ESG Regulatory Essentials

This is a regular publication from KPMG's EMA Financial Services Regulatory Insight Centre, providing key updates on the latest ESG regulatory developments impacting financial services firms in the UK and the EU.

The political drive for growth and competitiveness has been felt across many areas of FS regulation, including ESG. This, alongside the transition from rulemaking to implementation in some areas, broader concerns around continuing geopolitical uncertainty, and questions around whether regulations are achieving their intended outcomes, is contributing to deferrals and scaling back.

The European Commission has published its first ‘Omnibus’ package, responding to calls for simpler and more streamlined sustainability reporting requirements. The omnibus puts forward several proposals which would make significant changes to the scope, timing and content of the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD), EU Taxonomy, and carbon border adjustment mechanism (CBAM). The EU describes the package, which will now be subject to the usual legislative process, as an ‘unprecedented simplification effort’.

The EBA has released final guidelines on the management of ESG risks and a report on ESG data availability. It and is now consulting on ESG scenario analysis. EIOPA’s consultations have focused on sustainability risk management, biodiversity and the development of a natural catastrophe (Nat Cat) tool for consumers.

The EU Regulation on ESG ratings has now been published in the Official Journal, with rules applying from July 2026. And fund managers that are applying ESG—related fund name guidelines will now need to consider ESMA’s Q&As, particularly around the definition of ‘meaningfully investing in sustainable investments.

For updates on these and other items, please see below.

EU publishes its ‘Omnibus’ package on streamlining sustainability disclosures

The first European Commission ‘Omnibus’ package proposes amendments to sustainability reporting requirements under CSRD, the CSDDD and the EU Taxonomy. See above for more details.

FSB report on the relevance of climate transition plans for financial stability

The Financial Stability Board (FSB) has published a report examining the potential use of climate transition plans to assess financial stability. While acknowledging the potential of transition plans, the report highlights current limitations including their primary focus on business strategy rather than financial stability, and their existence for only a limited population of firms. The FSB concludes that transition plans could inform financial stability monitoring by providing insights into portfolio alignment, planned investments and financing/underwriting activities. However, to unlock this potential the challenges around standardisation, broader adoption and assurance will need to be addressed.

EBA final guidelines on management of ESG risks

The EBA has finalised its guidelines on the management of ESG risks for banks. The guidelines cover detailed requirements on materiality assessments, identification and measurement of ESG risks, managing and monitoring ESG risks, and transition plans. They will apply from 11 January 2026 except for small and non—complex institutions (SNCIs), for which they will apply at the latest from 11 January 2027.

key points include:

• Materiality assessment: firms should consider the impact of ESG risks on all traditional financial risk categories, and use short, medium and long-term time horizons. Materiality assessments should be performed at least every year, or every two years for SNCIs.
• Identification and measurement: the EBA provides detailed guidance on conducting exposure, portfolio, and scenario-based assessments. Additionally, firms should consider collecting specific data points for large corporate counterparties, such as geographical location of key assets and dependency on fossil fuels. 
• Strategies and business models: firms should consider ESG risks when developing and implementing their business and risk strategies, including how ESG risk factors can affect business model viability and targets in their transition plans. 
• ICAAP and ILAAP: material effects of ESG risks should be incorporated into ICAAP and ILAAP, including a description of risk appetite, threshold and limits set for ESG risks on solvency and liquidity. 
• CRD—aligned plans: firms’ CRD—aligned transition plans should be integrated into their business strategies, and consistent with risk and funding strategies, risk appetite, ICAAP and the risk management framework. 

EBA consultation on ESG scenario analysis

The EBA is consulting on ESG scenario analysis guidelines for banks. The guidelines cover scenario analysis to test a firm's financial resilience in the short to medium term, verifying its capital and liquidity adequacy, and long—term analysis to challenge business model resilience and help navigate an uncertain future. There are three key sections in the consultation:

• Uses of scenario analysis and proposals for a progressive and proportionate approach;
• What is required before undertaking scenario analysis and the criteria for setting scenarios and identifying transmission channels; and
• The distinctive features of climate stress testing and how it can test the robustness of a firm's business model and strategy in a range of plausible futures.

The EBA notes that while firms mainly focus on climate scenario analysis, it expects them to develop their tools and practices progressively to cover a wider range of environmental and other ESG risks, such as increased risk of disease outbreaks, human migration, ecosystem collapse and species extinction, terrorism and warfare, and political instability, which are often interrelated with or amplified by climate—related risks.

The consultation deadline is 16 April 2025 and the EBA intends to finalise the guidelines in H2 2025. The guidelines will apply to most firms from 11 January 2026 and to small and non—complex institutions (SNCI) from 11 January 2027.

EBA report on availability and accessibility of ESG risk data

The EBA has published a report assessing the availability of ESG risk data and the feasibility of a standardised methodology to ‘identify and qualify’ banking book credit exposures to ESG risks. It focuses on the impact of ESG risks on credit risk and the potential for using existing elements such as sustainability disclosure frameworks, supervisory stress testing and ESG scores in credit risk ratings to support a common methodology.

Key findings include:

Data Availability:

• Data is most readily available for large corporates and mortgage exposures, primarily for climate risk (transition risk for corporates).
• Significant data gaps exist for social and governance risks, and for other exposure classes like SMEs.

