ESG Regulatory Essentials

IFRS guidance on climate-related transition disclosures

The IFRS Foundation has published guidance on climate-related transition disclosures, including transition plans, as part of its commitment to supporting the implementation of its sustainability standards. The guidance is intended for use by jurisdictions that intend to adopt the ISSB standards, specifically IFRS S2, as part of local requirements. The IFRS Foundation will continue to monitor disclosures provided by entities applying IFRS S2 and will consider further enhancements to its guidance accordingly. The guidance is not binding and there are no immediate actions for firms, but the content may be useful in assisting them in making transition-related disclosures.

UK Government consultation on transition plans

As part of London Climate Action Week, on 25 June the UK government launched consultations on transition plans, the UK Sustainability Reporting Standards (SRS) and sustainability reporting assurance. For more information, see the article below.

TPR and net zero transition risks

The Pensions Regulator (TPR) will work with industry stakeholders to develop and test a voluntary template for transition plans. The template will draw on the work of the UK Transition Plan Taskforce (TPT) and will be tailored specifically to occupational pension schemes. At present there are no requirements to mandate transition plans for occupational pension scheme providers, but their use can help providers manage transition risks, capitalise on investment opportunities and prepare for the government's goal of transitioning the UK to a net zero nature-positive economy by 2025. TPR will present its template to the Department for Work and Pensions later this year.

SBTi Financial Institutions Net Zero Standard

The Science Based Targets initiative (SBTi) has launched a Financial Institutions Net-Zero Standard – a “science-based, robust, and credible framework that enables financial institutions to align financial flows with pathways to limit global warming and achieve net-zero emissions by no later than 2050”. The voluntary, cross-sector standard was created in consultation with financial institutions and has been designed for institutions of all sizes and geographies to use across their lending, asset owner investing, asset manager investing, insurance underwriting and capital market activities. The SBTi standard is not linked to any regulatory requirements.

EBA revision of product oversight and governance guidelines to address greenwashing

The EBA is consulting until 9 October on revisions to its product oversight guidelines (POG) for retail banking products with ESG features. It proposes to revise the POG to explicitly include ESG and greenwashing considerations for such products, to ensure high standards of business conduct and avoid consumer detriment. The revisions are intended to be proportionate and targeted, adjusting existing requirements related to internal control functions, target markets, distribution channels and information for distributors and manufacturers. The updates also reflect changes introduced by the EBA Founding Regulation in 2019 and the revision of the EBA Guidelines on outsourcing arrangements.

Decision not to proceed with UK Green Taxonomy

Following a 12-week consultation, the UK government has concluded that a UK Green Taxonomy “would not be the most effective tool to deliver the green transition”. Instead, it will focus on other higher priority policies to accelerate investment into the transition to net zero and limit greenwashing. The decision is not surprising, given that feedback from industry was generally not supportive and that firms are already subject to extensive, and increasing, sustainability reporting requirements in the UK. The experience of the EU Taxonomy Regulation, which has been criticised as overly complex and recently been subject to simplification measures (see below), has demonstrated the challenges of applying a sustainability taxonomy whilst also trying to maintain proportionality and international competitiveness.

European Commission measures to simplify EU Taxonomy

The European Commission has adopted a Delegated Act introducing a set of measures to simplify the application of the EU Taxonomy. The amendments are intended to reduce the administrative burden on EU companies while maintaining climate and environmental goals, and will apply from 1 January 2026, covering the 2025 financial year – with an option for companies to start in 2026 if preferred. Key simplification measures include:

• Exempting companies from assessing Taxonomy-eligibility and alignment for non-material economic activities. For non-financial companies, activities are non-material if they account for less than 10% of total revenue, capital expenditure (CapEx), or operational expenditure (OpEx).
• Simplifying key performance indicators such as the green asset ratio (GAR) for financial companies, with the ability to opt out of detailed Taxonomy KPIs for two years.
• Streamlining Taxonomy reporting templates, reducing data points by 64% for non-financial companies and 89% for financial companies.
• Simplifying criteria for “do no significant harm” (DNSH) for pollution prevention and control in relation to chemicals.

UK government consultations on UK SRS and sustainability reporting assurance

At London Climate Action Week, the UK government also launched consultations on the UK Sustainability Reporting Standards (SRS) and sustainability reporting assurance, as part of its work to modernise the UK corporate reporting framework.

