UK
Sustainability-related initiatives are set to continue in the UK, with the government having identified sustainable finance as a growth-driving sector of the UK economy in its Modern Industrial Strategy: “The transition to net zero is the economic opportunity of the century, one which will bring significant benefits for households, communities, businesses, and the economy through good jobs, growth, energy security and lower bills. Global competition to gain a foothold in rapidly growing markets for clean energy technologies, green services and sustainable finance is intensifying. Countries that leverage their natural strengths, technological edge, and skilled workforce will seize the economic prize of the net zero transition. The UK is perfectly placed to do this…”
That said, however, the regulatory landscape has become highly nuanced, with competing drivers. A key focus for the UK at present is as follows: reducing the burden on business, stimulating economic growth, rebalancing the approach to risk, and international competitiveness.
Disclosure and reporting
After a slow start, the UK is expected to make progress in 2026 on the introduction of Sustainability Reporting Standards (UK SRS). In 2025, the government conducted a consultation seeking views on exposure draft standards UK SRS S1 and S2, based on standards published by the International Sustainability Standards Board (ISSB). The UK SRS will be the foundation for the UK’s future sustainability disclosures regime. Following this consultation, the intention is for the standards to be available for voluntary use at the outset, with further consultations planned on how the UK SRS should be integrated into UK law and which entities should be within scope.
Following on from the government’s consultation, the Financial Conduct Authority (FCA) proposes to consult on adopting the UK SRS for UK listed companies.
Transition plans
A related consultation in 2025 sought views on the government’s manifesto commitment on the theme of transition planning. The goal is to support an orderly transition in line with global climate goals, enhance transparency for investors, promote efficient capital allocation, and support companies in capturing net zero-related opportunities. It is also to support the growth of the UK’s financial services industry by ensuring its sustainable finance framework is internationally competitive and maintains the UK’s status as a global financial hub.
The government will consider feedback to the consultation before bringing forward a “package of coherent and proportionate proposals that considers the UK's regulatory landscape as a whole”. So far at least, it seems likely that this workstream will not move at pace, but it is possible we will see next steps emerge in 2026.
In terms of the FCA’s approach, the December 2025 regulatory initiatives grid suggests that the FCA’s consultation on UK SRS will include a proposed approach to transition plan disclosures. However, it is unclear if the FCA will stick with this or delay until the position of the UK government is clear.
Transition finance
The Transition Finance Council launched a consultation in November 2025 on draft guidelines for transition finance and an implementation handbook. The consultation closes on January 30, 2026, with final versions likely to be published in the spring.
The council was launched in February 2025 by the City of London Corporation and the UK government to drive forward the recommendations set out in the 2024 UK Transition Finance Market Review. The draft guidelines set out four key principles that each address a dimension of credibility. These are supported by “universal factors” containing practical criteria for assessing whether the principles are satisfied. The principles are as follows: credible ambition, action into progress, transparent accountability, and addressing dependencies.
Stewardship code
The Stewardship Code was originally introduced in the UK in 2010, with an update in 2020. The latest version represents an overhaul of the 2020 Code, with a number of material changes having been made to (among other things) reduce the administrative burden on relevant firms. This is consistent with a general theme in UK (and EU) regulation at present, namely to streamline and simplify, taking a more pro-business approach to facilitate economic growth.
The new code applies from January 1, 2026.
The code sets out core principles of effective stewardship for asset owners and managers, as well as the service providers that support them (e.g. investment consultants and proxy advisors).
Becoming a signatory to the code is voluntary. However, most UK regulated asset managers that have professional clients must disclose on their website the nature of their commitment to the code or (if they do not commit to it) their “alternative investment strategy”.
The process for becoming a signatory is set out on the Financial Reporting Council's website and includes the submission of a report and an assessment process.
ESG ratings
The UK government’s proposal to bring ESG ratings providers into the UK “regulatory net” has similarly taken time to come to fruition, with the initiative first announced in 2022. The Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025 has now been laid before Parliament, with most of its operative provisions effective from June 29, 2028. This allows time for relevant firms to obtain authorisation, and for the FCA to introduce relevant regulatory rules.
To that end, the FCA has issued a consultation which closes on March 31, 2026. The FCA is expected to publish final rules in Q4 2026. The gateway for authorisation applications will open in June 2027, with a six-month pre-gateway support period provided prior to that time for ESG ratings providers proposing to submit an authorisation application.
Key areas of focus in the consultation are transparency, systems/controls, governance and conflicts.
