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2 October 2026
The Financial Conduct Authority (FCA) has dropped plans to make climate disclosures mandatory for listed companies, opting instead to apply UK SRS 2 on a comply-or-explain basis. The move represents a major departure from the regulator's original proposals and raises fresh questions about whether voluntary reporting can provide investors with consistent and comparable climate-related information.
The change is one of the most consequential decisions to emerge from the FCA's long-awaited sustainability reporting framework. While the regulator argues that a comply-or-explain model will support flexibility and international alignment, critics warn it could weaken the quality and comparability of disclosures at a time when investors are seeking more standardised sustainability data.
The most notable change in the FCA's final rules is its decision to apply UK SRS 2, which covers climate-related disclosures, on a comply-or-explain basis rather than making it mandatory as proposed in consultation CP26/5. UK SRS 1, covering broader sustainability disclosures and Scope 3 emissions reporting had already been expected to follow a comply-or-explain model.
As a result, the entire UK SRS framework will now operate under a comply-or-explain approach. The FCA said the change would promote international alignment and comparability while giving companies flexibility to explain how their individual circumstances affect reporting.
The regulator also cited concerns raised during consultation about proportionality and competitiveness. Some respondents questioned whether mandatory compliance with UK SRS 2 would impose disproportionate burdens, particularly on smaller listed companies whose business models are less exposed to climate or sustainability-related risks.
However, support for the overall direction of travel was strong. According to the FCA, 94 of the 110 respondents backed the proposed scope of the sustainability disclosure framework. The consultation summary also noted that many respondents favoured mandatory climate disclosures under SRS 2, arguing that they would improve the availability, quality and comparability of information for investors.
The FCA's decision has drawn criticism from investor advocates who argue that voluntary compliance risks undermining reporting consistency.
ShareAction's Head of UK Policy, Luke Hildyard, warned that a comply-or-explain approach could leave investors and other stakeholders without "complete, reliable and comparable data" if companies opt not to comply. He argued that environmental and social reporting should be "foundational to all corporate disclosure".
Similarly, James Alexander, CEO of the UK Sustainable Investment and Finance Association, said it was disappointing to see a move away from mandatory climate reporting, although he expressed hope that companies would continue to produce high-quality disclosures under the new framework.
Minerva Analytics was among the respondents to the FCA consultation and supported mandatory reporting under UK SRS 2. In our response, we argued that mandatory climate disclosures would better align the UK with the International Sustainability Standards Board (ISSB) framework, which is now being adopted across around 40 jurisdictions.
We also cautioned that voluntary frameworks have historically failed to deliver the consistency investors require. In a previous analysis, Minerva warned that the UK risked undermining its credibility as a sustainable finance centre if it fell behind international peers on disclosure quality. The FCA's decision to make SRS 2 comply-or-explain may intensify those concerns.
The regulator's decision also reinforces questions about the role of comply-or-explain mechanisms more broadly. In our submission, Minerva raised concerns that similar flexibility around Scope 3 emissions reporting could become a permanent feature rather than a transitional measure. We argued that the FCA should set clear expectations on the duration of reporting exemptions and assess whether company explanations contain meaningful implementation plans rather than standardised justifications.
“An indefinite explain option risks locking in the very data gaps the proposed regime intended to address,” said Rina Cindrak, ESG Analyst at Minerva Analytics. "This would be problematic for Minerva and our clients because investors can only hold boards to account on what they can see and compare. The FCA's decision means there will likely be less climate-related information which many investors have long been hoping for."
Explanation can set out planned steps but not when. An issuer can repeat the same explanation without breaching the rules. Alongside this, the FCA has ruled out a post-implementation review, it remains uncertain at which point a persistent gap triggers reconsideration. Whether that locks in data gaps will now depend on how the FCA supervises explanations from 2028.
The FCA's move comes amid broader signs of regulatory retrenchment on sustainability disclosures. The EU has moved to simplify and scale back elements of its corporate sustainability reporting regime, while the US has stepped away from pursuing comparable disclosure requirements. Reports have also suggested that the US has put pressure on European policymakers to weaken green reporting obligations.
Against that backdrop, the FCA's final position reflects a growing tension between maintaining international competitiveness and advancing more comprehensive sustainability reporting standards.
The new requirements will apply to accounting periods beginning on or after 1 January 2027, with the first reporting cycle taking place in 2028. The FCA is also consulting on a Technical Note intended to help companies apply the comply-or-explain framework proportionately, with feedback open until 28 October. A regulator-hosted webinar on 19 October will provide further guidance on the updated requirements.
The success of the FCA's compromise will ultimately depend on how companies use the discretion it provides. If most issuers comply, the UK may still achieve a degree of consistency with international reporting standards. If explanations become commonplace, however, investors could face a more fragmented disclosure landscape than the FCA originally envisaged. The implementation period will therefore provide an early indication of how committed the UK remains to internationally comparable sustainability reporting.
