Introduction
This guide will assist in-house counsel and private practice lawyers with their understanding of climate-related regulations that specifically impact the financial services sector in the EU. The guide will also help organisations prepare for likely forthcoming EU climate and sustainability regulatory initiatives.
This guide covers:
- Key financial services climate-related regulations in the EU
- Expected future regulatory developments in the EU
For information about more general EU climate-related regulations (ie, that impact all sectors) see How-to guide: Overview of climate legislation and regulation in the UK and Europe. For information about UK climate-related financial services regulation see How-to guide: How to comply with climate-related regulations applicable to the financial services sector in the UK.
Section 1 – Key financial services climate-related regulations in the EU
In 2021, the EU adopted the European Climate Law, which sets out the goal established in the European Green Deal for Europe to achieve net-zero greenhouse gas emissions by 2050, and for Europe to be the first climate-neutral continent – while leaving no-one behind. Net zero by EU countries is expected to be achieved by cutting emissions, investing in green technologies and protecting the natural environment.
The law also sets an intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. A ‘Fit for 55’ package of legislation will make all sectors of the EU’s economy fit to meet this target.
Alongside the Fit for 55 package of legislation, the EU has put in place a ‘sustainable finance framework’ – regulations to support economic growth while reducing pressures on the environment to help reach the climate and environmental objectives of the European Green Deal. Sustainable finance involves taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects.
To highlight the importance of climate change for the European financial services sector, the European Central Bank (ECB) has stated that it needs to account for the influence of climate change in its work on maintaining price and financial stability. The ECB goes on to state that it is its responsibility to make sure that banks can detect, manage and disclose risks properly, including those resulting from climate change, as well as managing climate-related risks in its own portfolios. In its role as banking supervisor, the ECB ensures that banks have a safe and prudent approach to identifying, assessing and managing climate-related and environmental risks, and that they transparently disclose the risks to which they are exposed. The ECB has identified that stepping up efforts to address climate change is one of its supervisory priorities and focuses of risk assessment in 2023-2025.
The EU sustainable finance framework broadly requires in-scope organisations to undertake the following activities:
- make detailed, accurate climate-related and sustainability disclosures; and
- ensure information published about sustainable products is accurate.
Key regulations within this framework are:
- The Sustainable Finance Disclosure Regulation – Regulation (EU) 2019/2088 (SFDR) (see section 1.1 below) and its implementing and delegated acts; and
- The EU Taxonomy – Regulation (EU) 2020/852 – (see section 1.3 below) and its list of environmentally sustainable activities, as defined in the following associated delegated acts:
- The Climate Delegated Act (see section 1.3 below);
- The Disclosures Delegated Act (see section 1.3 below);
- The Complementary Climate Delegated Act (see section 1.3 below); and
- The Environmental Delegated Act (see section 1.3 below).
The key aims of the sustainable finance framework are to ensure:
- transparency and consistency for investors regarding sustainable investments; and
- that finance is available for activities that are already environment-friendly and for activities that help with the transition to a net-zero and sustainable economy.
Financial sector organisations may also be subject to the Corporate Sustainability Reporting Directive - Directive (EU) 2022/2464 (see 1.2 below), which requires large organisations and listed organisations (in any sector) in the EU to publish regular reports on the social and environmental risks they face, and on how their activities impact people and the environment.
Financial sector organisations will need to understand the totality of climate and sustainability-related regulations that impact them (whether EU or otherwise) and may want to consider whether a one-size-fits-all approach to disclosures (ie, producing one disclosure report that meets the requirements of all applicable regulations) is appropriate. It will also be important to continuously monitor developments in this area as it is relatively fast-moving.
1.1 The Sustainable Finance Disclosure Regulation
The Sustainable Finance Disclosure Regulation (SFDR) as amended by Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (the EU Taxonomy) is described by the EU as a transparency framework. It sets out:
- how ‘financial market participants’ and ‘financial advisers’ (as defined in the regulations) have to disclose how they integrate sustainability risks and other ESG factors into their investment decisions and advice;
- how they disclose information about the environmental or social characteristics or sustainability objectives of their products to investors before they invest; and
- how they report back to investors on how those environmental or social characteristics or sustainability objectives were actually met.
