International

From an international perspective, the Glasgow Financial Alliance for Net Zero (GFANZ) published a consultation paper in October 2024 on proposed supplemental guidance on nature in net zero transition plans, which covers opportunities to reduce nature emissions or increase nature sinks and to support emissions reductions and sequestration through nature-related activities. The consultation closes on 27 January 2025. GFANZ has also published a separate consultation on index guidance to support real-economy decarbonisation. The consultation closes on 9 January 2025. GFANZ expects to publish final guidance for both consultations in Q1 2025.

U.K.

New labour government manifesto and policy statements

To date, the U.K. has not followed the EU's regulation- heavy approach (discussed below) on tackling ESG issues, having been somewhat wary of over-regulation. Nevertheless, sustainability-related reforms have continued to emerge in the U.K. in 2024, with more to come over the next 12 months. The new Labour government ran on a manifesto commitment of making the U.K. the green finance capital of the world and accelerating the transition to net zero. It aims to deliver a regulatory framework to support sustainable growth and help the private sector to harness the opportunities of the energy transition.

In November 2024, HMT published a consultation on a proposed U.K. Green Taxonomy and a consultation response on a future regulatory regime for ESG ratings providers as part of its Mansion House Reforms. The new Labour government plans to require U.K.-regulated financial institutions and FTSE 100 companies to implement transition plans aligned with the 1.5-degree goal under the Paris Agreement. Other regulatory developments in the pipeline for 2025 were put in train by the previous Conservative government, including the U.K. Sustainability Reporting Standards and changes arising from the Transition Finance Market Review, demonstrating the direction of travel is towards increasing oversight on sustainability and ESG.

Disclosure and reporting

In June 2023, the International Sustainability Standards Board (ISSB) launched its first sustainability-related reporting standards: the General Requirements for Disclosure of Sustainability-related financial information (IFRS S1), and the requirements for Climate-related Disclosures (IFRS S2). In May 2024, the Secretary of State for the Department for Business and Trade published the Framework and Terms of Reference for the development of U.K. Sustainability Reporting Standards (SRS), setting out the three phases for the delivery of the U.K. SRS which will be based on the IFRS standards. The overall process is supported by two committees established for this purpose: the U.K. Sustainability Disclosure Technical Advisory Committee (TAC) (supported by the Financial Reporting Council) and the U.K. Sustainability Disclosure Policy and Implementation Committee (PIC).

The U.K. government intends to consult on the exposure drafts of the U.K. SRS in Q1 2025 and take a decision on whether to endorse them. The ultimate goal is to establish SRS that form the basis of future requirements in U.K. legislation or regulation for companies to report on ESG-related risks and opportunities. Provided there is a positive endorsement decision, the FCA will be able to introduce U.K. SRS requirements for U.K.-listed companies to report on sustainability-related information. The U.K. government will then decide, in Q2 2025, on disclosure requirements for U.K. companies that do not fall within the FCA's regulatory perimeter, as well as whether to create exemptions from the Companies Act 2006 requirements for those companies that choose to comply with the U.K. SRS voluntarily. Any such changes would be effective no earlier than for accounting periods beginning on or after 1 January 2026. 

The FCA has said that, once available for use in the U.K., its intention is to update its climate-related disclosure rules for listed companies to reference the U.K. SRS standards (replacing the Task Force on Climate-related Financial Disclosures-aligned standards). 

As part of the FCA's consultation on the new Public Offers and Admissions to Trading Regime (see the U.K. Primary Markets part of the Financial markets section below), the FCA has proposed revisions to sustainability- related disclosures in prospectuses. These would include requiring issuers seeking to list equity securities on a regulated market to include certain climate-related disclosures in their prospectuses if they have identified climate-related risks as risk factors or climate-related opportunities as material to their prospects. Issuers that have published transition plans with material information will need to reflect this in summary in their prospectuses in relation to their future strategy. Issuers of non-equity securities would need to disclose whether their debt instruments have been marketed as "green", "social" or “sustainable" or issued under a bond framework. The FCA aims to finalise its rules by the end of H1 2025, followed by a further period before the new rules comes into force.

The FCA had planned to consult in 2024 on guidance setting out its expectations for listed companies' transition plan disclosures, drawing on the Transition Plan Taskforce's Disclosure Framework, which was published in 2023. The FCA's proposed consultation did not materialise in 2024, but the Transition Finance Market Review (TFMR) was conducted (discussed below). The FCA said in response to the TFMR's report that it plans to consider how best to embed the TFMR's findings and to monitor market practices and raise standards, including strengthening disclosure expectations pending endorsement of the U.K. SRS.

