The FCA Drops Mandatory Climate Reporting: What Comply-or-Explain Means for SMEs
Will Marshall
Founder
Climate disclosure rules for listed companies have been tightening for several years, and the direction has generally been towards more detail and less discretion. The Financial Conduct Authority has now moved the other way. Its final rules give listed companies the option to explain why they have not made a disclosure rather than requiring them to make it, a change that will shape the sustainability data requests reaching UK SMEs over the next two years.
What the FCA Decided
On 30 September 2026 the FCA published Policy Statement PS26/19, confirming final rules that align listed company disclosures with the UK Sustainability Reporting Standards. UK SRS S1 covers general sustainability information and UK SRS S2 covers climate, and together they replace the TCFD-aligned regime that has applied through the Listing Rules since 2020.
The significant change came in how those standards apply. The FCA had consulted on making climate disclosure under UK SRS S2 mandatory, with flexibility only for the broader S1 standard. Following feedback that a mandatory approach would place disproportionate burdens on smaller listed companies, it extended comply-or-explain to both standards.
The timetable gives companies room to prepare. The rules apply to accounting periods beginning on or after 1 January 2027, with the first reports appearing in 2028. Scope 3 emissions carry a one-year relief and UK SRS S1 disclosures carry a two-year relief, so the fullest picture will not be published until the end of the decade.
Why "Explain" Is Not an Opt-Out
The comply-or-explain label can be misleading. Listed companies remain subject to existing Listing Rules requiring disclosure of principal risks, so a material sustainability risk cannot simply be left out of the annual report.
The FCA has also signalled that generic explanations will not satisfy the rules. Companies choosing to explain must identify what they have omitted, give proportionate reasons, and set out any steps planned to close the gap. The regulator is consulting on a technical note setting out its expectations, with feedback closing on 28 October 2026.
Investor groups have nonetheless criticised the decision. ShareAction warned that comply-or-explain risks leaving stakeholders without complete, reliable and comparable data if some boards choose not to comply, a concern that carries weight given the scale of UK pension money invested in listed equities.
The Scope 3 Question Still Reaches Suppliers
For SMEs, the most relevant part of the standards is Scope 3: the emissions produced across a company's value chain rather than in its own operations. For most listed businesses, Scope 3 is by far the largest share of the total, and it cannot be calculated without information from suppliers.
This is why the comply-or-explain shift does not remove the pressure on smaller businesses. A company that intends to report Scope 3 from 2029 needs supplier data well before then, because baselines take time to build and verify. Larger firms also set their own supplier requirements independently of regulation, as covered in our post on carbon reporting as an SME issue.
What does change is consistency. Where a mandatory regime would have produced broadly comparable requests on a common timetable, comply-or-explain means SMEs will see more variation between customers, with some asking detailed questions early and others asking little for several years.
What This Means for UK SMEs in Practice
The practical implications fall into a few areas.
- Requests will be uneven: Expect different customers to ask for different data in different formats, rather than one standard questionnaire arriving at the same time each year.
- Tenders will move faster than regulation: Procurement teams frequently ask for emissions data and reduction targets regardless of what the reporting rules require, so bid questions remain the most immediate driver.
- Early movers gain an advantage: Suppliers who can provide verified figures quickly reduce friction for their customers, which matters when contracts are being renewed.
- The deadline is further away than it looks: With first reports in 2028 and Scope 3 relief beyond that, there is time to build a credible baseline rather than rushing a weak one.
The Case for Waiting, and Its Limits
There is a reasonable argument for doing nothing yet. Measuring emissions costs time and money, the rules have just been loosened, and an SME with no large listed customers may never receive a formal request.
The difficulty is that the cost of starting is modest compared with the cost of being unprepared when a major customer asks. Research cited in our earlier post on the SME net zero divide found only 13% of SMEs consider themselves genuinely net zero ready, and the gap tends to show up at exactly the wrong moment, during a tender or a contract renewal.
Measurement also has value independent of reporting. Energy and fuel data gathered for a carbon baseline usually reveals cost savings, which is why many SMEs find the exercise pays for itself before any customer asks to see the numbers.
The Path Forward
The FCA's decision softens the regulatory requirement without changing the underlying trend. Listed companies will still report, Scope 3 remains part of the standards, and value chain data will still be requested from the businesses that supply them.
SMEs that treat the next two years as preparation time, rather than as a reprieve, will be in a stronger position when the requests arrive. A measured baseline and a simple reduction plan remain the most useful response, whether the rules require them or not.
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