The aim of SFDR is to help investors who want to invest in organisations and projects supporting sustainability objectives to make informed choices, and to assess how sustainability risks are integrated in the investee organisation’s investment decision process, ultimately making it easier to attract private funding to help the EU transition to a net-zero economy.
The table below sets out key information regarding SFDR.
| Status | ‘Level 1’ requirements (organisation-level disclosures in prospectus updates and on websites, and the requirement to disclose a sustainability risk policy) came into effect on 10 March 2021. ‘Level 2’ requirements (product-level mandatory disclosures using templates and the EU Taxonomy) came into effect on 1 January 2023. |
| Who is obliged to comply | Financial market participants required to comply with Level 1 SFDR disclosure obligations are the following EU organisations:
SFDR also applies to the following types of financial advisor:
Financial products that EU organisations must make Level 2 SFDR disclosures about are:
Larger financial market participants (defined as those with an average of 500 workers or those that are parent organisations of a large group with an average of 500 employees) are subject to all SFDR disclosure requirements. |
| Impact on financial market participants in other jurisdictions | Investment managers or financial advisers based outside of the EU, who market (or intend to market) their products to clients in the EU under article 42 of the EU Alternative Investment Fund Managers Directive (EU AIFMD). |
| Key Requirements | Level 1 – organisation-level disclosures The SFDR requires in-scope organisations to disclose how they manage the following:
Level 2 – product-level disclosures The SFDR refers to three different types of funds, which are commonly referred to as ‘grey’, ‘light green’, or ‘dark green’, with stricter reporting requirements for light green and dark green funds. ‘Article 6’ funds (grey funds) do not integrate any kind of sustainability into the investment process and could include stocks currently excluded by ESG funds such as tobacco organisations or thermal coal producers. These will continue to be allowed to be sold in the EU, provided they are clearly labelled as non-sustainable. ‘Article 8’ funds (light green funds) are those: ‘. . . where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the organisations in which the investments are made follow good governance practices . . .’ ‘Article 9’ funds (dark green funds) offer products that are designed to contribute to one or more environmental or social objectives. The financial market participant must disclose the methodology they have used to assess why their product is a sustainable investment, including how they have determined the contribution of the investments to environmental or social objectives, how investments do not cause significant harm to any environmental or social investment objective and how investee organisations meet the ‘good governance practices’ requirement. Whether a fund is article 6, article 8 or article 9 is self-assessed. The EU has clarified that financial products that have sustainable investment as an objective (article 9 funds) should only be used for sustainable investments. SFDR requires in-scope financial sector organisations to:
Here is a link to the article 8 and article 9 mandatory templates for Level 2 disclosure purposes, which came into force under the EU Taxonomy Delegated Disclosure Regulation (see section 1.3 below). The ESAs (see below) also publish word versions of the templates (e.g. EBA Word Templates ) |
| Sanctions | In its current state, the SFDR has no direct penalties for non-compliance. In their 28 September 2023 joint report on voluntary disclosures of PAIs under SFDR the three European Supervisory Authorities (the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority – together the ESAs) recommended that national regulators play a proactive role in ensuring compliance and employ appropriate enforcement tools for corrective actions. One such example is Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF), which issued its first administrative sanction for non-compliance with SFDR in October 2024, relating to ensuring that portfolio holdings reflect the name, investment objective, strategy, and characteristics set out in the documentation shared with investors. |
| Future Developments | EU Commission On 14 September 2023, the EU Commission published a targeted consultation aimed at gathering information from a wide range of stakeholders, including financial practitioners, non-governmental organisations, national competent authorities, as well as professional and retail investors, on their experiences with the implementation of the SFDR. The EU Commission is interested in understanding how the SFDR has been implemented and any potential shortcomings, including in its interaction with the other parts of the EU sustainable finance framework and whether ‘sustainable investment’ is sufficiently clear, and in exploring possible options to improve the framework. The main topics covered in the consultation were:
On the same day, the EU Commission also published a similar public consultation aimed at individuals and organisations (eg, interest groups, member associations and representative bodies) that have more general knowledge of SFDR. The main difference between the targeted and public consultation is that there are no questions regarding potential changes in the public consultation. The deadline for participating in both consultations was 15 December 2023. On 4 May 2024, the EU published a summary of the submissions by stakeholders. These were summarised as ‘Key Messages’ as follows:
European Supervisory Authorities Following consultations earlier in 2023, the ESAs published on 4 December 2023 their final report on proposed RTS on content and presentation of disclosures pursuant to SFDR. The final report is in response to a mandate sent by the EU Commission in April 2022 to review several aspects of the operation of the SFDR, including the disclosure of PAI of investment decisions on sustainability factors and to introduce disclosure of financial products’ decarbonisation targets. In the final report, the ESAs also suggest new product disclosures regarding greenhouse gas emissions reduction targets and the following further technical revisions to SFDR:
The EU has not yet acted on any of the recommendations set out above and the EU’s Financial Services Commissioner confirmed to the EU Parliament on 6 November 2024 that she wants to transform SFDR into a product categorisation system with clear criteria. She also mentioned that she wants to focus more on directing private capital into projects with a positive environmental and social impact, including investments in the economic transition which are currently not adequately represented in the EU sustainable finance framework. Following the consultation, the EU is currently carrying out a comprehensive assessment of the SFDR framework, looking at issues such as legal certainty, usability and how the SFDR can play a part in tackling green-washing. |
On 28 November 2023, the UK Financial Conduct Authority (FCA) issued a Policy Statement (PS23/16) that confirmed the final rules and guidance for its Sustainability Disclosure Requirements and a consumer-focussed investment labelling regime (UK SDR). The FCA stated that it is committed to implementing rules that are coherent with international frameworks and standards as far as possible and that they recognise that many UK firms are already subject to SFDR and have already invested in systems and processes to classify products according to SFDR provisions. Whilst the FCA goes on to state that the starting point for UK SDR is different to the SFDR, the regimes are compatible and organisations should be able to use much of the information they already use for their product categorisation and disclosures under SFDR to meet the FCA’s qualifying criteria and disclosure requirements. The policy statement includes a mapping of UK SDR against SFDR. The FCA will monitor developments and continue to support greater alignment and compatibility between the two regimes.
For further information see How-to guide: How to comply with climate-related regulations applicable to the financial services sector in the UK.
Organisations should also be aware that national regulators, eg, France’s Commission de Surveillance du Secteur Financier and Germany’s Federal Financial Supervisory Authority, have issued their own guidance in relation to SFDR.
1.2 The Corporate Sustainability Reporting Directive (CSRD)
CSRD came into force on 5 January 2023. It amends the EU’s Non-financial Reporting Directive (NFRD) and Accounting Directive (amongst others). The CSRD’s primary objective is to enhance access to sustainability information and enforce more consistent and transparent sustainability reporting by businesses. It applies to more than the financial services sector and complements the disclosure obligations under SFDR.
The NFRD was adopted by the EU in 2014 and applies to listed organisations with more than 500 employees. It requires these businesses to publicly report policies relating to environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on organisation boards. The CSRD applies to a broader set of organisations than NFRD and requires organisations to report using a double materiality perspective – reporting both on their impacts on people and the environment, and on how social and environmental issues create financial risks and opportunities for the organisation.
On 26 February 2025, the European Commission adopted a package of proposals (Omnibus I) to ‘simplify EU rules and boost competitiveness’. Key proposed changes include the following changes to CSRD:
- a revised scope - all companies with less than 1,000 employees and less than 50 million turnover will be outside the scope of the CSRD; and simplified reporting requirements (together the ‘Simplification’ Proposed Directive);
- the introduction of Voluntary Standards to support companies falling outside the CSRD scope; and
- a delay of up to two years for first reports for companies not reporting from 1 January 2024 (the ‘Stop-the-Clock’ Directive).
