FCA Rethinks Climate Disclosure Mandate in Final UK Sustainability Rules

Key Takeaways

• FCA Changes Course on Climate Disclosures: The regulator will apply a comply-or-explain approach across UK SRS, rather than making UK SRS S2 climate disclosures mandatory as originally proposed.
• New Rules Start in 2027: The requirements apply to accounting periods beginning Jan. 1, 2027, with the first reporting due in 2028.
• Smaller Issuers Drove Proportionality Concerns: Consultation respondents warned that mandatory climate disclosures could impose costs without producing useful information where climate and sustainability matters are not financially material.
• Overseas Issuers Come Under UK SRS: International commercial companies with secondary UK listings and depositary receipt issuers will also report against UK SRS on a comply-or-explain basis.
• Companies Get Transitional Relief: The FCA is providing 1 year of transitional relief for Scope 3 disclosures and 2 years for UK SRS S1 disclosures.

Deep Dive

The Financial Conduct Authority has changed course on one of the harder edges of its new sustainability reporting regime. When the regulator consulted on the rules earlier this year, it proposed requiring listed companies to comply with the UK’s climate disclosure standard, UK SRS S2. Broader sustainability reporting under UK SRS S1, along with Scope 3 emissions disclosures, would have been handled differently: comply with the requirements or explain why not.

That split is gone. Under final rules published by the FCA, listed issuers will report against the UK Sustainability Reporting Standards entirely on a comply-or-explain basis. The approach applies to climate disclosures, Scope 3 emissions and the wider sustainability matters covered by UK SRS S1.

The rules take effect for accounting periods beginning on or after Jan. 1, 2027, with the first reporting under the regime due in 2028. They will replace the FCA’s existing climate disclosure requirements aligned with the recommendations of the Task Force on Climate-related Financial Disclosures.

It is a meaningful change from what the FCA originally proposed, and the reasoning behind it came through plainly in consultation responses. Most respondents supported bringing UK SRS into the listed-company disclosure regime. The standards are the UK-endorsed version of those developed by the International Sustainability Standards Board, and respondents saw value in keeping UK reporting aligned with an international framework built around financially material information for investors.

The disagreement was over how much of that framework should be compulsory. Some respondents questioned whether mandatory application of UK SRS S2 would be proportionate, particularly for smaller companies whose businesses are not materially affected by climate or sustainability matters. Producing the disclosures still takes money, staff and time. If the underlying issue has little financial bearing on the company, respondents argued, the resulting disclosure may not tell investors very much.

The FCA had evidence of that problem already. It said voluntary sustainability disclosures from smaller companies whose business models were not materially affected by climate or sustainability matters were often of limited use to investors.

There is not much point in demanding more disclosure simply to produce more disclosure. The regulator instead wants companies concentrating on information that matters to investors. Climate and sustainability risks do not land evenly across the market. What is financially material to an energy company may bear little resemblance to what matters at a company with a very different business model, strategy and risk profile.

Comply or explain leaves room for that judgment. Where a company does not provide financially material information in accordance with UK SRS, the FCA expects a proportionate explanation of the reasoning and judgment behind that decision. That explanation can itself tell investors something useful.

The change also removes an awkward feature of the consultation proposal. Respondents had warned that making UK SRS S2 mandatory while treating S1 and Scope 3 disclosures on a comply-or-explain basis would leave companies working through different reporting expectations inside the same framework. The final rules put them under one approach.

The FCA expects market pressure to do some of the work that a blanket mandate would otherwise have done. Investors want sustainability information where it bears on a company’s prospects, and issuers with material climate or sustainability exposures will still face pressure to provide it.

That is not the same thing as making the disclosures optional in any meaningful sense. Companies will have to make a judgment, and where they do not report in accordance with the standards, they will have to account for that decision.

Overseas Companies Come Under UK SRS Too

The FCA made another change after consultation, this time involving overseas companies with securities traded in the UK. Its original proposal would have required international commercial companies with a secondary UK listing and depositary receipt issuers to signpost the sustainability reporting requirements and disclosures applying in their home jurisdictions.

The final rules bring them into UK SRS instead. Those issuers will report against the UK standards on the same comply-or-explain basis, replacing the proposed home-jurisdiction signposting approach. The FCA said the change should improve consistency and comparability for investors looking across companies in the UK market.

The regulator does not consider its changes from consultation significant when measured against either the proposals it originally put forward or the existing position for issuers under the TCFD framework. It has nevertheless updated its cost-benefit analysis to account in detail for the costs and benefits of the final approach.

TCFD Gives Way to the ISSB Framework

The rules also close another chapter in the UK’s climate reporting regime. Listed companies currently operate under FCA requirements aligned with the TCFD recommendations. Those requirements already use comply or explain and, according to the regulator, have supported high levels of disclosure among the largest issuers and among smaller companies where climate and sustainability risks are relevant to their businesses. But the institutional architecture behind those requirements has moved on.

TCFD was established in 2015 and disbanded in 2023. The ISSB, created in 2021, took on the larger task of bringing together a reporting landscape that had accumulated different climate and sustainability frameworks. Its standards build on and incorporate the TCFD recommendations while extending the framework beyond climate and concentrating disclosure on financially material information intended for investors.

UK SRS is the UK-endorsed version of those ISSB standards. The FCA’s new rules effectively move listed-company reporting from the earlier TCFD framework into that broader system. Companies will not have to absorb every part of the change at once.

The FCA is providing a 1-year transitional relief for Scope 3 emissions disclosures and a 2-year transitional relief for disclosures under UK SRS S1. The implementation date itself has not changed from consultation, with accounting periods beginning on Jan. 1, 2027, with reporting beginning in 2028.

There is still some work to be done before then. The FCA is consulting on Technical Note 803.1, updates to Technical Note 801.4 and the deletion of Technical Note 802.3 to help companies apply the comply-or-explain regime. The proposals are set out in Primary Market Bulletin 66, with comments due by Oct. 28. The regulator intends to finalize the guidance before the rules take effect. It also plans activities to help companies and investors understand UK SRS and what the new rules require.

For companies preparing for 2027, that leaves a more interesting question than whether another disclosure box needs to be filled. They will have to decide which climate and sustainability matters actually carry financial weight for the business, whether their systems can produce credible information about them and, when they decide not to make a disclosure, whether the explanation for that decision will withstand an investor reading it with the same care with which it was supposedly made.

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