Taxonomy

On 14 November 2024, HMT published a consultation on the value of a U.K. Green Taxonomy. The consultation closes on 6 February 2025. It seeks to establish whether a Taxonomy would be a useful addition to the U.K.'s regulatory framework to mitigate greenwashing risks and enable the private sector to capitalise on and support the green transition. It seeks feedback on uses for a U.K. Green Taxonomy and how to maximise usability (including any key design features) but is not considering specific activity-level standards at this stage.

In its sustainability disclosure implementation update published in May 2024, the previous government confirmed that once the Taxonomy has been finalised, the U.K. government will introduce a testing period for voluntary disclosures and use it for at least two years before considering mandatory disclosures against the Taxonomy.

SDR and labelling regime

The U.K. Sustainability Disclosure Requirements (SDR) and ESG labelling regime began to take effect in 2024, in line with the FCA's 28 November 2023 policy statement. From 31 July 2024, U.K. asset managers could begin to use one of four labels—Sustainability Focus, Sustainability Improvers, Sustainability Impact and Sustainability Mixed Goals—with any new or existing funds. If a label is used, prescribed criteria must be met.

In 2024, the FCA consulted on extending the application of the SDR rules to portfolio management. It plans to publish the policy statement with its proposals in Q2 of 2025. HMT intends to consult on expanding the regime to capture overseas funds, with a consultation paper likely to be published in 2025 (although no date has been confirmed). If overseas funds are caught, this may pose significant challenges for international groups in having to potentially comply, simultaneously, with the current EU disclosure regime (as well as any labelling requirements they might prescribe in the future), as well as those in force in the U.K.

The naming and marketing rules were intended to come into effect from 2 December 2024, meaning U.K. asset managers could only use sustainability-related terms in product names and marketing if either: (i) they were using one of the above-mentioned labels; or (ii) they complied with certain product name and marketing requirements. The FCA has offered temporary flexibility, until 2 April 2025, for U.K.-authorised investment funds which are currently using certain terms in the fund's name with the intention of either using a label or changing the name of the fund and which have submitted an application for approval of amended disclosures by 1 October 2024. Firms that are able to comply with the rules without relying on the flexibility should do so.
 
Firms using a label or sustainability-related terms in their naming and marketing should produce annual ongoing product-level disclosures. The FCA originally stated these disclosures should be made from 12 months after the date the label or terms are used. However, in December 2024, it published a consultation on minor amendments to aspects of the SDR regime, including giving asset managers 16 months from the start of their use of a label or terms in which to prepare the first report (with reporting on an annual basis thereafter). The consultation closes on 13 January 2025. Also from 2 December 2025, firms with more than £50bn in assets under management should provide entity-level disclosures on various matters, including in relation to their management of sustainability-related risks and opportunities.

Greenwashing risks and issues

The FCA's November 2023 policy statement on SDR (see above) introduced a new anti-greenwashing rule prompted by concerns that firms may be making exaggerated or unsubstantiated claims about the sustainability credentials of their products, which could in turn erode trust in the market. The rule came into force on 31 May 2024 and applies to all regulated firms. Broadly speaking, a relevant firm must ensure that any reference to the sustainability characteristics of a product or service is consistent with the sustainability characteristics of the product or service, and is fair, clear and not misleading. This will apply to all communications with clients in the U.K. in relation to a product or service, or communications of a financial promotion or approval of a financial promotion for communication to a person in the U.K. In December 2024, the FCA published a consultation on minor amendments to the anti- greenwashing rule, which closes on 13 January 2025.

The FCA also published final guidance setting out its expectations for firms making claims about the sustainability of a product or service in April 2024. The Financial Markets Standards Board has published a Transparency Draft of a Statement of Good Practice on the governance of sustainability-linked products (SLPs), upon which it is inviting comments until 21 February 2025. The statement is designed to establish good practices for the governance of SLPs and support the adoption of consistent governance approaches across jurisdictions and asset classes. The hope is that this will support the integrity of SLPs, build investor trust and help mitigate greenwashing risks.

ESG ratings

In November 2024, HMT published a response to its consultation on the future regulatory regime for ESG ratings, together with a draft statutory instrument implementing the proposed regime. Technical comments on the draft regulation should be submitted by 14 January 2025. HMT aims to lay the statutory instrument before parliament in early 2025, subject to Parliamentary time. The overall process for designing, developing and commencing the regime is expected to take around four years. Under the incoming regime, providing ESG ratings will become a regulated activity. This will include ratings produced in the U.K. and those produced overseas but made available to U.K. users by means of a business relationship. HMT has attempted to maintain consistency with international standards by broadly aligning the definitions with the International Organization of Securities Commissions’ (IOSCO) definition of ESG ratings provision. The FCA will be informed by the IOSCO recommendations when developing its regulatory regime and will align its territorial approach with the EU's where appropriate.

The FCA will consult on draft rules and guidance for ESG ratings providers after the statutory instrument has been laid before parliament in 2025. The FCA is considering how to approach overseas ESG ratings providers applying for U.K. authorisation, including the possibility of requiring them to be incorporated in the U.K. In the interim, the ESG Data and Ratings Code of Conduct Working Group published its code of conduct applicable to both ESG ratings and data providers in December 2023, which firms can sign up to on a voluntary basis.
 
These initiatives may have significant knock-on impacts for financial services firms generally, given the increased commercial pressure from investors and the market for ESG data and for issuers and/or financial instruments to be the subject of ESG ratings or scores. Among other things, this enables investors and the market to assess how ESG-friendly a financial instrument, issuer or firm may be. It may also assist investors in incorporating ESG risk into their investment decision-making process, which is an increasing trend and the preferred approach from a regulatory perspective.

Net zero targets

The former Conservative government expressed an ambition for the U.K. to be "the first ever Net Zero Aligned Financial Centre" and "the best place in the world for green finance", sentiments echoed in large part by the incumbent Labour leadership. In March 2023, the previous government issued the 2023 Green Finance Strategy, containing a number of initiatives and detailed timings. In December 2023, as part of the Strategy, it commissioned the Transition Finance Market Review (TFMR), an independent investigation into how best to scale up transition finance and maximise the opportunities for U.K.-based financial services.

• The report was published in October 2024 and sets out the TFMR's recommendations. From a financial services perspective, key proposals include:
  Closer work between key teams within government and within the Bank of England and FCA, as well as ongoing dialogue with industry on policy to support the delivery of decarbonisation targets,
• The Bank of England and FCA to include within their periodic reporting to the government information on how the transition of the economy and transition
  finance relates to the performance of their functions.
• The Bank of England and FCA to work with the Climate Financial Risk Forum to initiate a new workstream on transition finance.
• FCA and industry to engage to discuss approaches to establishing credible and robust transition pathways to demonstrate that underlying assets are fit for inclusion within the "Sustainability Improvers" label.
• U.K. financial institutions and regulators to monitor and engage with the Platform for Sustainable Finance, European Commission and ESMA on its review of SFDR, with the aim of supporting opportunities for interoperability where possible.

Some of the TFMR's proposed actions for 2025 include:

• The government should work with industry to consider the most appropriate structure of its net zero policy framework and should communicate its findings by Q1 2025, including an assessment of whether adjusting the structure of the framework could improve information flows and policy clarity.
• The government should publish a clear, funded plan for the establishment of a Transition Finance Lab in Q1 2025; the Lab would create a controlled environment to design and test innovative solutions for challenging transition finance deals.

The FCA has, in response, published feedback on how it will support the market to scale with integrity. This will include considering how it can embed the TFMR's findings in its policymaking and supervisory functions. Aspects of its ongoing initiatives, e.g., on ESG ratings providers and the U.K. endorsement of the ISSB standards will contribute to some of the objectives promoted by the TFMR. HMT has confirmed that it will co-launch the Transition Finance Council with the City of London Corporation, as recommended in the TFMR. It will also consult in H1 2025 on how best to take forward its manifesto commitment on transition plans to support its aim of making the U.K. the global hub for transition finance. For further details on the TFMR, see our client bulletin, “Inside the U.K.’s Transition Finance Market Review”.

Other initiatives

In November 2024, HMT published a call for evidence on the Financial Services Growth and Competitiveness Strategy, which is intended to serve as a guiding framework for sustainable growth in U.K. financial services over the next ten years. Sustainable finance is identified as a priority growth opportunity, with the government's longer-term vision being to develop a streamlined regulatory regime and effective policy framework to support the U.K. and global transition to net zero. The Strategy will be published in Spring 2025.

As part of the Mansion House reforms, the Department for Energy Security and Net Zero published a policy paper in November 2024 setting out principles for voluntary carbon and nature market integrity. It plans to consult on the proposed implementation of the principles and the steps the government could take to improve the integrity and use of voluntary carbon and nature markets in early 2025.

The FCA is continuing its work on stewardship. The Financial Reporting Council launched a consultation on proposed changes to the Stewardship Code in November 2024, including revisions to the definition of stewardship to clarify. Each signatory should determine their specific investment objectives with a focus on "long-term sustainable value".The consultation closes on 19 February 2025 and the FRC plans to publish an updated Code in H1 2025, to take effect on 1 January 2026. In September 2024, the FCA published details of its environmental, social and governance priorities and the metrics it is using to measure progress against them. It has decided to retire certain metrics, including that for measuring the effectiveness of stewardship, due to difficulties in devising metrics that properly reflect the impact of investor stewardship on firms' sustainability strategies. It will continue to support active investor stewardship, although it does not specify any planned initiatives for this purpose.

EU

Political background

Sustainability and climate change mitigation remained high on the EU agenda in 2024, with decarbonisation presented as one of three key transformations for Europe in Mario Draghi's flagship report on European competitiveness. On 8 November 2024, the newly reappointed President of the European Commission, Ursula von der Leyen, delivered the Budapest Declaration on the new European competitiveness deal and referred to a "simplification revolution" of the EU regulatory framework, with a key objective of reducing reporting requirements by at least 25% in H1 2025. During a press conference after the Declaration, Commissioner von der Leyen referred to an Omnibus Regulation that would streamline legislation and referenced the EU Taxonomy Regulation, Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD) as an example of regulation to be rationalised in this way. It is not yet clear whether, or to what extent, the requirements under those regulations will change— during the press conference, Commissioner von der Leyen said "the content of the laws is good" and will be maintained but there should be a reduction in the questions asked and data points to be collected, which often overlap. The European Commission's work programme for 2025 proposes publishing an Omnibus simplification package on 26 February 2025. In the meantime, further developments are expected in relation to the existing environmental, social and governance (ESG) regulatory regime over the next 12 months.

Disclosure and reporting

From 1 January 2025, the first cohort of firms (which include large EU companies subject to the EU Non- Financial Reporting Directive (NFRD) and large non-EU companies with securities listed on an EU regulated market) will start to report on the 2024 financial year in line with the CSRD. The CSRD regime, which had to be transposed into national legislation by 6 July 2024 and applies in stages, imposes enhanced ESG-related disclosure and reporting requirements on companies, and extends the application of the NFRD to a broader set of companies (large EU companies and non-EU companies with securities listed on an EU regulated market which do not satisfy the >500 employee test, as well as listed SMEs and non-EU companies with significant EU operations). It also introduces more detailed reporting requirements and requires adherence to mandatory EU sustainability reporting standards.

2025 will see the development of further detailed reporting standards and guidance under CSRD:

• The European Financial Reporting Advisory Group (EFRAG) plans to consult on an Exposure Draft of the Non-EU European Sustainability Reporting Standards (NESRS) in Q1 2025, which will apply to non-EU firms with significant EU operations that fall within the scope of CSRD (so-called Art. 40a companies). The NESRS will set out detailed requirements for sustainability reporting under CSRD. The final draft NESRS should be delivered to the European Commission by the end of 2025 at the latest and should be adopted by the Commission by 30 June 2026. Art. 40a companies are not required to report in accordance with CSRD until 2029, for the 2028 financial year.
• In November 2024, EFRAG published draft implementation guidance on transition plans for climate change mitigation, designed for use by large listed and unlisted companies that are subject to the European Sustainability Reporting Standards (ESRS). The guidance is non-authoritative and accompanies, but does not form part of, the ESRS. EFRAG plans to seek public feedback on the draft in early 2025 and finalise the guidance in the spring of 2025.
• ESMA is consulting on draft RTS for a European Single Electronic Format (ESEF) for sustainability reporting under the Accounting Directive (as amended by CSRD). The consultation paper was published in December 2024 and closes on 31 March 2025. ESMA expects to submit final draft RTS to the European Commission for endorsement in Q3 2025.