The Stop-the-Clock Directive was approved via fast-track on 14 April 2025 and it entered into force on 16 April 2025. EU member states have to transpose the directive into national law by 31 December 2025.
The Simplification Proposed Directive will go through the normal EU legislative process. The earliest the European Parliament will vote on the final text is 13 October 2025, with a plenary vote expected later in the month.
The specific information that is required to be reported under CSRD is set out in the European Sustainability Reporting Standards (ESRS), adopted by the European Commission as a delegated act. One way to explain the relationship between the two is that CSRD is the EU law that requires in-scope organisations to issue annual sustainability reports, whereas the ESRS outline how and what information and ESG metrics organisations need to report to comply with the CSRD.
The CSRD is aligned with SFDR and EU Taxonomy disclosures, and the ESRS are intended to be interoperable with the International Sustainability Standard Board (ISSB) standards relating to general sustainability disclosures (IFRS S1) and climate-related disclosures (IFRS S2). They are also intended to align with the Global Reporting Initiative reporting standards. However, organisations applying ESRS will not automatically meet the requirements of the ISSB standards and therefore organisations will need to understand the differences between the two standards if they want to make disclosures that are compliant with both ISSB and CSRD. The European Financial Reporting Advisory Group (EFRAG) has published guidance on the interoperability between the ISSB Standards and ESRS, which is available on EFRAG’s website.
The climate-related aspects of ESRS are also closely aligned with the disclosure requirements of the Task Force on Climate-related Financial Disclosures (TCFD).
As with all sustainability and climate-related regulation, organisations that do not fall under the scope of CSRD may voluntarily disclose this information in order, for example, to get access to sustainable financing, or for other business-related reasons.
The table below sets out summary information regarding CSRD and the ESRS and how they have been, or might be amended under Omnibus I.
| Status | CSRD came into force on 5 January 2023, but the timetable for compliance has been amended by the ‘Stop-the-Clock’ Directive. Organisations will have to start reporting, using the ESRS framework (which is also expected to be revised and simplified under the Simplification Proposed Directive), according to the following timetable:
In addition, non-EU organisations that generate over €150 million per year in the EU and that have in the EU either a branch with a turnover exceeding €40 million or a subsidiary that is a large organisation or a listed SME will have to report on the sustainability impacts at the group level of that non-EU organisation as from financial year 2028, with first sustainability statement published in 2029. Separate standards are expected to be adopted specifically for this case, but this may be impacted by the Simplification Proposed Directive. The thresholds for non-EU organisations are also expected to increase under the Simplification Proposed Directive with the new threshold expected to be €450 million generated per year in the EU, the branch having a turnover exceeding €50 million, and the subsidiary undertaking would need to qualify as a ‘large undertaking’ under the Accounting Directive. |
| Applicability | Pre- Simplification Proposed Directive - All large undertakings (including large public-interest entities) and all listed undertakings (including listed small and medium undertakings, but excluding listed micro-undertakings). Micro-undertakings are undertakings which on their balance sheet dates do not exceed the limits of at least two of the three following criteria:
Small undertakings are undertakings which on their balance sheet dates do not exceed the limits of at least two of the three following criteria:
Medium-sized undertakings are undertakings which are not micro-undertakings or small undertakings and which on their balance sheet dates do not exceed the limits of at least two of the three following criteria:
Large undertakings are undertakings which on their balance sheet dates exceed at least two of the three following criteria:
Public-interest entities are undertakings that are:
If the Simplification Proposed Directive is adopted, CSRD will only apply to companies that have more than 1,000 employees and either a turnover above €50 million, or a balance sheet total above €25 million. |