Methodologies:

• Methodologies for assessing environmental risks, particularly climate risks, are the most advanced.
• Social and governance risk assessments are mostly qualitative.
• ESG scores are commonly used, but challenges include variability due to differing approaches, data sources and rating providers.
• Linking ESG risk to credit risk remains nascent.

Standardised Methodology Feasibility:

• Currently, a robust, standardised methodology is not feasible due to the incomplete data landscape and ongoing development of key elements.
• A sequenced approach, starting with climate risks for large corporates, may be most feasible.

Future Considerations:

• Full implementation of the CSRD is expected to significantly improve the ESG data landscape for the corporate sector.
• Further development and support for voluntary standards for SMEs is needed.
• Supervisory stress testing and scenario analysis targeting climate—related financial risks are still in an exploratory phase.
• More transparency is needed on the role of ESG factors in external credit ratings.
   

EIOPA Solvency II consultations on biodiversity and sustainability

As part of the Solvency II review process, EIOPA ran two consultations, which closed on 26 February, on biodiversity risk management and managing sustainability risks.

Biodiversity risk management: EIOPA noted that biodiversity loss can result in significant economic risks, affecting the value of investments, the frequency and intensity of insured losses, and the overall risk profile of insurers’ portfolios. It identified significant investment exposure in the insurance sector to assets dependent on nature and ecosystem services, which may indicate an exposure to biodiversity risks. The consultation focussed on defining biodiversity and risk drivers for insurers, identifying current market practices on biodiversity risk assessment, and how biodiversity can be considered in the Solvency II framework. 

Managing sustainability risks: the consultation aimed to establish a coherent and proportionate approach to sustainability risk management, including the development (and partial disclosure) of sustainability risk plans. The consultation explored the relationship of sustainability risk plans with ORSAs, transition plans, and other reporting and disclosure requirements.

EIOPA will consider stakeholder comments and publish revised papers in the summer of 2025.

EIOPA consultation on a natural catastrophe tool

EIOPA’s consultation on a Nat Cat tool to raise awareness on potential risks and prevention measures closed on 28 February. EIOPA noted that climate change is leading to more frequent and intense natural hazards, increasing the risk of property damage and higher insurance premiums. Raising awareness about natural hazards and climate risks is therefore crucial for citizens and insurers.

Proposals for key information in the tool included:

• Risk score to natural hazards based on property location
• Risk prevention measures for common perils
• Information on insurance coverage, being aware of exclusions, and national insurance schemes for natural catastrophes

EIOPA will publish a final paper on the Nat Cat tool at the end of the year.

Proposals from ECB and EIOPA to reduce economic impact of natural catastrophes

The ECB and EIOPA have published a joint paper making two proposals to help reduce the natural catastrophe protection gap. This comes from the fact that in the last three years, only a quarter of losses incurred from extreme weather events in the EU were insured, and the share of insurance protection is declining.

The first policy proposal is for an EU-wide public-private reinsurance scheme, aimed at increasing insurance coverage and diversifying risks across the EU. The second is for an EU fund for public disaster financing, improving disaster risk management across Member States.

Decisions on whether to accept either proposal need to be made at political level. 

FSB framework for monitoring climate vulnerabilities

The FSB has set out a framework and toolkit for monitoring climate—related vulnerabilities in the global financial system. The report is aimed at FSB members and focuses on risks to financial stability, specifically emphasising the need to assess how physical and transition climate risks can be transmitted and amplified through credit, market and liquidity channels. The toolkit includes proxies, exposure metrics and risk metrics to provide early signals, gauge exposures and quantify impacts.

FSB report on the relevance of climate transition plans for financial stability

See ‘Reporting and disclosures.

EU regulation on ESG ratings

The Regulation on the transparency and integrity of ESG rating activities has been published in the Official Journal of the EU, with rules applying from July 2026. For more information, see the article above. 

ESMA Q&A on the application of ESG fund name guidelines

ESMA has published a Q&A on its ESG—related fund name guidelines, covering three topics.

• Green bonds: investment restrictions related to the exclusion of companies do not apply to investments in European Green Bonds (i.e. those issued under Regulation (EU) 2023/2631). For other green bonds, fund managers may use a look—through approach to assess whether the activities financed are relevant for the exclusions.
• Controversial weapons: the reference for the exclusion related to controversial weapons should be the one referred to in SFDR principal adverse impact (PAI) indicator 14. This is "Exposure to controversial weapons (anti—personnel mines, cluster munitions, chemical weapons and biological weapons)".
• "Meaningfully investing in sustainable investments”: funds may not be doing this where less than 50% of their assets are in sustainable investments.

The final point will have the greatest impact on fund managers. ESMA's fund name guidelines state that funds using sustainability—related terms need to ensure that 80% of investments are used to meet environmental or social characteristics or sustainable investment objectives, exclude investments that are excluded from Paris—aligned benchmarks, and commit to "invest meaningfully" in sustainable investments, as defined by the SFDR.

This clarification is noteworthy in that it has added a 50% quantitative threshold to the third requirement in ESMA's guidelines to define what "meaningfully invest" means in practice. ESMA also notes that "that amount [of sustainable investments] could be higher, subject to the circumstances of the case". Together, these have the effect of tightening up the requirements in practice.

Fund managers will need to be mindful of these clarifications as they implement ESMA's guidelines. The guidelines applied to new funds from 21 November 2024 and will apply to existing funds from 21 May 2025.