Other initiatives
For completeness, it is noted that, throughout 2026, the FCA is likely to continue to monitor the industry’s implementation of its entity and product level reporting regime, and ESG labelling regime, which began to take effect in 2024. It is also likely to continue to monitor developments in relation to greenwashing, in conjunction with the Competition and Markets Authority (CMA) and Advertising Standards Authority (ASA).
On the other hand, HM Treasury announced in 2005 that it would not take forward proposals to develop a UK taxonomy similar to that in force in the EU. The FCA also announced it would not take forward its proposal to extend its ESG product labelling regime to portfolio management. These initiatives will therefore not be taken forward in 2026.
EU
Progress on various sustainability-related initiatives is set to continue in the EU throughout 2026. Similar to the UK, however, the regulatory agenda is highly nuanced at present, with a focus on reducing the burden on business (through simplification and other measures), and enhancing economic growth and competitiveness, as well as energy security (given current geopolitical tensions).
The upshot is that a number of ESG-related initiatives have been delayed, pared back or revisited. Certain other actions to be taken by the European Commission (Commission) or other bodies have also been deprioritised.
CSRD, CSDDD and taxonomy
Throughout 2025, work progressed on an omnibus package of changes to the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), the EU Taxonomy Regulation and related law, with the goal of simplifying certain ESG-related laws and regulatory requirements. One key aspect of this package was a directive to delay the start date of certain requirements. This entered into force in 2025, with member states required to transpose it by December 31, 2025.
Another key aspect of the package was a directive to make certain substantive changes, including a reduction of the companies in scope of CSRD and paring back various aspects of CSDDD to reduce the impact and compliance burden. Work on this directive occurred throughout 2025, with certain final steps still to be taken in early 2026 before the directive can be said to have come into force. Member states will have 12 months to transpose it into national laws, with the directive entering into force 20 days after publication in the Official Journal.
A delegated regulation (Commission Delegated Regulation (EU) 2026/73) was adopted in relation to the Taxonomy Regulation to simplify the content and presentation of information to be disclosed and certain technical screening criteria for determining whether the DNSH (do no significant harm) test is met. The Delegated Regulation came into force on January 28, 2026, but applies from January 1, 2026.
In parallel, the Commission has published a call for evidence on proposals to further amend the taxonomy regime through two delegated regulations that would amend certain technical screening criteria that has proved complex or difficult to evidence in practice. The call for evidence closed in December 2025, with the Commission indicating a planned adoption date of Q2 2026.
The Commission proposes to adopt a new delegated act to revise the new European Sustainability Reporting Standards (ESRS), to clarify and simplify the requirements, reduce the number of mandatory datapoints and delete voluntary disclosures. This seems likely to be adopted in Q2 2026. In the interim, a delegated act was introduced as a “quick fix” to (among other things) defer certain obligations and introduce phase-in provisions.
The Commission will also work in 2026 on various guidelines contemplated by the overall regime, including targeted assurance guidelines in relation to CSRD, and guidance and best practice on how to conduct due diligence processes for the purposes of CSDDD. Other guidelines required to be published relate to the assessment of risk factors, how stakeholders are to engage with the due diligence process, and climate transition plans.
ESMA work plan
For 2026, the European Securities and Markets Authority (ESMA) aims to support the Commission’s efforts:
- in streamlining sustainability-related requirements, making the regulatory framework more consistent and effective and not creating unnecessary burden
- to monitor ESG market developments and update risk assessments
- to promote effective and consistent integration of sustainability-related factors in supervisory and convergence activities
- to maintain investor confidence in ESG investments by promoting high quality sustainability disclosures and addressing the risk of greenwashing
- to contribute to facilitating the financing of the transition towards a more sustainable economy, while preserving a high level of investor protection as well as market integrity and financial stability.
Among other things, ESMA proposes to continue to review the EU rulebook to increase its effectiveness and support the reduction of unnecessary burden for market participants; it will devote specific attention to transition finance, it will build on the greenwashing reports it has prepared, and it will develop practical and digital supervisory and convergence tools.
ESG ratings
The EU’s new regulation on ESG ratings contains new regulatory requirements for ESG rating providers operating in the EU. It came into force on January 2, 2025 and will begin to apply from July 2, 2026. Going forward, ESG ratings providers must be authorised by ESMA, but certain transitional provisions will apply for the benefit of firms already in operation.
Among other things, ESG ratings providers will be subject to certain independence, conflicts and governance requirements, as well as requirements in terms of the methodologies they apply to formulate ratings. Transparency requirements will apply, with mandatory disclosures required to be made on certain matters to the public, to subscribers of ESG ratings and to rated entities. The regulation has some extraterritorial effect: a third country firm must comply with a regime on equivalence, endorsement or recognition to be able to provide ESG ratings into the EU.
