UK FCA Adopts Comply-or-Explain for IFRS-Based Climate Reporting: What It Means for Global Alignment

Why it matters: The UK was expected to become one of the first major markets to mandate ISSB-aligned climate disclosure for listed companies. By retreating to comply-or-explain, the FCA sets a precedent that other jurisdictions watching the UK’s rollout may follow, potentially slowing the convergence toward a single global baseline for sustainability reporting. For companies operating across borders, the decision adds another variable to an already fragmented disclosure landscape.

What changes for Brazilian companies with cross-border exposure

Brazil’s securities regulator, the Comissão de Valores Mobiliários (CVM), adopted its own ISSB-aligned framework through CVM Resolution 193/2023, which initially allowed voluntary adoption of IFRS S1 and S2 for fiscal years starting in January 2024 and set a path toward mandatory reporting for listed companies from January 2026 onward. In contrast to the FCA’s comply-or-explain route, the CVM’s trajectory has pointed toward full mandatory adoption. Brazilian companies dual-listed or raising capital in London now face a divergence: what Brazil may require as mandatory, the UK will treat as discretionary for the same reporting period.

For Brazilian exporters, asset managers with UK-based funds, or companies in global supply chains that report to UK-listed parent entities, the practical effect is asymmetry. A Brazilian subsidiary might be compelled under CVM rules to produce granular climate disclosures while its UK-listed parent is permitted to explain away the same obligation. This creates a scenario where downstream reporters produce more rigorous data than the consolidated entity is required to present, complicating audit trails and investor comparability.

Who gains and who loses from the FCA’s shift

The immediate beneficiaries are smaller UK-listed companies, particularly those in sectors with limited direct climate exposure. The FCA cited feedback that mandatory disclosure placed disproportionate burdens on these firms and that the resulting data was often of limited use to investors. For these companies, the comply-or-explain model removes a compliance cost without, in theory, depriving the market of material information.

The losers are institutional investors and civil society groups that depend on mandatory, comparable data to assess systemic climate risk across portfolios. ShareAction’s reference to £3trn in UK pension savings illustrates the scale of capital that relies on standardized disclosure. Under comply-or-explain, the completeness of the dataset depends on each board’s willingness to report. Historical experience with the UK Corporate Governance Code (which also operates on comply-or-explain) shows that compliance rates can be high for large companies, but the quality and depth of explanations for non-compliance vary significantly.

What remains undecided

The FCA announced a new consultation on a technical note intended to guide companies on how to apply the comply-or-explain approach proportionately. Until that note is finalized, companies lack specific guidance on what constitutes an adequate explanation for non-compliance. The content of that technical note will determine whether comply-or-explain functions as a genuine flexibility mechanism or as a soft opt-out. Additionally, the interaction between the FCA’s rules and the UK government’s broader sustainability disclosure strategy (including potential legislation beyond FCA-regulated entities) remains undefined. Whether the comply-or-explain approach is a transitional step toward eventual mandatory reporting or a durable policy choice has not been stated by the FCA.

via ESG Today