The first consultation seeks views on exposure draft UK SRS, which are based on IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. The government proposes six minor amendments to the standards for application in the UK. It also asks for evidence on the costs and benefits of using the UK SRS, to inform future decisions on whether to require entities to report information using the standards.

The second consultation seeks views on a proposal for the planned Audit, Reporting and Governance Authority (ARGA) to be given responsibility for creating a voluntary registration regime for entities that offer third-party assurance services for sustainability-related disclosures. The regime is intended to build trust in the UK sustainability assurance market and support companies in easily identifying appropriately qualified sustainability assurance providers.

EFRAG consultation on revised ESRS exposure drafts

EFRAG is consulting until 29 September on revised and simplified exposure drafts of the European Sustainability Reporting Standards (ESRS). The revisions are part of the European Commission's Omnibus initiative to simplify sustainability disclosures. EFRAG notes that the revised ESRS would cut mandatory datapoints by 57% and reduce the full set of mandatory and voluntary disclosures by 68%. Final technical advice on the standards will be presented to the European Commission by 30 November 2025. For more information, see article below.

TNFD proposals on simplification of ESRS

Alongside the other simplification initiatives from EFRAG (see above), the Taskforce on Nature-related Financial Disclosures (TNFD) has proposed the consolidation of the existing ESRS E2-E5 environmental standards into one integrated ‘E2’ nature standard. The proposal notes that benefits could include:

• A more coherent, conceptually consistent and science-based approach
• Reduction in the reporting burden by simplifying the structure and presentation of the ESRS – including reducing the number, fragmentation and complexity of disclosure requirements without compromising the disclosure of information on all major environmental factors listed in the Corporate Sustainability Reporting Directive (CSRD)
• Potential reduction of duplicated mandatory datapoints in the current ESRS E2-E5 standards
• A clear and structured approach for the double materiality assessment of all nature-related issues
• Improved interoperability with current and emerging global reporting standards on nature-related issues, such as the IFRS S1 Standards

Voluntary sustainability reporting standard for SMEs

The European Commission has recommended the voluntary sustainability reporting standard (VSME), developed by EFRAG in December 2024, for Small and Medium-sized Enterprises (SMEs – companies with fewer than 250 employees) that are not within scope of the CSRD. The Commission notes that the VSME will act as a “value-chain cap” to protect SMEs and other companies not subject to mandatory reporting under the CSRD from excessive information requests. For more details, see below.

FCA report on climate disclosures by regulated firms

The FCA’s review of the TCFD disclosures of asset managers, life insurers and FCA-regulated pension providers found that, in the main, the disclosure requirements have supported firms' consideration of climate-related risk and their integration into decision-making. However, some firms have found it challenging to meet the requirements. The FCA is considering how to streamline and enhance its sustainability reporting framework to ease unnecessary burdens on firms, maintain good client and consumer outcomes and promote international alignment. Key finding include:

• Risk management: the disclosure rules have helped firms consider climate change as a material risk, build their capabilities and integrate it into their strategies.
• Audience: detailed disclosures are helpful for institutional investors but may be too complex for retail investors.
• Accessibility: entity reports are easily accessible from main webpages but product reports are harder to find.
• Data: firms find it challenging to provide quantitative data on forward-looking disclosures, such as scenario analysis.
• Proportionality: firms suggested that the FCA simplify and streamline disclosure requirements, given that they (especially asset managers) are required to report under multiple disclosure regimes.
• Clarity: firms sought clarity on the future of the FCA's TCFD rules given the likely introduction of ISSB-aligned standards in the UK, and have asked the FCA to consider international consistency.

In a related development, the FCA has refreshed its webpage on its sustainability reporting requirements and, notably, has added a new section for asset managers with further information on the interaction between TCFD and Sustainability Disclosure Requirements (SDR) reporting.

FSB climate Roadmap update

The FSB has updated the four pillars in its 'Roadmap for Addressing Financial Risks from Climate Change' to reflect work being undertaken on: firm-level disclosures, data, vulnerabilities analysis, and regulatory and supervisory practices and tools. In the medium-term the FSB will focus on activities such as:

• Coordination of international efforts to ensure that resources of supervisory, regulatory and other financial authorities are used wisely and avoid duplication.
• Information sharing on its own climate-related work.
• Identifying financial stability vulnerabilities.

