‘Comply or explain’: FCA abandons plans for mandatory sustainability disclosures

FCA abandons plans for mandatory sustainability disclosures

Britain's financial regulator has dropped plans for mandatory sustainability disclosure requirements, opting instead for a comply-or-explain framework.

In January this year, The Financial Conduct Authority proposed that listed companies would be required to meet a new UK climate standard. This would cover financially material climate-related risks and opportunities, climate targets, and the potential impact of climate change on a company’s business. However, the plans were scrapped after firms raised concerns about implementation costs and impacts on their competitiveness. While listed companies will still be expected to report against the UK Sustainability Reporting Standards, the FCA has dropped plans to make full compliance mandatory.

Instead, under new rules which come into effect from 1^st January 2027, businesses will either need to meet the requirements of the UK Sustainability Reporting Standards (UK SRS) or provide information on why they haven’t met certain requirements from accounting periods, a ‘comply or explain approach’.

“Our final rules adopt a comply or explain approach across the UK SRS. Climate, and sustainability risks affect firms differently and the relevance of particular disclosures will depend on an issuer’s business model, strategy and risk profile. A comply or explain approach allows issuers to reflect those differences and focus on providing high-quality, decision-useful information, rather than applying the standards mechanically in a way that could produce lengthy disclosures of limited value to investors.”[i]

Earlier this year the UK Government published its finalised SRS, setting out a clear framework for corporate sustainability disclosures. Known as UK SRS S1 and UK SRS S2, the regulations are based on guidance developed by the International Sustainability Standards Board (ISSB) and follow a consultation held last year. In addition, the SRS standards align with IFRS Foundation standards IFRS S1 and IFRS S2[ii]. In summary, the two standards cover the following:

· The UK SRS S1 sets out the general requirements for sustainability-related financial disclosures, requiring companies to report on sustainability risks and opportunities.

· The UK SRS S2 focuses specifically on climate-related disclosures, covering both physical risks and transition-related risks.

Companies aligning with S1 and S2 are required to provide information to cover governance, strategy, risk management, metrics, and targets. The documents state that companies must publish sustainability disclosures at the same time as their financial statements and cover the same reporting period.

Wider climate roll-back persists

The move forms part of a wider climate roll-back of regulation seen across the globe. Earlier this year the EU announced measures to water down its flagship sustainability regulation the CSDDD and CSRD. The CSDDD is a regulation that will impose sustainability and human rights due diligence standards on firms operating within the EU, and the CSRD will require businesses in the EU to disclose their environmental and social impacts.

Last year the European Commission released its Omnibus Specification package, an attempt to streamline sustainability reporting within the EU[iii]. The package covered the CSDDD, the CSRD, the Carbon Border Adjustment Mechanism (CBAM), and The EU green taxonomy[iv]. Further changes followed last October. The European Parliament's Committee on Legal Affairs voted to significantly narrow the scope of both directives, limiting their application to only the largest companies. Where both the CSDDD and CSRD had previously been due to apply to companies with at least 250 employees, this was increased, meaning:

· CSDDD will now be limited to companies with at least 5,000 employees and €1.5 billion ($1.73 billion) in annual revenue. Businesses will also be required to ensure they have transition plans that align with EU climate law and the Paris Agreement.

· The CSRD will only apply to companies with at least 1,000 employees and annual revenue of €450 million ($520 million) or more, though financial holdings and listed subsidiaries will be exempt.

The decision to narrow the scope of the CSDDD and CSRD comes on the heels of implementation delays for both directives. Further changes could be on the horizon, with the United States recently calling on the European Union to further limit the impact of the CSRD and CSDDD[v]. The EU and US previously agreed on methods to remove barriers to transatlantic trade as part of the 2025 US-EU trade framework known as the Turnberry Agreement.