A quiet year for new regulation but more is on the way – sustainability is the flavour of the month

2026 is set be a fairly quiet year for new UK corporate governance regulation. That said, the regulatory merry-go-round keeps turning; boards must continue to keep pace with the demands of regulation adopted in earlier years.

The FCA has been consulting on proposed new UK Sustainability Reporting Standards (SRS) – see CP 26/5 ‘Aligning listed issuers’ sustainability disclosures with international standards’ – to come into effect for accounting periods starting on or after 1 January 2027. The objective is to align the UK with global standards developed by the International Sustainability Standards Board (ISSB) established in 2021 to unify fragmented climate and non-climate-related sustainability reporting frameworks. MM&K has contributed to the QCA’s consultation response to CP 26/5.

The UK’s existing rules for listed companies’ sustainability disclosures are aligned with the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD was disbanded in 2023 but its rules have been retained.

Rationale for the proposals

The FCA recognises that the TCFD rules have played a role in supporting market integrity and driving up disclosure standards. Its rationale for proposing new UK SRS disclosure rules is that they are necessary to support the Government’s aim to promote international alignment and competitiveness and provide clarity about the future of disclosure in the absence of TCFD.

Comment on proportionality, complexity and cost

A unified Sustainability framework is desirable – even if, currently, some of the world’s most powerful nations, politically and economically, take a different view and do not join the party.

Overall, the proposals are disproportionate (they catch all in-scope companies regardless of size) and potentially increase complexity (provisions relevant for climate-related disclosures, covered by SRS S2, including definitions, are contained in SRS S1). Transitional provisions, available to some companies but not those that choose to adopt UK SRS proposals early, also introduce complexity. Compliance costs will rise, particularly if mandatory third-party assurance for information contained in sustainability disclosures, which will be voluntary initially, is introduced.

The cost/benefit analysis in CP 26/5 points to additional costs for investors when collecting and processing sustainability disclosures, owing to inconsistency and comparability of the information. Direct company engagement and third-party data providers are cited as two of the more costly avenues through which investors obtain extra information; hopefully, not an indication that for investors engagement is seen as a costly exercise to be avoided.

The importance of comply or explain

Initially, at least, all sustainability disclosures under SRS S1 (non-climate-related) and Scope 3 disclosures under SRS S2 will be subject to comply or explain.

Comply or explain is a fundamental concept underpinning UK’s principles-based corporate governance codes. Constructive engagement between issuers and investors is essential for the successful operation of this concept – a point recently reinforced by the UK Stewardship Code 2026.

It would be disturbing, therefore, if, albeit inadvertently, the FCA’s current sustainability proposals were to result in the diminution of comply or explain and direct engagement in favour of third-party assurance. The subject raises many questions, not least about accountability, authorised providers, independence, governance framework and issuers’ compliance costs.

Proxy advisers, whose services are used by many companies, are seen by some as creating more distance between issuers and advisers. A greater reliance on third-party assurance, if it were to result in lower levels of engagement, risks further increasing the gap.

Seemingly, issuers are left in a halfway house, waiting for the outcome of government consultation on mandatory assurance over UK SRS disclosures. Companies thinking about early adoption of the proposed UK SRS rules, which would disqualify them from benefitting from transitional arrangements, might welcome more certainty about requirements regarding third-party assurance before making their decision.

Takeaway

A unified sustainability standard is a desirable goal. However, if introduced unchanged, the current proposals are disproportionate and likely to increase the cost and the burden of regulation, particularly for smaller listed companies which have fewer in-house resources to bear the weight.

There is a faint suspicion that the FCA’s sustainability proposals might have been removed from the oven a little early and could have benefited from more careful thought about key areas, such as third-party assurance and how they fit into the UK’s overall governance framework.

Please contact paul.norris@mmk.com if you would like to discuss this article.

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