| Key Requirements | Pre- Simplification Proposed Directive - The ESRS consist of 12 reporting standards – two general (cross-cutting) standards, five environmental standards, four social standards and one governance standard: General: Environmental: ESRS E3 – Water and marine resources ESRS E4 – Biodiversity and ecosystems ESRS E5 – Resource use and circular economy Social: ESRS S2 – Workers in the value chain ESRS S3 – Affected communities ESRS S4 – Consumers and end-users Governance: ESRS 1 sets general principles to be applied when reporting according to ESRS and does not itself set specific disclosure requirements. ESRS 2 specifies essential information to be disclosed irrespective of which sustainability matter is being considered. ESRS 2 is mandatory for all in-scope organisations. All the other standards are subject to a materiality assessment. This means that the organisation will report only relevant information and may omit the information in question that is not relevant (‘material’) for its business model and activity. Disclosure requirements subject to materiality are not voluntary. The information in question must be disclosed if it is material, and the undertaking’s materiality assessment process is subject to external assurance in accordance with the provisions of the Accounting Directive. The standards require undertakings to perform a robust materiality assessment to ensure that all sustainability information necessary to meet the objectives and requirements of the Accounting Directive will be disclosed. If an organisation concludes that climate change is not a material topic and therefore does not report in accordance with that standard, then it has to provide a detailed explanation of the conclusions of its materiality assessment with regard to climate change. This requirement reflects the fact that climate change has wide-ranging and systemic impacts across the economy. The ESRS are expected to be revised and simplified under the Simplification Proposed Directive. |
| Sanctions | Each EU member state will set penalties and sanctions for non-compliance within their jurisdiction. |
| Future Developments | Draft ESRS for SMEs were issued for consultation in January 2024 and were expected to come into effect on 1 January 2026. Whether these will still be required depends on the outcome of the Simplification Proposed Directive process. CSRD also includes provisions for the adoption of sector-specific ESRS and separate standards to be used by certain non-EU companies. The adoption of these had been postponed from mid-2024 to mid-2026 to give companies more time to comply with the ESRS. Whether these will still be required depends on the outcome of the Simplification Proposed Directive process. |
1.3 The EU Taxonomy
The EU Taxonomy entered into force on 12 July 2020 and establishes the criteria for determining whether an economic activity qualifies as environmentally sustainable, which can then be used to assess the degree to which an investment is environmentally sustainable. It supports the disclosures made under SFDR (see section 1.1) and CSRD (see section 1.2) and helps direct investments to the economic activities in line with the European Green Deal objectives, including the 2050 climate-neutrality target.
For the purposes of establishing the degree to which an investment is environmentally sustainable, an economic activity shall qualify as environmentally sustainable where that economic activity:
- contributes substantially to one or more of the following environmental objectives:
- climate change mitigation;
- climate change adaptation;
- the sustainable use and protection of water and marine resources;
- the transition to a circular economy;
- pollution prevention and control; or
- the protection and restoration of biodiversity and ecosystems.
- does not significantly harm any of the environmental objectives set out in 1 above;
- is carried out in compliance with minimum safeguards (such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights); and
- complies with technical screening criteria established by the EU Commission through the following delegated acts:
- The Climate Delegated Act – this sets out the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives. The Climate Delegated Act entered into force in January 2022.
- The Disclosures Delegated Act – this specifies mandatory reporting templates for the content and presentation of information to be disclosed by financial and non-financial undertakings concerning the proportion of environmentally sustainable economic activities in their business, investments or lending activities. This entered into force in January 2022.
- The Complementary Climate Delegated Act – this sets out the strict conditions when specific nuclear and gas energy activities can be included in the list of economic activities covered by the EU Taxonomy. This entered into force in January 2023.
- The Environmental Delegated Act – this includes a new set of taxonomy criteria for economic activities making a substantial contribution to one or more of the non-climate environmental objectives: sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems. To complement this, the EU Commission adopted amendments to the Climate Delegated Act, which expand on economic activities contributing to climate change mitigation and adaptation not included so far – in particular in the manufacturing and transport sectors. The Commission has also adopted amendments to the Disclosures Delegated Act, to clarify the disclosure obligations for the additional activities. The Environmental Delegated Act entered into force on 21 November 2023.
The EU Taxonomy requires companies to classify their environmentally sustainable economic activities and investments and report related economic key performance indicators (KPIs) annually.
