Sustainability Regulatory Radar, from KPMG's EMA Financial Services Regulatory Insight Centre.
Welcome to the latest and final edition Sustainability Regulatory Radar. Moving forward, all our insights on Sustainability will be merged into our other regular publications, UK Regulatory Radar and European Regulatory Radar.
Growth and competitiveness mandates and the drive for regulatory simplification continue to impact the sustainability agenda in the UK and EU.
The European Sustainability Reporting Standards (ESRS) which underpin the Corporate Sustainability Reporting Directive (CSRD) have been simplified and adopted by the European Commission, to be applied for the first time for the 2027 reporting period. EFRAG has resumed its work on the sustainability reporting standard for non-EU groups (N-ESRS), with a 100-day consultation expected in the second half of July. It has also published a sustainability report based on its voluntary standard for SMEs (VSME), intended to help smaller companies to understand best practices and anticipate common hurdles in their own sustainability reporting journeys.
The EBA, ESMA and EIOPA have each responded to the European Commission’s call for technical advice on reviewing the Disclosures Delegated Act (DDA) under Article 8 of the Taxonomy Regulation. All three authorities have put forward suggestions to simplify sector-specific KPIs and streamline group reporting. Final advice will be submitted to the Commission by October 2026.
The UK government has endorsed the ISSB’s sustainability standards, IFRS S1 and S2, and issued the UK SRS with limited modifications. The FCA has proposed (CP26/5) to realign listed issuers’ current TCFD sustainability disclosures with the new standards, with some of the requirements on a ‘comply or explain’ basis, for accounting periods from 1 January 2027.
The FCA also proposes (CP26/17) to remove the requirement for TCFD product-level reporting requirements for asset managers, life insurers and FCA-regulated pension providers from autumn 2026. Instead, institutional investors would be able to request key emissions data once a year for their own reporting requirements, and retail investors would receive relevant information about how material climate risks could affect a product’s financial performance.
The UK Government committed at the end of January to moving forward with plans for a voluntary oversight regime for the assurance of sustainability-related financial disclosures, as set out in its June 2025 consultation. However, no further updates have been issued. Nor have there been any developments on the UK approach to transition plan requirements.
The SFDR remains under review, with the European Commission proposing updates to make information clearer and more decision-useful for investors. Three new product categories would replace the existing Article 8 and 9 classifications: transition products (Article 7), ESG basics (Article 8) and sustainable features (Article 9). Each category would have a 70% investment threshold to be held in line with a binding investment strategy – to note, this is inconsistent with ESMA’s fund name guidelines, which require a threshold of 80% for certain fund names. The European Parliament and European Council have set out their draft positions but, with trilogue negotiations still to come, the final SFDR text is unlikely to be agreed by the end of 2026.
In May, ESMA also urged national competent authorities (NCAs) to take a more proportionate approach to supervising sustainability requirements.
The impacts of climate and nature-related risk on financial stability are front of mind for prudential regulators. The June 2026 deadline has passed for UK firms to develop ‘credible and ambitious’ plans for the management of climate-related financial risk, as set out in PRA PS25/25 and SS5/25. With the initial six-month period now concluded, we may see supervisors starting to ask firms for evidence of their internal reviews and action plans.
Meanwhile, the ECB published two ‘good practice’ reports in May, one on overall climate and nature (C&N) risk management and the other on C&N stress testing. Most of the newly added good practices in the first report related to nature risks, prudential transition planning, physical risks and the management of reputational and litigation risks. The second report found that all significant institutions had integrated climate risk into their stress-testing frameworks, but that there was still room for improvement, particularly in integrating C&N risks into modelling approaches.
In June, the EBA published the draft methodology, templates and guidance for its 2027 EU-wide stress test, which will integrate climate risks for the first time through a dedicated module. At the start of 2026 it also consulted on updating the systemic risk buffer guidelines to include climate-related exposures – the amended guidelines are yet to be issued.
EIOPA is consulting on the prudential treatment of adaptation measures under the Solvency II framework, with policy output expected in Q4 2026. It also published a discussion paper with the European Stability Mechanism (ESM), outlining a European risk-sharing mechanism, based on a natural catastrophe insurance pool and a loan-based backstop, to manage the financial fallout from large natural catastrophes. To note, this paper does not constitute formal regulatory proposals at this stage.
The EU ESG ratings regime went live on 2 July, with ESMA supervising methodology transparency, governance and conflicts of interest. Most ratings providers must apply for authorisation by 2 November 2026. Third parties, including fund managers, may continue to distribute ratings while applications, registrations or notifications are pending. After that date, they will only be able to distribute ratings from providers listed on ESMA’s Article 14 register.
ESMA has also consulted on guidelines on the endorsement mechanism for ESG ratings issued by third-country ratings providers. The consultation proposed requirements on expertise, accountability, governance, periodic reviews, information-sharing within the group and likely information requests from ESMA, with final guidelines to apply from 2 August 2026.
The FCA has consulted on a UK regime for ESG ratings providers, with requirements largely the same as the EU. It has proposed a 12-month application window beginning in June 2027, with the regime to go live in June 2028. Firms should note some of the nuanced differences between the two regimes, for example on scope and exclusions, mitigating versus managing conflicts of interest, and prescriptive versus principles-based governance requirements.
Meanwhlie, the European Commission has updated the EU Emissions Trading System (ETS) benchmark values for the period 2026–2030 to ensure they remain current and support decarbonisation efforts while maintaining competitiveness. A comprehensive review of the EU ETS is due to take place in July 2026 and will introduce sector-specific fallback benchmarks.
Finally, the FCA has shared examples of good and poor practice in relation to the UK Sustainability Disclosure Requirements. It has also considered barriers to scaling finance for climate solutions and highlighted challenges in attracting private capital and matching capital properly to opportunities, and frictions caused by information and capacity gaps.
At a glance – watch out for:
