ESG regulatory essentials

Progress on the EU Omnibus initiative 

The Omnibus 'stop the clock' Directive has been published in the Official Journal of the EU. The proposals, published in February 2025, have progressed at rapid pace and have been approved by both the European Council and Parliament. The measures will delay second and third wave sustainability reporting under the CSRD by two years, and application of due diligence requirements under the CSDDD by one year to July 2028 at the earliest. The Directive came into force on 17 April 2025 and Member States must transpose it into national law by 31 December 2025. Additional omnibus proposals on reducing the scope of and simplifying sustainability reporting are still being considered as part of the legislative process. For more information, see below. 

EFRAG final work plan for ESRS review

In support of the Omnibus initiative, EFRAG is due to deliver revised draft ESRS to the European Commission by 31 October 2025. Its final work plan sets out a commitment to gathering evidence from stakeholders to mid-May, drafting Exposure Drafts in the second half of May to July 2025, and consulting on them and analysing feedback during August and September. EFRAG has already sought advice on:

• ESRS mandatory datapoints that are least important or problematic for general-purpose sustainability, per each disclosure requirement (with separate consideration given to cross-cutting, environment, social and governance matters);
• Suggestions for how to:
  o Modify ESRS provisions that are deemed unclear;
  o Improve consistency with other EU legislation;
  o Improve ESRS provisions on materiality to ensure that undertakings report only material information, do not report unnecessary information and do not dedicate excessive resources to the materiality assessment process;
  o Simplify the structure and presentation of the standards;
  o Enhance interoperability with global sustainability reporting standards further; and
  o Implement other modifications that could simplify the ESRS without compromising their role in supporting the Green Deal.

ISSB publishes Exposure Draft with targeted amendments to IFRS S2 

The ISSB is consulting until 27 June on an Exposure Draft proposing amendments to IFRS S2 to ease greenhouse gas (GHG) emission disclosure requirements. The amendments aim to simplify compliance without reducing disclosure value. Specific examples include:

• Relief from measuring and disclosing Scope 3 Category 15 GHG emissions associated with derivatives and some financial activities;
• Relief from the use of the Global Industry Classification Standard (GICS), in some circumstances, in disclosing disaggregated financed emissions information;
• Clarification on the jurisdictional relief to use a measurement method other than the Greenhouse Gas Protocol for measuring GHG emissions; and
• Permission to use jurisdiction-required Global Warming Potential (GWP) values that are not from the latest Intergovernmental Panel on Climate Change (IPCC).

ISSB and TNFD MoU to integrate nature-related disclosures for capital markets 

The IFRS Foundation and the Taskforce on Nature-related Financial Disclosures (TNFD) have signed a Memorandum of Understanding (MoU) to integrate TNFD recommendations into the International Sustainability Standards Board's (ISSB) work. This collaboration aims to create globally applicable nature-related financial disclosures for capital markets. The ISSB has been a TNFD Knowledge Partner since 2021, and the TNFD has been supporting the ISSB’s Biodiversity, Ecosystems and Ecosystem Services (BEES) research project that commenced in 2024. The MoU will deepen collaboration between the two organisations.

UK Government guidance on best practice examples in sustainability reporting 

HM Treasury (HMT) has published a Best Practice Guide on Climate, TCFD, Environmental & Sustainability, based on observations from 2023-24 Annual Reports and Accounts​.

HMT sets requirements for central government annual reports and accounts (ARAs) – including on environmental and climate performance reporting. The Task Force on Climate-related Financial Disclosures (TCFD) recommendations identify key climate-related information for decision-making and accountability purposes.

The Best Practice Guide aims to provide real-world examples of good practices, highlight areas where reporting often falls short, and offer actionable advice on improving reports. It notes that effective ARAs are concise and tell the story of an organisation’s performance while ensuring that mandatory and material information is conveyed to users. Examples in the guide illustrate specific features of high-quality ARAs.

HMT notes that these may not be relevant for all organisations or situations. It stresses that the good practice examples are not intended as templates. Instead, they should be used to "inspire, to expand, and to improve an organisation’s own disclosures". Flexibility in reporting allows organisations to decide how best to communicate the right information to users.

