The FCA has let UK boards explain their way out of climate reporting. Your EU subsidiary can't do the same.

On 30 September the Financial Conduct Authority gave every UK-listed board a way out.

In January the plan was mandatory climate reporting from 2027. Policy Statement PS26/19 drops it. UK SRS S1 and S2, the British versions of the ISSB standards, will apply on a comply-or-explain basis. All of it. Scope 3 gets a year's grace, and the rest of S1 gets two.

Some finance directors will hear "optional". They shouldn't.

If your group owns a large EU subsidiary, the EU half of your reporting did not get any softer last week. It got finalised. The revised ESRS were published in the Official Journal on 21 September. They are mandatory from 2027, built on double materiality and subject to an assurance opinion. An auditor in Frankfurt or Amsterdam will check your climate numbers, whatever you decide to explain in London.

And "explain" now has a rulebook. The FCA is consulting until 28 October on what a credible explanation must contain, and the draft is tougher than the word suggests.

That leaves you with a choice the FCA never mentions: run two climate reports, or build one and publish it twice. We think the answer is one. Below is the reasoning, and the things to settle before the consultation closes.

What the FCA actually decided

Start with what did not change. Premium-listed UK companies have reported against TCFD on a comply-or-explain basis since January 2021, and standard-listed ones since January 2022. PS26/19 therefore takes nothing away. The FCA has declined to tighten the rules, which is a different thing from loosening them.

• UK SRS S2 climate disclosures (excluding Scope 3):
  
  • CP26/5 (January 2026): Mandatory
  • PS26/19 (30 September 2026): Comply or explain
    
• Scope 3 emissions:
  • CP26/5 (January 2026): Comply or explain, 1-year relief
  • PS26/19 (30 September 2026): Comply or explain, 1-year relief
• UK SRS S1 (non-climate):
  
  • CP26/5 (January 2026): Comply or explain, 2-year relief
  • PS26/19 (30 September 2026): Comply or explain, 2-year relief
• International secondary listings and depositary receipts:
  
  • CP26/5 (January 2026): Signpost home-country reporting
  • PS26/19 (30 September 2026): Report against UK SRS, comply or explain
• Assurance:
  
  • CP26/5 (January 2026): Disclose whether obtained, by whom, to what level and standard
  • PS26/19 (30 September 2026): Unchanged: disclosure only, no mandate
• Start date:
  
  • CP26/5 (January 2026): Periods beginning on or after 1 January 2027
  • PS26/19 (30 September 2026): Unchanged, with first reports in 2028

The FCA's reasoning is short. Respondents warned that mandatory S2 would weigh on smaller listed companies whose business models barely touch climate, and would produce disclosures "of limited use to investors". The FCA also rejected a size threshold, on the grounds that "energy and transport companies, regardless of their size, are likely to be highly impacted by climate risks."

The FCA's own cost-benefit analysis shows the trade-off. The final rules save business £100m compared with the January proposal. They are also worth about £60m less to the market in net present value, because companies that explain "may provide less complete, consistent, and comparable disclosures". The regulator has put a price on explaining, and investors are the ones who absorb it.

Investors noticed. Buy-side firms were among the strongest supporters of a mandate. Many who accepted comply-or-explain called it appropriate "at this stage" and asked for a review point after two to five years. The FCA says it will keep the rules under review. In practice, you get comply-or-explain until the FCA decides it has seen enough explanations.

Why "explain" costs more than it sounds

You lose the sentence investors look for

Annex 1 of the draft Technical Note 803.1 is the part most boards will miss. A company that explains on any UK SRS S2 requirement "cannot make an explicit and unreserved statement of compliance" with the standard. Using the transitional reliefs does not count against you. If you take the Scope 3 deferral and meet everything else, you keep the statement, and you say which relief you used. The reliefs are free. An explanation costs you the compliance statement.

The explanation has a template

Under the draft, an S2 explanation must summarise the requirements you have not met (headings or paragraph numbers are enough), give your reasons, and say whether you plan to disclose in future. The FCA wants it "clear, concise and cogent" and "issuer-specific" rather than generic. Its own worked example is a company that has not disclosed Scope 3 (paragraph 29(a)(vi)) or targets (paragraphs 33 to 37). The company says it is working with suppliers on the data, and it does not expect to set quantitative targets before periods beginning 1 January 2029. That is the standard to meet. "We are assessing our approach" falls short of it.

Your principal risks are already on the record

The policy statement reminds issuers of DTR 4.1.8R. Where climate is among your principal risks and uncertainties, you "should consider how this is appropriately reflected" when you choose to explain. Suppose your risk register names climate and your sustainability section explains away scenario analysis. Then two pages of the same annual report contradict each other. The FCA and the FRC share the job of monitoring these rules, and the FCA will publish its supervisory approach in the second half of 2027, before the first reporting season.

The EU half of your group is assured

Any EU subsidiary with more than 1,000 employees and more than €450m in net turnover reports under the ESRS, with limited assurance. Suppose your Dutch subsidiary publishes assured greenhouse gas figures under ESRS E1, while the London parent explains that it "could not obtain sufficient Scope 3 data". An analyst will find both documents in ten minutes, and the explanation will not survive the comparison.

One data model, two reports

The good news is that most of the work overlaps. EFRAG and the IFRS Foundation mapped every IFRS S2 paragraph against the ESRS in their joint interoperability guidance of May 2024. EFRAG concluded that companies reporting under ESRS "will to a very large extent report the same information as companies that use ISSB standards" on climate. The revised ESRS moved further towards the ISSB, including new reliefs on anticipated financial effects.

• Legal Status:
  
  • ESRS E1 (EU subsidiary or EU sub-group): Mandatory once in scope
  • UK SRS S2 (UK-listed parent): Comply or explain
    
• Materiality:
  • ESRS E1 (EU subsidiary or EU sub-group): Double: impacts and financial
  • UK SRS S2 (UK-listed parent): Financial only
• Assurance:
  
  • ESRS E1 (EU subsidiary or EU sub-group): Limited assurance required
  • UK SRS S2 (UK-listed parent): Not required; you must disclose whether you obtained it
• First period:
  
  • ESRS E1 (EU subsidiary or EU sub-group): Financial years beginning on or after 1 January 2027 (revised ESRS)
  • UK SRS S2 (UK-listed parent): Accounting periods beginning on or after 1 January 2027
• Boundary:
  
  • ESRS E1 (EU subsidiary or EU sub-group): The EU entity and its subsidiaries
  • UK SRS S2 (UK-listed parent): The whole listed group

The overlap only works in one direction. Build to ESRS E1 and you hold almost everything UK SRS S2 asks for, plus the impact disclosures the FCA does not require. Build to UK SRS S2 and the EU side is left short. So the stricter standard should be your data model, and the FCA report should be one output from it.

Where the overlap ends

The 2024 guidance maps the 2023 ESRS, and nobody has yet published an updated map for the revised text. Do your own paragraph check rather than relying on a vendor's mapping tool. The boundaries also differ. Your UK report covers the whole group, and your ESRS statement covers the EU entity and its subsidiaries, so the same methodology will still produce two sets of numbers. Reconcile them before the analyst does.

The parent-level question arrives in 2028

For larger groups, the question then moves up to the parent. A non-EU group with more than €450m of net turnover in the EU and an EU subsidiary or branch above €200m must publish a group-level report under ESRS-40a for financial years from 1 January 2028. The first reports are due in 2029. Climate is reported globally. For other topics the group can limit itself to EU-related impacts. EFRAG's consultation on the draft closes on 31 October, and its worldwide outreach webcast is on 12 October.

Within two reporting cycles, a UK parent can therefore end up publishing a comply-or-explain UK SRS report built on financial materiality and a mandatory ESRS-40a report built around impacts. Those are two reports on one company, with one set of underlying climate data. You can build that data once, or have two teams build it twice.

There is a shortcut for the subsidiaries. Under the amended CSRD, an EU subsidiary can skip its own report if it is included in a consolidated parent report that fully complies with the ESRS. A UK SRS report does not qualify. The Commission would first have to declare UK SRS equivalent, and no such decision exists.

What to do before 28 October

1. Run a UK SRS S2 gap check against what your EU subsidiaries already report under ESRS E1, paragraph by paragraph. Anything already assured in the EU belongs in the UK report as compliance, not as an explanation.
2. Decide which UK SRS items you will explain, and write the decision down. For each one, state the paragraph, the reason and the date you expect to disclose, then test it against draft TN 803.1. If an explanation contradicts your principal risks or a number your EU subsidiary publishes, the problem lies in your data, and an explanation will not fix it.
3. Put one yes-or-no question to the audit committee: do we want the unreserved compliance statement for UK SRS S2? Relying only on the transitional reliefs keeps it. Any explanation loses it.
4. Ask your assurance provider for one quote that covers ESRS E1 at subsidiary level and UK SRS S2 at group level. The FCA makes you disclose who assured what, and to which level and standard. Reporting no assurance at all is also a disclosure investors will read.
5. Check your ESRS-40a position (more than €450m of EU turnover, plus an EU subsidiary or branch above €200m) before 31 October. If you are close to the thresholds, join EFRAG's webcast on 12 October.
6. Respond to Primary Market Bulletin 66 by 28 October at primarymarketbulletin@fca.org.uk. The FCA asks directly whether you agree with its expectations for explaining. The draft covers international companies that rely on home-country reporting. It says nothing about UK companies whose subsidiaries report under the ESRS, and you can tell the FCA what that case needs.

The FCA has taken the mandate off the table "at this stage". Respondents have already asked when the FCA will look again. Build the climate report you would need if the mandate came back, because for the EU half of your group the obligation is already in force.

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