ESAs consult on integration of ESG risks into financial stress tests

The ESAs (the EBA, EIOPA and ESMA) are consulting until 19 September on draft Joint Guidelines on ESG stress testing, as mandated by the Capital Requirements Directive and the Solvency II Directive. Aimed at competent authorities, the draft Joint Guidelines set out how supervisors should integrate ESG risks when performing supervisory stress tests. They aim to harmonise methodologies and practices among supervisors in banking and insurance, to ensure proportionality, and to enhance the effectiveness and efficiency of ESG stress testing. The final Joint Guidelines are expected by 10 January 2026.

ECB collateral framework to address climate-related transition risks

The ECB is introducing a "climate factor" into its collateral framework to mitigate financial risks stemming from climate change. This is intended to protect the Eurosystem against potential declines in the value of collateral due to adverse climate-related transition shocks. The climate factor will reduce the value assigned to eligible assets pledged as collateral, specifically focusing on marketable assets issued by non-financial corporations and their affiliated entities. This reduction will depend on how susceptible an asset is to climate-related uncertainties, acting as a buffer against financial impacts. The calibration will consider sector-level data from the 2024 climate stress test, the issuer's corporate sector purchase programme (CSPP) climate score and the asset's residual maturity. The new measure will take effect in the second half of 2026 and will be reviewed regularly to adapt to new data, models, and regulatory advancements.

BCBS framework for voluntary disclosure of Pillar 3 climate-related financial risks

The BCBS has published a voluntary framework for the disclosure of climate-related financial risks, including qualitative and quantitative disclosures and bank-specific metrics. It will be for individual jurisdictions to decide whether or not to adopt the BCBS framework. This decision may depend on whether they already have comparable (or more complex) Pillar 3 disclosure requirements (e.g. EU - EBA Pillar 3 disclosures – see below). They may need to weigh the benefits of additional disclosures against political and economic pressures to facilitate growth and international competitiveness. Where the framework is adopted, banks will need to consider their processes for gathering and validating the data for disclosure, and how these fit in with existing reporting/disclosure schedules.

EBA consultation on amendments to Pillar 3 disclosure requirements 

The EBA is consulting until 22 August on amendments to Pillar 3 disclosure requirements on ESG risks, equity exposures and aggregate exposure to shadow banking entities. In line with the European Commission's Omnibus initiative to reduce reporting burdens and simplify sustainability disclosures, the EBA is proposing a new approach to Pillar 3 ESG disclosures based on a firm's type, size and complexity. All banks in scope of the CRR will now be subject to the ESG disclosure requirements, not just large banks. The new approach would be consistent with the ESG disclosure requirements set out in CRR3. The consultation paper also includes new templates and amendments on disclosures relating to shadow banking entities, equity exposures, and non-performing and forborne exposures.

The EBA has also published a no-action letter, asking National Competent Authorities (NCAs) not to prioritise enforcement of some of these disclosures while it finalises the ITS. It will submit the final ITS to the European Commission in Q4 2025.

EIOPA integration of climate change in insurers’ risk assessments

EIOPA has published a statement outlining key findings from its monitoring exercise on how insurers are integrating climate change considerations into their risk management. It found that insurers have made important progress in integrating climate-related risks into their risk management frameworks, but that they also face important challenges including:

• Significant variance in how climate change is assessed across jurisdictions and amongst different insurers, particularly in materiality assessments and scenario analysis
• Firms in countries with comparable climate-related exposures report diverging materiality outcomes, suggesting that insurers with comparable exposures may apply different thresholds, methodologies or levels of ambition when evaluating climate risks – this should be followed up by NCAs
• Limited availability and quality of data to support risk assessments
• Application of long-term scenario analysis remains challenging because of data gaps, modelling uncertainties and misalignment with business planning practices, with many insurers finding it difficult to expand their time horizon beyond that typically used in the ORSA

EIOPA welcomes the progress made by firms but notes that it is important for them to address the continuing challenges. It will host workshops between different NCAs to facilitate improvements in and more consistent ORSA supervision across the authorities.