European Commission call for evidence on the SFDR

The European Commission is seeking evidence to inform its Q4 2025 review of the Sustainable Finance Disclosure Regulation (SFDR). This aims to improve the functioning of the SFDR by clarifying the framework for firms and end-investors, and reducing the burden of reporting by simplifying and streamlining the requirements. The review will also take account of wider proposed changes to reporting obligations under the CSRD and EU Taxonomy. The call for evidence window is short, closing on 30 May.

FCA update on SDR for portfolio managers

The FCA has announced that it will no longer publish a policy statement in Q2 2025 on extending its Sustainability Disclosure Requirements (SDR) to portfolio management services, including wealth management, saying that now is "not the right time".

Although the SDR rules for UK funds were finalised in December 2023, a policy statement on SDR for portfolios has been expected since CP 24/8 was launched in April 2024. The FCA will instead focus its resources on carrying out the planned multi-firm review on model portfolio services in the context of the Consumer Duty. This announcement comes hot on the heels of the FCA's feedback on DP 23/1 (see below). The FCA's pause also likely reflects the very challenging implementation of SDR for fund managers and lessons to be learned.

ESG-related fund name changes and their impact on investment flows

ESMA has published a report, exploring how the decision to incorporate ESG or sustainability-related terms in a fund's name can lead to additional investor interest, potentially incentivising greenwashing behaviour. ESMA found that adding an ESG term can significantly boost fund inflows, with environmental-related terms showing the most substantial effect on inflows. ESMA plans to continue to monitor fund market trends and the impact of its ESG naming guidelines (effective from 21 May 2025 for existing funds).

Simplification of ESG disclosure rules for benchmarks administrators 

ESMA has published the findings of a Common Supervisory Action (CSA) on ESG disclosures required under the Benchmarks Regulation (BMR). The CSA, launched in December 2023, aimed to assess how benchmark administrators in the EU comply with BMR ESG disclosure requirements and to promote consistent supervision. Key findings include divergent practices in calculating and disclosing ESG factors due to a lack of specific guidance, inconsistent underlying assumptions and low data coverage for certain social factors.

The report provides clarifications on transparency expectations, guidance on definitions and methodologies for calculating ESG factors, and recommendations for potential amendments to the BMR to streamline disclosure requirements while ensuring data quality and comparability. It also highlights the importance of data coverage transparency, urging administrators to disclose coverage levels for all calculated ESG factors and explain low coverage instances.

ESMA advocates for aligning ESG factor calculations with other sustainable finance regulations and standards, such as the CSRD, SFDR and EU Taxonomy, to ensure consistency and comparability.

The report concludes by outlining ESMA's plan to continue working with National Competent Authorities (NCAs) on follow-up actions, including potential supervisory convergence tools and technical advice to the European Commission for future BMR amendments. 

PRA proposes updates to SS3/19

The PRA has published its promised consultation setting out expectations for enhancements to banks’ and insurers’ approaches to managing climate-related risk. CP10/25 comes with a draft supervisory statement which will replace SS3/19.

The PRA notes that, since the publication of SS3/19, banks’ and insurers’ progress in building their climate-related risk management capabilities has been “uneven”. CP10/25 sends a clear signal that more work is needed, and that the PRA intends to keep climate-related risk high on the supervisory agenda. The CP comprises 7 chapters, covering governance, risk management, climate scenario analysis (CSA), data, disclosures and banking- and insurance-specific issues.

The consultation will close on 30 July 2025. Once finalised, the updated Supervisory Statement is intended to take immediate effect. For more information, see the article below. 

NGFS short-term scenarios 

The NGFS has published short-term climate scenarios, the first publicly available tool offering a dedicated framework to analyse the potential near-term impacts of climate policies and climate change on financial stability and economic resilience. The NGFS notes that:

1. Regional extreme weather events generate temporary but material GDP losses, with effects on the global economy and potential to increase the cost of the transition; and
2. Delaying transition efforts increase the economic costs of transitioning and could cause additional financial stress.

The four scenarios have a five-year time horizon and comprise:

• A physical risk scenario that delves into the economic and financial consequences of extreme but plausible regional weather events;
• Two transition risk scenarios that focus on the effects of transition risk only ("Highway to Paris" and "Sudden Wake-up Call"); and
• A fourth scenario that combines transition and physical risks and has three main assumptions: i) large discrepancies across regions’ climate ambitions, (ii) adverse weather events affecting some regions (Asia, South America and Africa) and (iii) the supply chain disruptions in critical raw materials.