New EU green bond regime
The EU’s Green Bond Regulation has applied (for the most part) since December 21, 2024. The regime introduces the European Green Bond label as a designation which can be used on a voluntary basis by bond issuers. Issuers seeking to use the label must comply with various requirements, including the requirement to have certain applicable disclosures reviewed.
Firms wishing to provide external reviewer services after June 21, 2026 must be registered with ESMA.
Prior to this time, a transitional period applies. During this period, firms can provide external review services for EU Green Bonds after notifying ESMA and providing certain information to ESMA as specified in the regulation. External reviewers operating during this period are also required to comply with certain requirements on a best efforts basis.
SFDR 2.0
In November 2025, the Commission published a proposal to amend the Sustainable Finance Disclosure Regulation (SFDR). This was far reaching, with the Commission proposing to remove the entity-level disclosures on principal adverse impacts and remuneration, to remove advisers and portfolio managers from scope, and to simplify and significantly shorten product level disclosures.
The Commission also proposed introducing a categorisation system for relevant products, with three levels (sustainable, transition, ESG basics). Everything else would fall with a new Article 6a. Only financial products categorised as sustainable, transition or ESG basic could include sustainability-related claims in their names and marketing communications, and claims in names and marketing communications would have to be clear, fair and not misleading. Various other requirements would apply, as well as transitional provisions.
Negotiations with the European Parliament and the Council on SFDR 2.0 are yet to begin and it is not yet clear what position they will take. This will hopefully become more clear in the next 6–12 months.
Prudential
Although climate-related financial risks remain of concern to regulators and supervisors generally, the focus of international standard setters has subsided. The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) is, however, expected in 2026 to update the 2020 Guide for Supervisors to provide a set of recommendations and good practices on the supervision of climate- and nature-related risks.
With respect to the pillar 3 disclosure framework proposed by the Basel Committee on Banking Supervision (BCBS) in late 2023 for implementation by January 1, 2026, in the summer of 2025 the BCBS concluded that a voluntary disclosure framework for jurisdictions to consider was more appropriate. This means that jurisdictions must consider for themselves whether, and how far, to require banks and other entities to disclose qualitative and/or quantitative information about the climate-related financial risks they face.
UK
In December 2025, the Prudential Regulation Authority (PRA) published a new supervisory statement setting out its expectations for firms’ approaches to managing climate-related risks. It replaces the PRA’s 2019 supervisory statement on the same topic. Described as “another step in the PRA’s work to support the enhancement and maturation of banks’ and insurers’ approaches to managing climate-related risks”, it requires firms to carry out an internal review of their current status in meeting the updated expectations by June 3, 2026. As part of this internal review, firms should identify the expectations that require further work for them to meet, and develop a plan for how they will address any gaps.
EU
The ECB’s supervisory priorities for 2026–2028 include ensuring prudent management of climate and nature-related risks. EU banks are expected to effectively assess and manage short-, medium- and long-term risks stemming from climate and nature crises, and remedy persistent shortcomings in their related risk management frameworks.
Directive 2024/1619 (CRDVI) contains requirements to improve the way banks measure and manage ESG risks, and to ensure that markets can monitor what banks are doing. CRDVI was published in the Official Journal in June 2024 and members states have until January 10, 2026 to transpose the requirements into national legislation, with a general application date of January 11, 2026. As at December 31, 2025, however, all but two member states were still to finalise their legislation transposing the directive.
Credit institutions will require robust strategies, policies, processes and systems for the identification, measurement, management and monitoring of ESG risks over an appropriate set of time horizons. EU banks are required to develop prudential transition plans which will be reviewed by supervisors in accordance with the European Banking Authority’s (EBA) guidelines on the management of ESG risks, which also apply from January 11, 2026.
2026 will be the first year in which all EU credit institutions need to develop and monitor the implementation of specific plans to address the financial risks stemming from ESG factors in the short-, medium- and long-term, which should contain quantifiable targets and processes. Competent authorities will start to assess these plans, considering the specifications introduced by the EBA guidelines.
The EBA expects emphasis to also be put on the work institutions should perform to include ESG risks in their regular risk management and remuneration policies and practices and to test their resilience to negative impacts of ESG factors using different scenarios and time horizons. The ECB states that “supervision will take a gradual and targeted approach, focusing on the new elements from [the] guidelines, first via informal dialogues with the banks that will be followed by a thematic review. Supervisors will also continue to monitor banks’ compliance with Pillar 3 disclosure requirements for environmental, social and governance-related issues and perform a targeted review of their physical risk disclosures”. The EBA has also published guidelines on environmental scenario analysis which are set to apply from January 1, 2027.
