The FCA Has Gone "Comply or Explain" on Sustainability Reporting. Here's Why Supplier Diversity Data Still Matters

Last week the Financial Conduct Authority (FCA) stepped back from making climate reporting mandatory for listed companies. On the surface, that sounds like good news for anyone worried about workload. But if you work in procurement, supply chain or sustainability, the story is a bit more interesting than "less pressure."

When a rule gets softer, the quality of your evidence usually matters more, not less. That's the bit we want to unpack here, and why having a solid, validated picture of your suppliers is going to be useful as the new reporting regime beds in.

First, What Is the FCA and What Is This Policy?

If terms like "FCA", "UK SRS" or "comply or explain" don't mean much to you, you're not alone. Here's the plain-English version before we get into the detail.

Who is the FCA?

The Financial Conduct Authority is the UK's regulator for financial services firms and financial markets. It's an independent public body that answers to the Treasury and Parliament. It also sets the rules for companies whose shares are listed on UK markets, including what those companies have to tell investors about their business.

What is the policy about?

Investors want to know how climate change and other sustainability issues could affect the companies they put money into. The FCA's policy decides how listed companies have to share that information. The FCA calls the document that sets out its final decision a policy statement, and this one is called PS26/19. It was published after a public consultation, where companies, investors and others gave their views.

A few terms, explained simply

• Listed company: a business whose shares can be bought and sold on a stock market.

• UK SRS (UK Sustainability Reporting Standards): a common set of rules for how companies report on sustainability and climate risks. They are the UK's version of international standards created by the International Sustainability Standards Board (ISSB).

• UK SRS S1 and S2: S1 covers sustainability-related risks and opportunities in general. S2 covers climate-related ones specifically.

• Scope 3 emissions: greenhouse gas emissions that come from a company's wider value chain, such as its suppliers, rather than from its own operations.

• Comply or explain: a flexible approach. A company either follows the rule, or it tells investors why it hasn't and gives its reasoning.

In short, the FCA has decided that listed companies should report on sustainability using the new UK standards, but on a comply-or-explain basis rather than as a strict legal must-do for every company. Now let's look at what that means in detail.

What the FCA Actually Decided

The short version

On 30 September 2026, the FCA published its final rules in Policy Statement PS26/19. They replace the old climate reporting rules for listed companies with requirements aligned to the UK Sustainability Reporting Standards (UK SRS), which are the UK's version of the international ISSB standards.

Here's what matters most:

• In-scope listed companies will report against UK SRS on a comply-or-explain basis. That means they either follow the standard or explain why they haven't.

• The comply-or-explain approach applies across the whole framework, including climate (UK SRS S2) and wider sustainability disclosures (UK SRS S1). The framework is also broader than the old climate-focused rules it replaces.

• The new rules apply to accounting periods starting on or after 1 January 2027, with first reporting in 2028.

• There are transitional reliefs. Companies get one year for Scope 3 emissions disclosures and two years for the wider sustainability disclosures under UK SRS S1.

• The FCA is consulting on a technical note to help firms apply the rules, with feedback open until 28 October 2026, and it's hosting a webinar on 19 October.

Why the regulator backed away from "mandatory"

The FCA had originally proposed making climate reporting mandatory. After the consultation, it dropped that plan following concerns about cost and UK competitiveness. Reporting by smaller companies whose business models aren't materially affected by climate issues was also seen as being of limited use to investors, as ESG Today reported.

The FCA was clear that this doesn't mean sustainability reporting is going away. It expects investor and market demand to keep disclosure going where sustainability matters are relevant to a company's business model and risks.

Not everyone is comfortable with the change. ShareAction, a responsible investment charity, warned that comply-or-explain could leave investors without complete, reliable and comparable data if some boards choose not to comply. That's exactly why the quality of the evidence behind each disclosure is going to get so much attention.

Why "Explain" Is Harder Than It Sounds

It's tempting to read comply-or-explain as a get-out clause. In practice, it's more like a spotlight.

If a company chooses to comply, it needs data that stands up to scrutiny from investors, analysts and its own auditors. If it chooses to explain, it has to give a reasoned account of why it isn't reporting something, and that explanation will be read closely by the same people. Neither route is easy if your underlying data is patchy.

That's the shift worth paying attention to. The question stops being "are we required to report this?" and becomes "can we back up what we say, or what we've decided not to say?"

Where Supplier Diversity Data Fits In

Let's be upfront about what the rules do and don't say

We want to be accurate here. The FCA rules don't create a specific requirement to report on supplier diversity. UK SRS S1 is about sustainability-related risks and opportunities more broadly, and a lot is left to each company's own judgement about what's material to its business.

So this isn't a story about a new box to tick. It's a story about what happens around the edges of the rules, where companies make their own calls about what to say and investors ask their own questions.

Supplier data is already in the spotlight

Scope 3 is about emissions across a company's value chain, so it isn't a diversity measure. But it does mean one thing for procurement teams: they're being asked for better information about their suppliers, and they'll need a way to collect and maintain it.

Once that conversation starts, the same practical questions tend to follow:

• Who are our suppliers, really, and who owns and runs them?

• How many of them are small, regional or diverse-owned businesses?

• Can we show how our spend with those suppliers is changing over time?

• Is the information current, or is it a spreadsheet someone updated eighteen months ago?

For companies that want to tell a credible story about inclusive supply chains, social value or local economic impact, the answer to those questions needs to be something they can defend.

Why spreadsheets and self-declarations struggle

Most procurement teams know this pain. Supplier details sit in different systems, certifications expire without anyone noticing, and self-declared diversity status is rarely checked. It works fine until someone external asks you to prove it.