Key innovations to the scenarios include:

• Modelling of compound extreme climate events - simultaneous occurrences of multiple hazards such as floods, storms, heatwaves, droughts, and wildfires;
• Incorporating cross-regional transmission of shocks - short-term spillover effects of both transition and physical shocks through trade and financial linkages;
• Providing a framework to study the interplay between climate risks and business cycles, by integrating climate policy, extreme weather events, economic trends and sectoral dynamics;
• Zooming in on a policy-relevant timeframe for financial stability and monetary policy; and
• Provision of granular economic data across a wide range of sectors and countries.

Key indicators on climate risk in the EU/EEA banking sector 

The EBA has launched an ESG dashboard to monitor climate-related risks across the EU/EEA banking sector. Using data from banks' Pillar 3 ESG disclosures, the dashboard provides a centralised, comparable indicators for both transition and physical climate risks, highlighting areas needing further attention and improvement.

The data on the dashboard reveals significant exposure (over 70% in most countries) to companies in high-emission sectors, suggesting substantial transition risk. This risk could stem from potential policy changes, technological advancements, and shifting consumer preferences. However, the aggregate data do not reflect individual company differences or existing transition measures. Physical risk exposure averages below 30% in most countries, but data granularity and assessment methodologies vary across institutions.

The dashboard also shows that about half of EU real estate lending is in the first two buckets of energy efficiency categories (under 200 kWh/m²), suggesting relatively limited transition risk in this area, though data relies heavily on estimates.

Finally, the dashboard includes indicators on alignment with the EU Taxonomy, showing an average Green Asset Ratio (GAR) of below 3%. The EBA notes that the economy is still under transition and few activities can demonstrate alignment with the Taxonomy criteria at this stage.

IAIS application paper on supervision of climate-related risks 

The IAIS has published an Application Paper on the supervision of climate-related risks in the insurance sector, following four consultations and extensive member and stakeholder engagement. The paper does not contain any new requirements but outlines good practices and guidance. Areas covered include:

• Corporate governance: climate risk is an evolving area, requiring roles and responsibilities at board, senior management and control functions to adapt continuously. Insurers should incorporate and assess climate-related risks in their annual financial planning and strategic planning processes.
• Enterprise risk management for solvency purposes: insurers should consider the potential impact and materiality of climate-related risks when assessing existing risk categories.
• Valuation: climate-related risk drivers should be considered in both asset valuations and when estimating the value of liabilities.
• Investments: supervisors may consider the potential impact of climate change on insurers’ investments when establishing regulatory investment requirements, and insurers should consider climate risks as part of their asset-liability management especially for long-duration liabilities.
• Public disclosure: insurers should ensure connectivity between financial statements and climate disclosures.
• Scenario analysis: historical trends of climate risk drivers will not reliably predict future trajectories, and scenario analysis should extend beyond typical business planning cycles and consider medium- and longer-term risk perspectives.
• Greenwashing: supervisors should assess the risk of greenwashing throughout an insurer’s product design process, and advertising on environmentally and socially friendly business operations should be clear, fair and not misleading.
• NatCat: communication materials related to natural catastrophe (NatCat) coverage and exclusions should be clear and comprehensive, and pricing should reflect adequate risk-based technical models.

Insurers will note many similarities between the IAIS Application Paper and expectations from the PRA and FCA in the UK. 

BIS paper on the climate protection gap 

The Bank for International Settlements (BIS) has published a research paper on the implications of retreating reinsurance coverage for NatCat risks. While the paper does not represent a change in policy or require any action from firms, it does emphasise the importance of reinsurance in the financial system and calls for accelerated climate change adaptation measures 'as an "insurance policy" against failed transition'.

BIS notes that it is crucial to make climate-related risks insurable at affordable levels. It argues that governments, insurers and supervisors need to work together to support climate risk adaptation measures, aligning the interests of primary insurers and reinsurers. Public-private partnerships may become increasingly important to address market failures but the extent to which public sector reinsurance schemes can cover losses is limited. BIS states that, ultimately, a wider policy response is needed to address the climate crisis, including accelerating risk adaptation measures.