To comply with the EU Taxonomy, companies must report in 4 steps. One of these steps is to disclose the proportion of the company’s aligned turnover, CapEx and OpEx, all technical screening criteria fulfilled, or eligible under the environmental objectives. These KPIs need to be presented for each relevant activity defined in the EU Taxonomy, ensuring no double counting, in addition to the total KPIs for the company. In addition to the proportions, companies need to provide the absolute numbers underlying the calculations.
The information should be accompanied by qualitative information, such as how the KPIs were determined. In addition, the figures of each KPI and the reasons for any changes in those figures in the reporting period should be provided.
The EU has published a Taxonomy Navigator to help users better understand the EU Taxonomy in a simple and practical manner.
Further significant detail regarding each of the environmental objectives, what significant harm is and what minimum safeguards are can be found in the text of the EU Taxonomy regulation.
1.3.1 Simplification of EU Taxonomy
On 4 July 2025, the EU adopted a set of measures to simplify the application of the EU Taxonomy. The changes are aimed at reducing the administrative burden for companies while preserving the framework’s core objectives.
The changes were adopted in the form of a Delegated Act amending the Taxonomy Disclosures, Climate and Environmental Delegated Acts. The Delegated Act will now be transmitted to the European Parliament and the European Council for their scrutiny. The changes will apply once the scrutiny period of 4 months, which can be prolonged by another 2‑month period, is over. The simplification measures laid out in the Delegated Act will apply as of 1 January 2026 and will cover the 2025 financial year. However, undertakings are given the option to apply the measures starting with the 2026 financial year if they find this more convenient.
Simplifications to reporting requirements
The amendments to the Disclosures Delegated Act aim to simplify reporting obligations for both financial and non-financial undertakings, reducing administrative burdens while maintaining essential data transparency. They include:
- Non-financial undertakings can omit non-material activities if they account for less than 10% of KPIs.
- Financial undertakings may exclude exposures to counterparties not required to report sustainability information.
- Reporting templates have been significantly shortened, with a 64% reduction in data points for non-financial undertakings.
- Derivatives, cash, and goodwill are excluded from the denominator of financial KPIs.
- Financial undertakings may include exposures to non-reporting counterparties if they voluntarily report taxonomy KPIs.
- Until 2028, specific KPIs related to trading books and fees will be postponed.
- Non-material activities must be reported separately to ensure transparency.
KPI Adjustments
The adjustments to KPIs focus on enhancing accuracy and reducing the complexity of reporting for financial institutions. They include:
- Financial undertakings can exclude non-material activities from their KPIs, allowing for a more focused assessment.
- The application of certain KPIs, such as Trading Book KPI, is postponed until 2028.
- Simplified templates will reduce reported data points for credit institutions by 89%.
‘Do No Significant Harm’ (DNSH) Criteria Simplification
Amendments to the DNSH criteria aim to alleviate compliance burdens, particularly concerning the use and presence of chemicals in various sectors. They include:
- A revised Appendix C clarifies exemptions from EU environmental legislation, enhancing usability.
- The removal of certain assessment requirements will significantly reduce compliance costs for reporting undertakings.
- The amendments are designed to improve alignment with existing EU legislation and facilitate compliance.
Section 2 – Other and expected regulatory developments in the EU
2.1 EU Green Bond Standard
On 30 November 2023, the EU published a voluntary European Green Bond Standard as part of its sustainable finance framework. The aim is for it to be a gold standard for green bonds and to tackle greenwashing. It relies on the detailed criteria of the EU Taxonomy to define green economic activities, ensures levels of transparency in line with market best practice and establishes supervision of companies carrying out pre- and post-issuance reviews at European level.
2.2 The Corporate Sustainability Due Diligence Directive
The EU’s Corporate Sustainability Due Diligence Directive (CSDDD, also known as CS3D), which was approved by the European Parliament on 24 April 2024, requires organisations to identify actual and potential adverse human rights impacts and actual and potential adverse environmental impacts arising from their own business operations or the business operations of their subsidiaries. Organisations must also identify any actual and potential adverse impacts arising from their upstream business relationships.
