identify energy and carbon (and hopefully costs) savings, and SECR requires in-scope organisations to report on energy consumption and greenhouse gas emissions largely for the purpose of increasing transparency, SRS is a far more comprehensive sustainability-focused framework requiring new areas of disclosure and a greater depth of reporting. The draft SRS goes beyond mere-climate change reporting standards - it is an investor-focused sustainability disclosure framework designed to align the UK with global capital markets and support the growth of sustainable finance.  

Will my organisation be subject to SRS?

The government has initiated a consultation on exposure drafts of SRS S1 and S2, with the consultation period recently coming to an end on 17 September 2025.  At the date of publication of this article, the SRS remain in draft form and no UK organisations are required to report under them.

The SRS will initially be available for voluntary adoption, though there is an expectation that these standards will eventually apply to “economically significant entities”. The consultation does not define the term “economically significant entities”, but the definition is likely to include listed companies and perhaps also large LLPs and private companies. The FCA is expected to consult separately on mandating SRS within the UK listing rules (UKLR), while the government considers introducing mandatory reporting for large companies through the CA06.

What will in-scope organisations be required to disclose? 

The draft SRS S1 establishes general requirements for disclosing material sustainability-related risks and opportunities that could reasonably be expected to affect a business's cash flow, access to finance, or cost of capital over the short, medium, or long-term. Disclosures must be provided across four key areas: 

• Governance: The governance processes, controls and procedures the entity uses to monitor and oversee sustainability related risks and opportunities;
• Strategy: The entity’s strategy for managing sustainability-related risks and opportunities;
• Risk Management: The processes the entity uses to identify, assess and prioritise sustainability-related risks and opportunities; and
• Metrics and Targets: The entity's performance in relation to sustainability-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation. 

The draft SRS S1 has a financial materiality focus. Sustainability-related financial information is ‘material’ (and must be disclosed) if omitting, misstating or obscuring it could reasonably be expected to influence investors’ decisions.  

SRS S2 mandates disclosures relating directly to climate-related risks and opportunities. SRS S2 will likely require that companies disclose how their governance handle climate-related risks and opportunities, including how these considerations influence strategy, major transactions and risk management processes. Companies may also need to provide traditional disclosures about greenhouse gas emissions and how the implement climate-related targets in their business. 

SRS S2 may require that disclosures be aligned with both cross-industry metrics relevant to all companies (e.g. GHG emissions), and company / industry-specific metrics considered appropriate by the board or management. 

Key changes to IFRS standards 

The consultation proposes six key modifications to IFRS S1 and S2:

• Comparative Information: The UK version may remove transition relief that permits delayed reporting in the first year, requiring comparative information to be published simultaneously with annual financial statements from year one;
• Extended Phased Implementation: Companies would be permitted to focus on climate-related matters for up to two years before fully integrating broader sustainability issues, compared to one year under ISSB standards;
• Classification Flexibility: The requirement to use the Global Industry Classification Standard (GICS) for financed emissions may be removed, allowing UK entities to use other classification schemes;
• Implementation Timing: The exposure draft removes the "effective date" clauses from IFRS S1 and IFRS S2, with mandatory implementation timings to be determined by future legislative provisions;
• SASB References: References to Sustainability Accounting Standards Board materials and Industry-based Guidance would be permissive rather than compulsory under the proposed UK standards; and
• Transition Relief: Transition reliefs would apply from either the point of voluntary adoption or when mandatory requirements take effect, providing flexibility in how entities phase in their reporting.

The bigger picture: Strategic implications for your business

The transition from voluntary to mandatory reporting across multiple frameworks presents both challenges and opportunities. While the administrative burden may seem daunting, these schemes are designed to drive genuine operational improvements and cost savings through enhanced energy efficiency and strategic sustainability planning. Early preparation and proactive engagement with these evolving standards will be essential for maintaining competitive advantage and avoiding the significant penalties associated with non-compliance.

We understand the challenges facing organisations as they navigate this evolving regulatory landscape. Our market-leading ESG team combines deep technical knowledge with practical commercial insight to help clients achieve compliance, manage regulatory relationships, and turn ESG obligations into strategic advantages. Whether you are preparing for ESOS Phase 4, considering early adoption of SRS, or ensuring SECR compliance, we provide the creative, timely, and pragmatic advice you need to succeed.

If you want to discuss your organisation’s sustainability reporting obligations, please get in touch with Andrew Dean or Hadrien Espiard.