FCA sustainability reporting

The FCA's sustainability reporting framework looks set to be “streamlined and enhanced” following a recent review into the application of climate reporting rules by firms. The FCA has published findings that provide insight on firms' current approach to climate risks, the quality of disclosures, and steps to be taken to strengthen implementation.

 

Highlights from the review

The FCA introduced climate-related disclosure rules for asset managers and asset owners in its ESG Sourcebook in 2022. The rules require in-scope firms to make climate-related disclosures aligned with the recommendations of Taskforce on Climate-related Financial Disclosures (TCFD) in order to promote transparency on climate change and wider sustainability issues along the value chain.

Three years on, the FCA has examined the change in practices by firms around the consideration and disclosure of climate and sustainability risks. Key findings of the review highlight:

• That the rules have increased firms' consideration of climate risks and improved integration of these risks into the firms' decision-making processes, supporting the strategic objective to promote and improve transparency.
• Whilst the rules have increased transparency, the disclosure requirements do not necessarily present information in a way that meets the needs of every audience. Firms observed that the level of detail that is of value to an institutional investor may be too complex or unnecessary for a retail investor and as a result the levels of engagement differ. Any amendments to the regime should therefore improve the “decision-usefulness” of reporting for investors.
• Data challenges continue to persist. Firms have had difficulties in providing quantitative data to support forward-looking disclosures. This has meant that product reports often do not include the level of scenario analysis that is envisaged by the regime.
• The volume of reporting that firms, particularly asset managers, are now required to undertake in order to meet their climate and sustainability disclosure obligations is significant. Each applicable regime (TCFD, the Sustainability Disclosure Requirements (SDR) etc) sets out differing levels of granularity in the information to be reported and as a result, the FCA flagged a desire for sustainability disclosures to be simplified and streamlined.

Following the review, as a first step, the FCA has indicated that firms can look to gain efficiencies across SDR and TCFD reporting by aligning timelines between the two. Firms can then produce one report under both regimes, provided the 12-month reporting period is fully captured and an interim report is issued if necessary to cover any gaps in reporting. The FCA is also considering how to streamline and enhance the sustainability reporting regime, including:

• Simplifying disclosure requirements and easing the burden on firms;
• Maintaining good outcomes for investors and consumers, improving trust and reducing greenwashing; and
• Promoting international alignment whilst maintaining the UK's position as a global leader in sustainable finance.

 

What is next?

In short, changes to the sustainability reporting regime are on the horizon. The FCA's sustainability reporting requirements web page has already been updated to make clear its intention to simplify and enhance the overlapping disclosure regimes as far as possible. The FCA has shown support for the UK Government's consultation on, and publication of, the draft UK Sustainability Reporting Standards (SRS). The FCA has also signalled its intention to consult on the adoption of the SRS by listed companies later in the year and to publish its proposed approach to the disclosure of transition plans.

The FCA will therefore be seeking further engagement from firms to inform its approach to streamlining and enhancing the sustainability reporting regime, strengthening the value of disclosures made to all investors, and reducing regulatory burdens.

 

FCA update: Sustainability-linked loans market

In keeping with sustainability updates from the FCA, the regulator has issued a follow up letter providing an updated view on sustainability-linked loans (SLL) market two years after its initial 2023 review of its uptake. The FCA makes clear that SLLs are “an important part of a bank's transition finance toolkit” and emphasises the FCA's focus on improving both the quality and quantity of their uptake to deliver on transition finance aims.

The FCA's Strategy 2025-2030 emphasises unlocking the financial sector's potential to channel capital into managing net-zero transition risks and opportunities, with the Government's Financial Services Growth and Competitiveness Strategy suggesting opportunities of up to GBP200bn for UK financial services by 2030. Responding to those opportunities, the FCA letter highlights the key market improvements since 2023 as well as the areas for development to unlock this capital for the benefit of net-zero transition. The FCA highlights observations that the market is prioritising better-structured SLLs with meaningful KPIs over volume growth and that banks are applying stricter criteria and declining poorly structured deals. One key improvement is the strengthening of standards and governance to assist banks when assessing SLL criteria. Many banks cite the Loan Market Association's Sustainability-Linked Loan Principles as having raised baseline standards, with regular updates including those published in March 2025 providing clarity.

Looking towards improvements, the FCA has emphasised the need for banks to have clear governance and escalation processes in place for sustainability-linked instruments, with guidelines that allow for consistency across decision-making on sustainability characteristics. Alongside this, action is needed to provide clarity and improve the articulation of how SLLs fit into a bank's sustainable financing targets to ensure trust around the importance and accuracy of their function.

The letter sets out the FCA's commitment to continuing work in this space, and promote the UK's position as a transition finance hub. The delivery of this work alongside the Transition Finance Council will be pivotal to meeting its strategy aims and align across the market.