The Financial Conduct Authority (FCA) has today (30 September) adopted the UK Sustainability Reporting Standards (UK SRS), bringing mandatory UK sustainability reporting in line with International Sustainability Standards Board (ISSB) standards.

The announcement follows a consultation period in which it accepted representations from businesses, professional bodies and other organisations.

ICAEW’s CEO Alan Vallance welcomed the announcement as “a significant milestone” in the transition to international-sustainability reporting standards in the UK.

What this means for businesses

UK SRS is split into two standards: S1: General Requirements for Disclosure of Sustainability-Related Financial Information; and S2: Climate-Related Disclosures.

S1 covers the disclosure of material information about sustainability-related risks and opportunities. In-scope entities are required to disclose information around the current and anticipated effects of those risks and opportunities on the business model and value chain. The value chain covers all of the relationships, resources and interactions necessary for an entity to create its products and services, from conception to end-of-life. Materiality in this case follows the same principles as IFRS financial reporting.

Under S2, in-scope entities will be required to disclose information specifically about climate-related risks and opportunities that would be useful to general users of financial reports, to inform resourcing and investment decisions. This could include metrics such as greenhouse gas (GHG) emissions, internal carbon pricing, transition risks and capital deployment.

In its consultation response, ICAEW pressed that materiality must remain the central principle guiding sustainability disclosures, as opposed to compliance-driven behaviours.

Who is in scope?

From 1 January 2027, UK SRS reporting will become mandatory for companies listed in the following categories: 

• Commercial companies
• Non-equity shares and non-voting equity shares
• Transition

Separate requirements will apply to companies in the secondary listing and depositary receipts categories. These companies will disclose applicable overseas sustainability reporting requirements or voluntarily adopted standards and signpost relevant disclosures, or state where neither applies. 

The scope will widen to include high turnover private companies and other public interest entities at a future date.

'Comply or explain’ approach for Scope 3

Climate disclosures for Scope 1 and 2 emissions will be mandatory, while Scope 3 reporting will be on a ‘comply or explain’ basis. If a company is unable to disclose Scope 3 emissions data under S2, they will need to: 

• Identify the specific areas of UK SRS S2 where they have not included Scope 3 disclosures.
• Explain the reasons for not making Scope 3 disclosures.
• Outline steps taken – or planned – to ensure disclosures are made in the future, including a realistic timeframe. 

For S1, as the wider scope of disclosures is relatively new, in-scope entities can implement S1 reporting on a ‘comply or explain’ basis. Companies will be expected to explain what wider sustainability issues that they’ve been unable to disclose and why, along with how to rectify those hurdles and when they expect to start reporting.

During the consultation period, ICAEW expressed support for an initial ‘comply or explain’ approach for Scope 3 and S1 reporting as a “pragmatic interim step”, with a clear, feasible pathway for full, mandatory disclosures, including a future review date to formally assess the need for the ‘comply or explain’ approach.

“The proportionality mechanisms built into UK SRS already provide flexibility for preparers and in many cases offer a more appropriate way of addressing difficulties in readiness,” ICAEW said in its consultation response. “If ‘comply or explain’ remains in place for too long, there is a risk that entities may rely on it instead of making full and effective use of these proportionality mechanisms.”

It added that clear regulatory messaging was crucial to ensure that any ‘explain’ disclosures still align with materiality and are capable of assurance, which is consistent with the intent of UK SRS.

The need for assurance

The FCA’s proposals would require companies to disclose whether they have obtained third-party assurance and, where they have, provide details including the provider, information covered, level of assurance and standard used.

ICAEW has welcomed greater transparency as a step towards improving trust and comparability in sustainability reporting. It also supported a phased pathway towards mandatory assurance, initially focused on limited assurance, coordinated with broader government and Financial Reporting Council (FRC) developments. 

“While ICAEW supports the ‘comply or explain’ approach as a pragmatic interim step, particularly for Scope 3 and UK SRS S1 beyond climate-related disclosures, we urge the FCA to move to full mandatory UK SRS reporting as soon as feasible. The UK Government has already carried out a thorough endorsement process for UK SRS S1 and UK SRS S2, with a clear review point to support a timely transition. This would provide market clarity and ensure the UK keeps pace with international developments, remains a centre for sustainable finance, protects consumers and supports economic growth and innovation,” said Vallance.