What’s the news?
The FCA’s UK SRS consultation, rather dryly called “CP26/5: Aligning listed issuers’ sustainability disclosures with international standards”, is now open.
The IFRS Foundation/ISSB S1 and S2 reporting standards have, with relatively few changes, already been consulted upon by the UK government and the outcome of that consultation is expected to be finalised soon.
Around 40 other jurisdictions globally have taken similar steps. Meanwhile in Europe the 27 EU states are putting in place the related sustainability reporting requirements of the CSRD. It is anticipated that businesses will benefit from the interoperability of the various Standards.
Before finalising their own consultation, the UK government gave the FCA the go-ahead to consult on the practical implementation of these sustainability reporting standards. The FCA’s consultation is about how to get the UK SRS up and running so that investors can use standardised corporate disclosures in a meaningful way.
What’s being proposed?
- A set of Standards for UK listed entities reporting sustainability-related financial information useful to investors and markets
- Requirements for reporting on topics deemed material, such as pollution, water, greenhouse gas emissions, workforce, communities, and product stewardship
- Coherent, proportionate and cost-effective implementation of the UK standards
- Mandatory S2 climate reporting from years beginning on or after 1 January 2027, affecting 2028 reports
- A 'comply or explain' approach for many areas, including for transition plan reporting, scope 3 emissions and S1 disclosures
- An optional 1-year transitional relief for reporting scope 3 emissions
- An optional 2-year transitional relief for S1 (the general non-climate/GHG area)
- Assurance compliance with sustainability standards will not be mandatory; however companies must report whether assurance has been obtained, and on what basis
- A statement explaining whether a climate-related transition plan is in place; if there is no transition plan, then you must say why
- The FCA is consulting, with a policy statement expected in Autumn 2026 and the new rules in force from years beginning on or after 1 January 2027.
What does it mean?
The FCA is advocating flexibility and practicality. This suggests the regulator has accounted for the recent astonishingly complex and unpredictable international landscape of reporting regulations. Complex regulation, followed by uncertainty, is not generally beloved of industry. The FCA, however, has ‘read the room’.
Cost must have been a dominant consideration for the regulator in what it proposes. In describing climate and weather variability risks, IFRS Foundation/ISSB S2 requires a company to prepare its disclosures without “undue cost or effort”, and specifies that it should use an approach that is “commensurate with its circumstances”. This is welcome ‘proportionality’ by the FCA, and stems from IFRS Foundation/ISSB S2.
The FCA inserts the “comply-or-explain” approach as a key element of the UK SRS. This also aligns with the cost sensitivity.
Comply-or-explain is generally well-known in UK regulations and acknowledges that non-compliance is not a legal breach, provided it is properly and publicly explained to shareholders. It steers clear of a mandatory "one-size-fits-all" ruling. It allows tailored, context-specific management and supports transparent reporting. It’s an approach that suits mature organisations in mature markets. UK SRS deal with financial and commercial effects on the business because of external physical and market-based environmental-societal pressures and risks. In the current modern industrial age, most listed companies understand the wider externalities stemming from impacts.
Modern risk management and ESG/Sustainability
Behind the FCA’s consultation on how to apply the UK SRS lies a simple point: companies don’t ignore wider environmental, social, economic, and corporate integrity issues, and investors want to understand how they tackle those issues. Whether they are labelled ‘ESG’ or ‘sustainability’, the issues affect business value. They influence costs, fines, reputation, market access, supply chain resilience, business continuity, customer trust, access to capital, liquidity, and growth. Companies that manage these risks well are more likely to create value than erode it. The upside is real — and often underestimated. Credit risk management and evaluation already accounts for many wider risks, and importantly, companies are well-equipped to assess costs relating to impacts such as mitigation controls and adaptation measures.
Today, any news, bad or good, is instantly available, scrutinised digitally, and grabbed by artificial intelligence tools. In our opinion, this all aligns with ‘comply-or-explain’, it "lets the market decide". The onus is on shareholders and stakeholders to judge if an explanation is acceptable. If it is not acceptable, they may then penalise the company by selling shares or taking the issuer to court.
Transparency is the aim of the UK SRS, while the FCA’s consultation on how to implement them aims for practicality. At Friend we support both these principles and will be writing to the FCA to indicate our broad agreement with the proposals. Whether you agree or not, the opportunity to influence is there to be taken.