EIOPA biodiversity risk report

EIOPA has published a report on the identification, measurement and management of biodiversity risks by insurers. Despite the challenges in assessing these risks due to their complexity and interconnectedness with other environmental risk factors, EIOPA notes some promising market practices with around one in every five insurers mentioning biodiversity in their ORSA. The report highlights areas where further engagement will be essential to strengthen the industry’s ability to respond to biodiversity-related risks going forward. EIOPA will engage with stakeholders to:

• Identify areas of action that should be prioritised, such as data availability issues, the development of models and scenarios and risk-based measures to manage biodiversity risk
• Better understand the interplay of biodiversity and climate risks, including the potential benefits of (nature-based) adaptation measures for addressing natural catastrophe insurance gaps
• Build capacity through structured dialogue between supervisors and industry representatives

ESMA notes improvements in supervision of sustainability risks and disclosures

ESMA has completed a Common Supervisory Action (CSA) with EU regulators that examined asset managers’ compliance with two sets of regulations – UCITS and AIFMD requirements on the integration of sustainability risks, introduced in 2022, and the SFDR framework. Findings include good practice, below average practice and non-compliance.

• UCITS and AIFMD requirements: despite identifying some breaches to be addressed, ESMA found that asset managers’ compliance was satisfactory overall, with most firms’ boards and committees taking steps to discuss sustainability matters and the integration of sustainability risks
• SFDR framework: ESMA found significant room for improvement across entity- and product-level disclosures, flagging inconsistencies, vague language and missing or inadequate detail. It noted that any changes resulting from the SFDR review will not be applicable soon – in the meantime, regulators should continue with vigilant supervision of the current rules

Sustainability-related communications

ESMA has published a note on good and poor practice around sustainability-related claims made by firms. No new requirements are introduced, but ESMA sets out four principles for firms to follow, aligned to previous publications from the EBA and EIOPA – that claims should be “accurate”, “accessible”, “substantiated” and “up to date”. Aspects of these principles resemble the FCA’s “four Cs”, set out in FG 24/3. In addition to these general expectations, the note provides “dos” and “don’ts” in relation to ESG credentials, industry initiatives, labels and awards and peer comparisons.

SFDR Q&A

The ESAs have published updated consolidated Q&A regarding technical aspects of the SFDR Delegated Regulation. The new content relates to:

PAI disclosures:

• Q30: The definition of the term ‘water usage’
• Q31: References to ‘per square meter’ in the context of energy consumption and real estate

Financial product disclosures:

• Q29: Disclosure of minimum investments for Article 8 and Article 9 products
• Q30: The calculation of top investments/shares in periodic disclosures

IOSCO report on sustainable bonds  

IOSCO has published a report on sustainable bonds, identifying key characteristics and trends linked to the sustainable bond market and analysing the distinctive features of these bonds compared to their “traditional” counterparts. The report includes information on a wide range of sustainable bond types or labels, the unique risks identified in the sustainable bond market, and practices in different jurisdictions to oversee the market. The findings require no actions by firms but highlight issues and trends for regulators and standard-setters to consider.

IOSCO cites five key considerations to address challenges in the sustainable bond market:

1. Greater clarity in regulatory frameworks, especially regarding alignment with internationally accepted principles and standards to support consistency, build investor confidence and support market participation.
2. Consistency in classification standards or guiding principles across jurisdictions.
3. Greater transparency and ongoing disclosure requirements to promote public accountability and to support market discipline when issuers fail to meet their stated sustainability commitments.
4. Use of independent and credible external reviewers to promote robust assessment and mitigate conflicts of interest.
5. Capacity building, collaboration and knowledge sharing to bridge knowledge gaps in the market and increase understanding of sustainable bonds amongst issuers, investors, intermediaries and regulators.

European Commission Defence Readiness Omnibus

The European Commission has published a 'Defence Readiness Omnibus' which includes a notice on the application of the EU sustainable finance framework to the defence sector. The notice is intended to clarify and ensure compliance of the defence industry with the requirements of the EU sustainable finance framework. It aims to prevent any undue discrimination of the sector in investment decisions and ensure a better understanding of the sector's potential to contribute to social sustainability.

The notice states that 'the Union defence industry is a crucial contributor to the resilience and the security of the Union, and therefore to peace and social sustainability. Given its contribution to resilience, security and peace, the EU defence industry enhances sustainability’.

Firms should review their investment strategies and make appropriate changes if they previously interpreted the SFDR or wider sustainable finance framework as prohibiting defence investment.