It's also worth remembering that plenty of diverse-owned businesses don't hold formal certification. That doesn't make them any less diverse, but it does make them harder to spot. At GoDiverse, suppliers in our database are marked as certified, self-certified or identified, so buyers can see how a supplier's status was established rather than guessing.

What a baseline looks like in real life

Avanti West Coast is a good example. They had more than 700 suppliers and little visibility of diversity beyond SMEs and VCSEs. Their drivers were public sector ones, namely Department for Transport SME spend reporting and the Procurement Act 2023, rather than the FCA rules. But the lesson carries over.

GoDiverse analysed 498 of their suppliers without surveying a single one, and found that 37 of them, or 7.4%, were verified as diverse-owned. Just as useful was what Avanti's sustainable procurement manager said afterwards: this data isn't static, and the exercise can't be a one-off. A baseline only helps if you keep it alive.

Why This Reaches Beyond Listed Companies

You might be reading this thinking, "We're not listed, so this doesn't affect us." It's worth pausing on that.

Listed companies sit at the top of long supply chains. When they get more serious about the data behind their reporting, the questions tend to flow downstream to their suppliers. Public sector buyers are already under their own pressure to show results. Procurement makes up about a third of public sector spending, according to the House of Commons Library. The British Chambers of Commerce and Tussell found that direct public sector spend with SMEs in England reached a six-year high of 21% in 2025, but central government departments were still 8.4 percentage points below their new SME spending targets on average. Buyers are being measured on this, and measurement needs data.

For diverse-owned businesses and SMEs, that's an opportunity. Being easy to find, easy to verify and easy to understand puts you ahead of suppliers who make a buyer do the detective work.

What Procurement and ESG Teams Can Do Now

You've got time, but not an endless amount of it. For companies in scope, the first accounting period that counts starts on or after 1 January 2027, so the groundwork is best done now. A sensible way to use the next few months:

1. Work out what you already know

Pull together what you currently hold on supplier ownership, size, location and certification. Be honest about the gaps and about how old the information is.

2. Decide what's material for your business

Comply-or-explain puts the judgement on you. Talk to your sustainability, finance and procurement colleagues about whether supplier diversity and inclusive procurement are part of your story, and if so, what evidence you'd need to support it.

3. Build a validated baseline

A baseline isn't about looking good on day one. It's about having a trustworthy starting point so that progress means something later. Validated data beats self-declared data every time.

4. Keep it alive

Ownership changes, certifications lapse and suppliers grow. A one-off exercise goes stale quickly, so look for ways to keep records current rather than rebuilding them every reporting cycle.

5. Use the FCA's own timeline

The consultation on the technical note closes on 28 October, and the FCA has said it will publish details of its supervisory approach in the second half of 2027, ahead of the first reporting season. Keep an eye on both, and join the 19 October webinar if reporting sits anywhere near your role.

What This Means for Diverse Suppliers and SMEs

If you run a women-owned, ethnic minority-owned, disabled-owned, veteran-owned or LGBTQ+-owned business, or a social enterprise, there's a practical takeaway here. As buyers look for data they can rely on, suppliers with clear, up-to-date profiles become easier to say yes to.

It's worth keeping your company information current, making sure any certifications are up to date, and being visible on platforms that buyers actually use. That's one reason GoDiverse onboards diverse suppliers for free, so that good businesses aren't held back by paperwork or by being hard to find.

Frequently Asked Questions

What is the FCA, and what is this policy?

The FCA, or Financial Conduct Authority, is the UK's regulator for financial services firms and markets, and it sets rules for listed companies. This policy (PS26/19) decides how listed companies report on sustainability and climate risks, using the UK Sustainability Reporting Standards on a comply-or-explain basis.

What does "comply or explain" mean?

It means a company either follows the reporting rule or explains publicly why it hasn't, and gives its reasoning. It's more flexible than a strict legal requirement, but the explanation still gets read closely by investors.

Has the FCA made sustainability reporting optional?

Not quite. The FCA replaced its planned mandatory approach with comply-or-explain across the UK Sustainability Reporting Standards. In-scope listed companies either report against the standards or explain why they haven't.

When do the new FCA sustainability reporting rules start?

The rules apply to accounting periods starting on or after 1 January 2027, with first reporting in 2028. Transitional reliefs give companies one extra year for Scope 3 disclosures and two for wider sustainability disclosures under UK SRS S1.

Do the FCA rules require companies to report on supplier diversity?

No, there's no specific supplier diversity requirement. But companies that choose to talk about inclusive supply chains, social value or supplier data will need evidence they can stand behind, and a validated baseline helps with that.

Why does supplier diversity data matter for ESG reporting?

Because investors, auditors and public sector buyers increasingly want evidence rather than intentions. Accurate, regularly updated supplier data gives procurement and ESG teams a credible baseline to measure progress against.

Does this affect businesses that aren't listed on the stock market?

Indirectly, yes. Listed companies pass data requests down their supply chains, and public sector buyers face their own spending targets and reporting expectations. Suppliers with clear, current information are easier to work with.

The Bottom Line

The FCA's decision gives companies more flexibility, but flexibility isn't the same as less accountability. When reporting becomes comply-or-explain, the strength of your evidence does the heavy lifting. For anyone telling a story about inclusive, resilient and well-understood supply chains, reliable supplier data is what makes that story believable.

If you'd like to see how GoDiverse helps procurement teams build a supplier diversity baseline, take a look at our solutions, book a demo or email us at contact@godiverse.co.uk.