Only very large organisations are within the scope of CSDDD and the financial services sector is currently largely excluded, except in relation to its upstream activities (ie, goods and services that the financial sector purchases). CSDDD also excludes downstream activities, except in relation to the distribution, transport and storage of a product, where the business partners carry out those activities for the organisation or on behalf of the organisation.
The timetable for the application of CSDDD was amended by the Stop-the-Clock Directive and the deadline for transposition into national law is now 2027, with the first wave of reporting by in-scope organisations not required until 2028. Omnibus I increases the thresholds for in-scope organisations, changes which operations of an organisation are in-scope, changes the focus from an entity-based approach to a risk-based approach, and requires organisations to focus on areas where actual and potential adverse impacts are most likely to occur. Companies should no longer be required to carry out a comprehensive mapping exercise, but instead, conduct a more general scoping exercise and in-scope organisations should base their efforts on reasonably available information. The proposal also simplifies the provisions on transition plans for climate change mitigation by aligning them with the CSRD.
2.3 Regulation on the transparency and integrity of environmental, social and governance (ESG) rating activities
In June 2023, the European Commission released a proposal to regulate ESG rating providers. ESG ratings play an important role in the EU sustainable finance market as they provide information to investors and financial institutions regarding, for example, investment strategies and risk management on ESG factors.
On 24 April 2024, the European Parliament adopted the proposal for a regulation of the European Parliament and of the Council on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities (the ESG Ratings Regulation).
The European Commission has long considered that the ESG rating market suffers from a lack of transparency and the new regulation is aimed at improving the reliability and transparency of ESG rating activities and introduces rules on the prevention of conflicts of interest that it is intended will increase the integrity of the operations of ESG rating providers.
On 19 November 2024, the EU adopted the ESG Ratings Regulation. The ESG Ratings Regulation also introduces amendments to SFDR, in order to ensure that if financial undertakings develop and disclose their own ESG ratings they disclose the same information as specialised ESG rating providers. It was published in the EU’s Official Journal on 12 December 2024 and entered into force on 1 January 2025, with its provisions becoming applicable from 2 July 2026.
ESG rating providers offering services to investors and organisations in the EU must be authorised and supervised by the European Securities and Markets Authority (ESMA). This will also ensure the quality and reliability of their services to protect investors and ensure market integrity.
2.4 Basel Committee on Banking Supervision Pillar 3 Disclosure Framework
On 29 November 2023, the Basel Committee on Banking Supervision (the Committee) issued a public consultation paper on a Pillar 3 disclosure framework for climate-related financial risks. This work forms part of the Committee's holistic approach to address climate-related financial risks to the global banking system.
Basel III is an internationally agreed set of measures developed by the Committee in response to the financial crisis of 2007-09. The measures aim to strengthen the regulation, supervision and risk management of banks. Basel III builds on the previous banking accords, Basel I and Basel II, and is comprised of three parts, or pillars - Pillar 1 addresses capital and liquidity adequacy and provides minimum requirements; Pillar 2 outlines supervisory monitoring and review standards; and Pillar 3 promotes market discipline through prescribed public disclosures.
The Pillar 3 disclosure framework for climate-related financial risks strengthens the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability, and the potential design of such a framework. It published the consultation paper to seek the views of stakeholders on its preliminary proposal for qualitative and quantitative Pillar 3 disclosure requirements that would complement the work of other standard setters, including the ISSB, and provide a common disclosure baseline for internationally active banks. The consultation closed on 14 February 2024, and after considering the feedback from stakeholders, the Committee has amended certain elements relative to the proposals set out in the consultative document and on 13 June 2025 published a voluntary climate-related financial risks disclosure framework for jurisdictions to consider.
The Committee will monitor relevant developments, including implementation of other reporting frameworks and disclosure practices by internationally active banks in member jurisdictions, and consider whether any revisions to the framework would be warranted in future.
Additional resources
Task Force on Climate-Related Financial Disclosures
International Sustainability Standards Board
European Commission – Corporate Sustainability Reporting Directive
European Commission – Sustainable Finance Disclosure Regulation
European Commission – EU Taxonomy
Financial Conduct Authority – Climate change and sustainable finance
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