Protecting small DC scheme savers from climate risk

The Pensions Regulator (TPR) has issued a report suggesting that small defined contribution (DC) pension schemes that do not take appropriate action to protect investments from climate risk should consider exiting the market. TPR finds that there are many small DC schemes where trustees' knowledge of the scale of financial risks posed by climate change is limited and calls on these trustees to upskill or consider consolidating to protect savers’ interests.

ISSB and TNFD MoU to integrate nature-related disclosures for capital markets - see Reporting and disclosures.

ESG-related fund name changes and their impact on investment flows - see Reporting and disclosures.

Simplification of ESG disclosure rules for benchmarks administrators - see Reporting and disclosures. 

UK Government consultation on voluntary carbon and nature markets

The UK’s Department for Energy Security and Net Zero is consulting until 10 July on voluntary carbon and nature markets. The consultation invites views on implementation of the six principles for market integrity in the context of varying maturity of markets:

• Use credits in addition to ambitious actions within value chains
• Use high integrity credits
• Measure and disclose the planned use of credits as part of sustainability reporting
• Plan ahead
• Make accurate green claims using appropriate technology
• Co-operate with others to support the growth of high integrity markets

Technical standards for the European Green Bond Regulation 

ESMA has launched its second consultation on the technical standards for the European Green Bond Regulation. The consultation closes on 30 May. ESMA expects to publish a final report in Q4 and submit the draft technical standards to the European Commission for endorsement by 21 December 2025 at the latest.

Topics under consultation include:

• Systems, resources, and procedures: must protect the confidentiality, integrity, and security of information, ensuring the smooth operation of external reviews.
• Compliance functions: must have the authority to independently assess adherence to laws, regulations and internal policies, and have sufficient personnel with expertise in risk management, audit, legal or compliance.
• Internal policies and procedures: must ensure segregation of duties, clear audit trails and compliance with accounting standards. Internal control mechanisms must be in place to identify, assess, monitor, mitigate and report risks that could impact the external reviewer's obligations.
• Information used for reviews: must be complete, accurate and relevant to the project funded by the bond, including sufficient historical data. Sources of information must be unbiased, credible and supported by documentation.

The proposed standards are a significant step towards strengthening the EU Green Bond framework and promoting a more robust and credible green bond market. 

Technical standards for ESG rating activities 

ESMA is consulting until 20 June on ESG rating activities. It will submit draft technical standards to the European Commission by the end of October 2025 at the latest and publish a final report in Q4 2025. The consultation covers:

• Information to be provided in the applications for authorisation and recognition of an ESG rating provider;
• Measures and safeguards that should be put in place to mitigate risks of conflicts of interest within ESG rating providers who carry out other activities; and
• Information to be disclosed to the public and users of ESG ratings, to allow comparison and consistency.

The consultation is an important step forward in establishing a regulatory framework for ESG ratings providers and helping to achieve consistency and some level of transparency in these activities. 

FCA feedback on DP23/1: finance for positive sustainable change

The FCA has published a summary of feedback received following the launch of a discussion paper on sustainability considerations for regulated firms in February 2023. DP23/1 explored potential regulatory changes to support the embedding of sustainability considerations in various aspects of regulated firms' businesses.

However, the FCA has introduced various new rules since publication of the DP and notes that time is needed to embed these before introducing any further requirements. The FCA's decision not to bring forward new rules also reflects its new growth agenda and changing attitudes to ESG since the DP was published. 

FCA position on sustainability regulations and UK defence 

The FCA has published a statement clarifying that its sustainability rules do not prevent investment in or financing of defence companies. Instead, its rules are designed to increase the transparency and quality of sustainability information, allowing consumers to make informed decisions.

Key points in the statement include:

• No restrictions on defence: the FCA's rules, including those related to sustainability, do not prohibit financial institutions from investing in or financing defence companies.
• Focus on transparency and quality: the FCA's sustainability rules aim to ensure:

o Trustworthy information: that information about sustainable investments is reliable and easily understood.

o Improved sustainability data: that the quality of sustainability-related information in the market is enhanced.

• Individual choice: the FCA believes that it is up to individual lenders and investors to decide whether to provide capital to defence companies. Consumers should have the freedom to invest in line with their ethical values.

The FCA's sustainability rules focus on transparency and quality of information, not on dictating which sectors financial institutions can invest in. The FCA's statement is likely in response to growing political concerns about UK defence, and firms will likely welcome this clarification.