ESG Regulatory Essentials

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Reporting and disclosures
 

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.

For queries in the UK, please reach out to Richard.Andrews@kpmg.co.uk, Begona.Ramos@kpmg.co.uk, Myra.Doyle@kpmg.co.uk, Danny.Clark@kpmg.co.uk, Keith.Thompson@kpmg.co.uk

FCA delays policy statement on extending SDR to portfolio managers

The FCA has announced that it no longer intends to publish a policy statement in Q2 2025 on extending the SDR to UK portfolio managers. It wants to ensure that an extension of the SDR delivers good outcomes for consumers, is practical for firms and supports growth of the sector. It will therefore take the necessary time to deliver these outcomes.

FCA quarterly consultation paper with SDR clarifications

Following CP 24/26, which has now closed, the FCA published Handbook Notice 127, amending various elements of its handbook including corrections and clarifications to the SDR effective 28 February. These changes included:

• Minor amendments to the anti-greenwashing rule, clarifying that it applies not just to financial promotions but also to wider communications with clients and that it should be read consistently with the "clear, fair, not misleading" COBS rule.
• Updates to the ESG handbook relating to the wider Sustainability Disclosure Requirements (SDR):
  • Distributors: to clarify that distributors of overseas recognised funds that use restricted terms need to display the required notice about overseas funds and include the hyperlink to the FCA website
  • Feeder funds: to clarify that feeder funds only need to comply with certain disclosures where they are not using a sustainability label.
  • Pre—contractual disclosure KPIs: to clarify that managers using sustainability labels should disclose the KPIs they are using and any other metrics a retail client would find useful.
  • First product—level report: to amend the rule so that managers have 16 months from the time they start using a label or restricted terms in which to product the first product—level ongoing report (up from 12 months). In response to feedback on the consultation, the FCA has also decided to align the timeline for on—demand product—level reporting with the timeline for mandatory product—level reporting. 

In the Notice the FCA also confirmed it would proceed with additional minor amendments and addressed some industry queries – such as on aligning the timing of product—level TCFD and SDR reports.

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.

Climate and environment—related financial risks

PRA and FCA climate adaptation reports

The PRA’s latest Climate Change Adaptation Report summarises key work performed to date, as well as the PRA's latest views of firms' progress in managing climate—related risks. The report references the PRA's planned update of the expectations in SS3/19, with a consultation expected in 2025 followed by an updated supervisory statement. The Climate Financial Risk Forum (CFRF) will provide a forum for industry to share experiences and build on existing guidance to help firms meet revised supervisory expectations. Meanwhile, the Bank of England continues to assess the potential build—up of systemic risks relating to climate change.

The FCA’s Adaptation Report notes that the insurance sector faces increased claims due to extreme weather events, and highlights concerns about the future affordability and availability of insurance. Banking adaptation risks include reduced mortgage lending due to reduced flood insurance availability and increased defaults in commercial lending following climate—related economic downturns. Investment risks involve volatility in agricultural markets and water shortages impacting companies. The existing response to climate adaptation has involved FCA—mandated climate risk disclosures and industry collaboration through the Climate Financial Risk Forum (CFRF), but there continue to be barriers around data availability, insurance underwriting approaches and allocation of capital to climate adaptation. 

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.

Markets
 

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.