The next wave of firms to report under CSRD—namely, large EU companies not subject to the NFRD and large non-EU companies with securities listed on an EU regulated market which do not meet the >500 employees threshold—will need to begin preparing this year for their CSRD reporting obligations, which come into effect in 2026 for the 2025 financial year. EU and non-EU listed SMEs and certain small and non-complex institutions and captive insurance undertakings will need to report in 2027 for the 2026 financial year (subject to some exceptions).

Due diligence

Listening requirements

The much-anticipated EU Listing Act package (see the Financial markets section below) came into force on 4 December 2024. As part of the package, the European Commission has asked ESMA to produce a building block of information to be included in prospectuses by issuers of non-equity securities that are advertised as taking ESG factors into account or pursuing ESG objectives. The Commission is seeking to protect against the risk of greenwashing from the issuance of these securities while avoiding overly burdensome regulation and overlaps or inconsistencies with the rest of the EU's sustainability-related legislation (including CSRD). ESMA consulted on the proposed building block at the end of 2024 and plans to publish its final technical advice in Q2 2025.

Taxonomy

The Taxonomy Regulation is a key plank of the EU's overall sustainable finance strategy, intended to create a shared understanding of what activities can be considered "green" or environmentally sustainable. It also requires certain businesses and firms to make statements about whether, and to what extent, their activities (or in some cases, products) align with the taxonomy.

The European Commission is required to develop technical screening criteria on the different economic activities that fall within scope of the Taxonomy Regulation. The Platform on Sustainable Finance provides input on these criteria and itself relies on stakeholder requests on the scope of activities to be captured. The stakeholder requests are assessed by the Platform and Commission at specified "cut-off dates". In 2025, the Platform will publish a summary of the requests it had received at the first cut-off date on 15 December 2023, together with an explanation of how they were assessed and the recommendations that the Platform made as a result. The decision on the timing of the next cut-off date will be taken in 2025.

On 1 January 2024, three delegated acts under the Taxonomy Regulation were published. In November 2024, the European Commission published a draft notice containing FAQs on the interpretation and implementation of certain aspects of these delegated acts, which will be formally adopted in 2025 once versions are ready in all EU languages.

Please also see Sustainable Finance Disclosure Regulation (SFDR) and labelling section below which notes the ESMA Common Supervisory Action which is relevant to the Taxonomy Regulation.

Sustainable finance disclosure regulation (SFDR) and labelling

The European Commission launched a consultation on the implementation of SFDR in Q4 2023 to collect feedback on the strengths and weaknesses of the regime and views as to how it may evolve going forward, with the possible introduction of a product labelling regime. The Commission had been expected to publish a report in Q2 2024, but instead produced a summary of responses to the consultation with the full report still outstanding. The European Supervisory Authorities (ESAs) published a joint opinion in June 2024 with various recommendations for the future development of SFDR, including replacing the current method of product categorisation under Articles 8 and 9. The Platform on Sustainable Finance published its own proposal on categorisation of products in December 2024. It remains to be seen whether these will be reflected in the Commission's report, but they are certainly likely to influence the Commission.

In parallel, in December 2023, the ESAs published their final report on aspects of the operation of the SFDR Delegated Regulation including disclosures of principal adverse impacts (PAI) of investment decisions on sustainability factors and the introduction of disclosure requirements around decarbonisation targets. Specifically, the report covers various topics including: (i) extension of social PAI indicators; (ii) other changes to the PAI disclosure framework; (iii) disclosure of greenhouse gas emission reduction targets; (iv) improvements to product templates; and (v) certain other minor technical amendments. The Commission had been expected to review the report in 2024 but there has been no update. If it does take this forward in 2025 and the proposals are endorsed, they will proceed to be reviewed and approved by the European Parliament and Council.

Also related to PAI, the ESAs have proposed that their annual report on the extent of voluntary PAI disclosures under SFDR should be delivered only every two to three years, to allow the ESAs and national competent authorities to focus more resources on meaningfully analysing PAI disclosures and reflecting on lessons learnt. The Commission has not yet responded to this proposal and ESMA has stated that the ESAs do intend to publish the report in 2025.

In July 2023, ESMA launched a Common Supervisory Action (CSA) on sustainability-related disclosures and the integration of sustainability risks, which was due to conclude in Q3 2024. Among other things, the goal was to assess the compliance of firms with SFDR and the Taxonomy Regulation, as well as the provisions in the UCITS and AIFMD regimes on the integration of sustainability risks. The exercise also aimed to consider greenwashing risks in the investment management sector, and whether additional regulatory intervention is required. A complete assessment of the outcome is expected in early 2025, after which ESMA will coordinate supervisory case discussions with national competent authorities building on the findings of the exercise.

