New UK sustainability reporting standards consultation opened

The Financial Conduct Authority revealed its long-trailed plans as it opened a consultation into how official sustainability reporting standards should be adopted by companies listed in the UK

Among the impacts for UK listed companies would be a requirement of ISSB-aligned climate disclosures from 2027, disclosure on third party assurances, and a requirement for wider sustainability reporting, transition plans and emissions disclosures on a ‘comply or explain’ basis.

The proposals come after the UK government looks to develop its own UK Sustainability Reporting Standards to tailor the ISSB standards – used by around 40 other jurisdictions around the world - for UK firms. It opened a consultation into those standards last year.

Once completed, the new rules are set to take effect on 1 January 2027.

Hayden Morgan, a sustainability expert with Pinsent Masons, said the new proposals represented a step-change in regulatory expectations for firms listed in the UK.

“This announcement is hugely significant UK listed firms and their supply chains,” he explained. “These proposals were tabled before the general election and have now been published,”

“Directors will need to carefully consider their company strategy, and their duty as directors, in response to this. Other than climate-related disclosures, which are set to become mandatory, this consultation builds on the established ‘comply or explain’ principle for disclosures.

“While this is potentially less stringent than a mandatory approach, it does allow for companies to set out alternative approaches, should that be appropriate, encouraging greater flexibility and proportionality. However, under these proposals directors should determine whether compliance is suitable, agree an alternative if not, and then approve the explanation.

“As investors increasingly scrutinise company strategy, governance and consider material risks and opportunities associated with climate and sustainability-related disclosures, there will likely be significant interest in this FCA consultation.”

The FCA said the new consultation exercise was to ensure sufficient time to consult and engage UK issuers and market participants on the proposals ahead of the UK SRS being finalised, replacing the Taskforce for Climate-Related Disclosures rules following that body’s closure in 2023.

Under the proposed new rules, listed companies would be required to provide mandatory disclosures based on the UK – an area the FCA says is already well accomplished by companies. Scope 3 emissions - all indirect emissions that occur in the upstream and downstream activities of a company and now covered by the Greenhouse Gas protocols’ other criteria – would not require mandatory reporting, and instead would operate on a ‘comply or explain’ basis to reflect the complexity of cost of doing so.

The ‘comply or explain’ approach would also be in effect for wider non-climate sustainability reporting, covering areas such as governance and nature-related issues, with the FCA admitting be a new requirement to many listed companies and may present challenges.

Rather than a mandated transition plan, the watchdog proposes requiring issuers to include a statement in their annual report, in which they would disclose if they had such a plan and if so where it could be found.  Explaining why not would be required for companies which do not have a plan.

The FCA also proposes requiring companies to disclose if they have received third-party assurance on sustainability disclosures, with an exception for international firms which have their primary listing in other jurisdictions.  Instead, those companies would be expected to display transparency of their reporting requirements and standards applicable in their primary home.

“Investors have said they value clear, consistent, financially material information about how sustainability risks, and the opportunities they create, could impact company performance and market value,” the FCA said.

“They want relevant and robust disclosures for accurate pricing of securities and to maintain trust and integrity in UK markets. We want to strike the right balance between enhancing transparency and maintaining proportionality by proposing a 'comply or explain' approach for some of the more challenging or new aspects of reporting.”

The consultation will run until 20 March.