‘Comply or explain’ approach taken to UK sustainability reporting standards

The UK SRS envisage the disclosure of both climate-related and non-climate related information, to help inform investor decision-making. The UK regime aligns with international sustainability reporting standards finalised by the International Sustainability Standards Board (ISSB) in 2023. When it takes effect, it will replace the current climate-related reporting standards that are aligned with standards developed by the Task Force on Climate-related Financial Disclosures (TCFD).

Consulting on the new regime earlier this year, the FCA had proposed a two-tier approach for the UK SRS under which listed issuers would be obliged to make climate-related disclosures but would not be forced to disclose other relevant sustainability information. Instead, a ‘comply or explain’ approach for non-climate-related disclosures was proposed.

Now, however, the FCA has confirmed a ‘comply or explain’ approach will apply across the whole of the new regime.

“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,” the FCA said in its policy statement on the new regime (87-page / 1.26MB PDF). “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.”

“We expect investor and broader market demand for sustainability-related information to drive issuers to provide disclosures where climate and sustainability matters are relevant to their business model and risks. Where issuers do not provide financially material information in accordance with UK SRS, a proportionate explanation of their reasoning and judgement can itself provide useful information to investors,” it said.

Climate and sustainability expert Hayden Morgan and capital markets expert Dinesh Banani of Pinsent Masons said that while UK-listed issuers already have experience of climate-related reporting under the current TCFD-aligned standards, there is still a lot of work to do to prepare for the broader scope of the new UK SRS.

Banani said: “This is a significant milestone in the UK's sustainability reporting agenda and reinforces the direction of travel towards globally aligned sustainability disclosure standards across major capital markets – with jurisdictions including Australia, Canada, Japan, Singapore, and Hong Kong also adopting or moving towards ISSB-aligned frameworks.”

Morgan said: “In-scope companies will need to focus on governance, materiality assessments, climate and sustainability risk management, transition planning, data assurance, controls, and implementation of ISSB-aligned reporting frameworks.”

According to Banani, given the FCA's decision to adopt a 'comply or explain' approach across the whole regime, companies will also need to “think carefully about how they right-size their disclosures to ensure they are proportionate and decision-useful, rather than adopting a one-size-fits-all approach”.

The UK SRS will apply to accounting periods beginning on 1 January 2027, with first reporting in 2028. However, the FCA is providing some temporary optional relief from some of the requirements.

First, listed issuers will not be forced to make disclosures in related to so-called ‘Scope 3’ greenhouse gas emissions – those emissions arising indirectly in their operations via their supply chains – in respect of the first annual accounting period in-scope of the new regime. Second, a two-year relief will apply in respect of all non-climate-related information that will thereafter fall subject to disclosure.