Greenwashing risks and issues

Greenwashing continues to be an area of concern for many European regulators, with ESMA, the EBA and EIOPA publishing reports on greenwashing for the financial sector in 2024. ESMA has confirmed that it intends to intensify its focus on the issue in 2025.

ESMA's 2024 report on greenwashing identified various actions that national competent authorities should consider to enhance supervision of the sustainable investment value chain.

In 2025, ESMA intends to clarify its supervisory expectations on managing greenwashing risks, develop tools to support national competent authorities in addressing those risks and improve the quality and effectiveness of ESG disclosures.

ESMA published guidelines on funds' names using ESG or sustainability-related terms in August 2024. The guidelines are designed to ensure that investors are protected against exaggerated or unsubstantiated claims in fund names and to give asset managers clear and measurable criteria to determine whether they can use certain terms. The guidelines began applying on 21 November 2024 and any new funds created on or after that date should apply the guidelines immediately. For funds existing before that date, there is a 6-month transitional period until 21 May 2025 before the guidelines apply.

In December 2023, ESMA announced the launch of a CSA with national competent authorities on ESG disclosures under the Benchmarks Regulation (BMR). The CSA will focus on supervised benchmarks administrators that have acquired an authorisation, registration, recognition or endorsement of their benchmarks under the BMR and will conclude in Q1 2025. The goal is to assess compliance with the ESG disclosure requirements in the BMR.

ESG ratings

The EU ESG Ratings Regulation came into force on 1 January 2025 and will apply from 2 July 2026. It aims to improve the reliability, comparability and transparency of ESG ratings in order to bolster consumer and investor protection and prevent greenwashing. The Regulation establishes an authorisation and supervision regime for EU rating providers, together with organisational, governance and transparency requirements. Third country providers will need to obtain either an endorsement of their ESG ratings by an EU-authorised provider, a recognition decision by ESMA, or an equivalence decision by the European Commission. By 2 October 2025, ESMA must submit various draft RTS and guidelines under the new Regulation to the European Commission.

New EU green bond regime

The EU's Green Bond Regulation came into force on 20 December 2023 and applies (for the most part) from 21 December 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: (i) comply with the allocation requirements; (ii) provide pre and post-issuance disclosure; (iii) have that disclosure externally reviewed; and (iv) be willing to submit to the oversight of the competent authority of its home Member State under the EU Prospectus Regulation.

Alternatively, an issuer could instead provide sustainability disclosures for: (i) use of proceeds bonds not using the label but marketed as environmentally sustainable; or (ii) sustainability-linked bonds, although competent authority supervision will still apply in this case.

Importantly, an issuer will also still be able to continue to follow the ICMA Principles instead, should they prefer.

The regime also establishes a system to register and supervise external reviewers of European Green Bonds. Until 21 June 2026, there will be a transitional period during which reviewers can provide these services without having been registered with ESMA. During the transitional period they will need to notify ESMA of their activity, as well as making their best efforts to comply with relevant provisions of the Green Bond Regulation.

ESMA is required to submit draft ITS and RTS under the Regulation to the European Commission in two tranches. It consulted on the first tranche during 2024, although has not yet published the final report as anticipated at the end of 2024. The consultation on the second tranche, together with the final report on the first tranche, are expected in 2025.

In December 2024, the European Commission published a draft delegated regulation on establishing the content, methodologies and presentation of the information to be voluntarily disclosed in the templates for periodic reporting of post-issuance information disclosures for bonds marketed as environmentally sustainable and for sustainability-linked bonds. Feedback on this draft can be provided until 28 January 2025.

Other initiatives

In the latter part of 2024, ESMA and the EBA published their 2025 work programmes which confirm their ESG priorities. 

Key 2025 objectives for ESMA are:

• Contributing to facilitation of the financing of the EU transition towards a more sustainable economy, while preserving market integrity and financial stability as well as a high level of investor protectio.
• Promoting efficient and consistent integration of sustainability-related factors in supervisory, convergence, risk assessment and regulatory activities.
• Maintaining investors' confidence in ESG investments by promoting high quality sustainability disclosures and addressing the risk of greenwashing.
• Systematically monitoring ESG market developments and climate risk including when performing stress tests.

