FCA Makes UK Sustainability Reporting Comply-or-Explain

The UK's Financial Conduct Authority has finalised new sustainability reporting rules for listed companies, moving them from the existing TCFD-aligned framework to the UK's IFRS-based Sustainability Reporting Standards while making the new requirements comply-or-explain. The rules apply to accounting periods beginning on or after 1 January 2027, with first reporting in 2028. Companies will also receive one year of transitional relief for Scope 3 emissions disclosures and two years for wider sustainability disclosures under UK SRS S1.

 

The Final Rules Step Back From Mandatory Climate Reporting

 

The FCA's original proposal would have required climate disclosures under UK SRS S2, while giving companies more flexibility for wider sustainability reporting under UK SRS S1 and Scope 3 emissions. The final rules extend the comply-or-explain approach across the full UK SRS framework, including climate reporting.

That changes how companies will move into the new regime. Listed issuers will still be expected to report against the new standards, but where they do not comply with particular requirements, they can explain their position rather than automatically being required to provide every disclosure. The FCA said the approach gives companies flexibility to reflect their circumstances while supporting more consistent sustainability information for investors.

 

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UK Reporting Is Still Moving Closer to ISSB Standards

 

The decision to use comply-or-explain does not change the underlying reporting framework. The FCA is replacing its existing TCFD-aligned rules with requirements based on UK SRS S1 and S2, the UK-endorsed versions of the International Sustainability Standards Board's IFRS S1 and IFRS S2 standards.

The change therefore moves UK-listed companies towards the same underlying sustainability reporting framework being adopted or considered in other markets. UK SRS S1 covers wider sustainability-related financial information, while UK SRS S2 focuses specifically on climate-related risks and opportunities. For multinational companies and investors, that alignment is intended to improve the consistency and comparability of disclosures across markets.

 

The Flexibility Creates a New Question Around Comparability

 

The FCA said consultation feedback raised concerns about the burden mandatory climate reporting could place on smaller listed companies, particularly where climate or sustainability issues have limited financial relevance to their business. A comply-or-explain framework gives those companies more room to reflect materiality and their readiness to report rather than applying the same disclosure burden in every case.

The trade-off is that greater flexibility can produce differences in the amount of information companies provide. ShareAction's Head of UK Policy, Luke Hildyard, welcomed the move towards international standards but warned that investors could be left without complete and comparable information if some companies choose not to comply. How companies use the explanation option will therefore matter almost as much as the wording of the rule itself.

 

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Scope 3 and Wider Sustainability Reporting Get More Time

 

The FCA has retained transitional relief for some of the more demanding parts of the framework. Companies can use a one-year relief for Scope 3 greenhouse gas emissions disclosures and a two-year relief for wider sustainability reporting under UK SRS S1, giving issuers additional time to build the data and reporting processes needed for those requirements.

Scope 3 is particularly difficult because much of the required information sits outside a company's direct operations, across suppliers, customers and other parts of its value chain. The transition period recognises that moving from the existing climate disclosure regime to broader UK SRS reporting will require companies to expand both the range of sustainability information they collect and the systems used to produce it.

 

How Companies Use Comply-or-Explain Will Shape the New Regime

 

The rules take effect for accounting periods starting from 1 January 2027, meaning the first reports under the new framework will appear in 2028. Before then, the FCA is consulting on a technical note explaining how companies should apply comply-or-explain proportionately, with feedback open until 28 October 2026.

The first reporting cycle will show whether the flexibility works as intended. The key question will be how often companies use the explanation route, what reasons they give for doing so and whether investors still receive enough consistent information to compare climate and sustainability risks across listed companies.