The future direction of the UK’s Sustainability Disclosure Regime

The latest review of sustainability disclosures by the Financial Conduct Authority (FCA) brings into focus how investment managers can balance clarity with depth in a field already tangled in overlapping regulations.

“Simplification” is an appealing term. Yet, as the UK prepares to align itself with the International Sustainability Standards Board (ISSB), a pressing question arises: Are we truly simplifying the system for users, or just swapping one form of complexity for another?

The number of regulatory agendas to deal with is already significant. For firms already contending with the UK’s Sustainability Disclosure Requirements (SDR), the EU’s Sustainable Finance Disclosure Regulation (SFDR), and the Taskforce on Climate-related Financial Disclosures (TCFD), this shift won’t be a clean replacement. It may yet be another layer that must coexist with existing obligations. Unless the transition is carefully managed, the prospect of improved disclosure is greatly at risk.

Simplification is not deregulation

ESG disclosures play an essential role in preventing greenwashing and supporting informed investor choices, especially among retail participants. Any reform should aim to make sustainability reporting more navigable and understandable in practice.

There are lessons to be learned. When SFDR first came into effect, it was billed as a breakthrough in transparency. However, its Article 8 and 9 classifications were inconsistently interpreted across the market. The FCA, mindful of this history, has tried to avoid repeating those mistakes through the SDR’s clearer fund categories.

Yet a sudden pivot toward ISSB-aligned reporting could once again unsettle firms still adjusting to SDR. FE fundinfo’s recent Asset Managers Report found that over 37% of respondents said regulatory document production takes up the most internal resources, while more than half (56%) cited fragmented data systems as a core operational challenge. Without a deliberate and measured rollout, moving to ISSB standards risks adding pressure where firms are least equipped to absorb it.

The impacts on retail investors

One persistent flaw in sustainable finance reporting remains the gap between disclosure content and investor understanding.

Whether under TCFD, SFDR, or the forthcoming Sustainability Reporting Standards (SRS), most climate-related reports are still written in terminology for regulators and analysts, making them impenetrable for many retail investors. Lengthy, jargon-heavy documents often obscure rather than illuminate what makes a fund sustainable. For retail investors, this can leave disclosures unreadable and trust in ESG claims uncertain.

The FCA’s introduction of Consumer-Facing Disclosures (CFDs) under SDR is a positive move, but much depends on execution. Global consistency through ISSB is valuable, yet it won’t automatically translate into accessibility. To genuinely serve investors, simplification must mean clearer language, intuitive presentation, and a focus on metrics that make sense to non-experts.

A period of transition

The UK’s migration from TCFD to ISSB is expected to unfold in stages, but asset managers are already feeling the strain. Many are still refining their TCFD processes, and the prospect of replacing or running them in parallel with ISSB-aligned frameworks poses resourcing and data integration challenges.

There’s also the challenge of the UK’s upcoming sustainability reporting standards (SRS), which are set to incorporate ISSB principles while reflecting domestic priorities. The key uncertainty is how closely it will track the ISSB and where it might diverge. For firms also subject to SDR or SFDR, even minor differences could multiply reporting complexity.

The reality is that many asset managers will continue to operate across multiple regimes. Global players already face the challenge of reconciling UK SDR with EU SFDR; adding ISSB and SRS to the mix compounds the difficulty. Unless interoperability is hard into these frameworks, firms risk producing inconsistent disclosures.

See also: SDR flows: The story so far

The divergence dilemma

Beyond the technicalities lies a broader strategic concern: regulatory divergence between the UK and the EU. While the FCA has focused on improving clarity and consumer confidence, Brussels is now considering revisions to SFDR that could take it in a different direction.

The UK’s early introduction of sustainability labels could be an advantage, but it also means firms will need to future-proof their systems against potential misalignment. Without conscious coordination, divergence could leave cross-border asset managers juggling two simultaneously evolving frameworks.

Firms investing now in modular, adaptable ESG reporting platforms are likely to find themselves ahead of the curve. Flexibility will be critical, not only for managing ISSB and SRS transitions, but also for adapting quickly when the EU finalises its next set of SFDR reforms.

Smarter, not simpler

The FCA’s desire to simplify sustainability reporting is well-intentioned. Global alignment through ISSB could ultimately benefit firms and investors alike. But “simpler” should not mean “shallower”.

If simplification merely reshuffles complex requirements under a new label, the industry will be no better off. True progress lies in smarter integration, connecting standards across regimes, aligning data definitions and fund labels, and ensuring the information presented actually empowers investors.

That’s the real measure of effective disclosure. And it’s the kind of simplification the UK should strive for as it redefines its sustainability reporting landscape.

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