Particular initiatives for ESMA include assessing the vulnerabilities that financial products and market participants may have to adverse climate-related financial shocks, producing guidance on sustainability claims to financial market participants, as well as monitoring the need for additional guidance under ESG legislation including SFDR, CSRD, the Taxonomy Regulation and the BMR. ESMA will also publish a statement in 2025 on its 2024 CSA on the integration of sustainability preferences in firms' suitability assessments and will report on its 2023/2024 CSA on sustainability in investment management. The EBA will continue building a risk monitoring framework for the banking sector in 2025, as well as delivering ESG-related technical standards, guidelines and reports in accordance with ESG-related legislation and pursuing its aims under the EBA roadmap on sustainable finance.

Prudential

Climate-related financial risks remain firmly on the radar at all levels. In the international arena, addressing financial risks from climate change was a key priority for the Financial Stability Board (FSB) in 2024. The FSB's 2024 annual report promoting global financial stability includes a summary of the FSB's continuing work to assess climate-related vulnerabilities and to enhance supervisory and regulatory practices. It will issue its next report on progress with the 2021 roadmap for addressing climate-related financial risks in mid-2025.

The Basel Committee on Banking Supervision (BCBS) is considering how climate scenario analysis can be practically used to help strengthen the management and supervision of climate-related financial risks. The outcome of a discussion paper, which closed in July 2024, is anticipated imminently as is a final proposal for a Pillar 3 disclosure framework for climate-related financial risks, the implementation date for which was suggested to be 1 January 2026 in the BCBS's November 2023 consultation.

U.K

The Bank of England's Financial Policy Committee confirmed in November 2024 its intention to publish further detail on its approach to evaluating the impacts of climate change on financial stability. It is also considering a range of potential metrics to help monitor climate-related risks to the financial system systematically over time.

Managing the risks to firms' safety and soundness from climate change remains a key priority for the PRA. It continues to focus on identifying and addressing emerging risks internationally, working closely with the BCBS on its response to consultations including disclosures for climate-related risks.

Domestically, the PRA continues to monitor firms' progress in managing climate-related risks and
is expected to consult in Q1 2025 on updating its supervisory statement on enhancing banks' and insurers' approaches to managing the financial risks from climate change, first published in April 2019.

For now, U.K. banks should continue to expect discussion with the PRA around their climate-related risk policies and maintain a watching brief on the PRA's expectations to ensure that those policies are aligned.

The FCA has been reviewing feedback on its 2023 discussion paper seeking views on sustainability-related governance, incentives and competence in regulated firms and is considering whether there is a case for further regulatory measures in the area to support the role of finance in contributing to positive change.

Further, unlike EU investment firms which have been required to make disclosures on ESG-related risks since December 2022, U.K. investment firms are not currently required to make specific disclosures under MIFIDPRU concerning ESG issues. The November 2023 Regulatory Initiatives Grid indicated that the FCA intended to publish a consultation paper on ESG disclosures and MIFIDPRU clarifications in Q2 2024. However, this was not published, and the initiative was not mentioned in the October 2024 interim grid.

EU

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 10 January 2026 to transpose the requirements into national legislation with an application date of 11 January 2026.

EU firms will be anticipating relevant draft national legislation transposing these requirements in 2025 to confirm the details.

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. The EBA is mandated to produce guidelines on the criteria for the assessment of ESG risks, including how they should be identified, measured, managed and monitored as well as how credit institutions should draw concrete plans to address and internally stress test resilience to, and long- term negative impacts of, the ESG risks by 10 January 2026. It consulted on draft guidelines in Q1 2024. Again, firms will maintain a watching brief to ensure that their internal compliance processes match the EBA's expectations.

Regulation 2024/1623 (CRR III) extends the requirement to disclose ESG risks to all banks, with proportionality for smaller banks, and mandates the EBA to draft implementing technical standards to specify uniform disclosure formats. Any EU bank not already disclosing their ESG risks will need to expand their 2025 disclosures with an eye on any future BCBS standards in this area.

On the prudential treatment of credit risk exposures to entities that operate or finance physical structures or facilities, systems and networks that provide or support essential public services originated after 1 January 2025, CRR III will permit a favourable risk weight treatment only where the relevant bank finances an infrastructure project that has a positive environmental impact assessment. Firms may seek to revisit their investment and lending policies to reflect these changes.

Download the full report.