Sustainability Regulatory Radar, from KPMG's EMA Financial Services Regulatory Insight Centre.
Welcome to our first edition of 2026 under the updated banner of Sustainability Regulatory Radar. Powered by KPMG Regulatory Horizon, Sustainability Regulatory Radar replaces ESG Regulatory Essentials and rounds up the latest regulatory developments impacting financial services firms in the UK and EU.
Recap
2025 closed out with some significant regulatory developments.
Following speculation that banks and insurers might have to wait until well into 2026, the PRA delivered SS5/25 on enhancing the management of climate-related risk for banks and insurers. SS5/25 replaced SS3/19 with immediate effect. It clarifies the PRA’s positions on proportionality and materiality and sets out more extensive expectations around the inclusion of climate-related risk management processes in strategic decision-making, the role of management and boards in overseeing climate-related risks and resilience, climate scenario analysis, stress testing, risk inventories and data. Crucially, in-scope firms have until 3 June 2026 to complete an internal review of their current approach versus SS5/25 and develop a credible and ambitious plan to remediate any gaps. For many, the updates may require significant uplift to existing frameworks. For banks operating in the UK and EU, the SS5/25 aligns requirements on climate-related risk more closely with ECB guidance — for more on the ECB’s approach, see below.
Also in December, the EU agreed revisions to the ‘Omnibus’ reporting initiative first introduced in February 2025. The final package significantly reduces the number of companies required to report under the Corporate Sustainability Reporting Directive (CSRD), with the scope now limited to EU companies with more than 1,000 employees and a net turnover of more than €450m. The scope for non-EU companies is also amended to apply to parent groups with more than €450m net turnover generated in the EU, and to their subsidiaries and branches generating turnover higher than €200m in the EU. The revised Directive is expected to be published in the Official Journal of the EU (OJEU) by March 2026, after which Member States will have 12 months to transpose it into national law.
Alongside the CSRD amendments, EFRAG presented revised European Sustainability Reporting Standards (ESRS) to the European Commission, targeting simplified double materiality assessments, enhanced readability of sustainability statements and greater interoperability with global standards. The Commission intends to make the revised standards mandatory for the 2027 reporting period. EFRAG has issued practical resources for Small and Medium-sized Enterprises (SMEs) to facilitate voluntary sustainability reporting, including for greenhouse gas (GHG) emissions.
The Corporate Sustainability Due Diligence Directive (CSDDD) has also been amended and will now apply only to large EU corporations with more than 5,000 employees and a net annual turnover of over €1.5 billion, and to non-EU companies above the same turnover threshold in the EU. Again, the revised Directive will be published in the OJEU in March 2026 — it will apply from July 2029 for all in-scope businesses.
The application of the EU Taxonomy Regulation has been simplified via a Commission Delegated Act published in the OJEU on 8 January 2026. It will enter into force on 26 January 2026 and will apply retrospectively from 1 January for the 2025 financial year. However, in-scope companies can opt to defer for one year providing they apply the previous rules in full for 2025.
Looking ahead — simplification or complication?
Looking ahead, pressures to simplify regulatory frameworks and requirements are likely to persist in both the EU and UK. However, this should not be categorised as deregulation, rather as a recalibration of the volume and complexity of regulatory requirements. For some, particularly international firms, the regulatory environment may become more complex, at least in the short term, as simplification measures may differ in scope across the UK and EU.
Key simplification initiatives in the immediate future look set to be of greatest benefit to asset managers. The European Council and Parliament are negotiating on the Commission’s proposed amendments to the Sustainable Finance Disclosure Regulation (SFDR) which would make disclosures clearer and more accessible for investors, while reducing compliance costs for firms.
The UK FCA has also committed to streamlining its sustainability reporting framework for asset managers and FCA-regulated asset owners, recognising the challenges that firms have faced in complying with existing requirements.
In other areas, firms should expect continued, targeted intervention to address material and emerging sustainability risks.
The ECB will continue to assess banks against its detailed climate and environment-related risk requirements, with the potential for financial penalties where they are not met. It has recently reiterated its commitment to three priority areas: the transition to a green economy (including assessing banks’ prudential transition plans), coping with the physical impacts of climate change (including banks’ capabilities in managing these risks) and assessing the impact of nature-related risks.
The European Supervisory Authorities’ joint guidelines on ESG stress testing will apply from 1 January 2027. National Competent Authorities (NCAs) will use 2026 to consider how to integrate ESG risks into their supervisory stress tests, either by integrating the risks into existing frameworks or designing adverse scenarios in a complementary assessment.
At a global level, the IAIS has raised concerns about how natural catastrophe insurance protection gaps could have a systemic impact on financial stability, especially in emerging markets.
Meanwhile, UK firms await the outcome of consultations on transition plans and the UK Sustainability Reporting Standards (SRS). The FCA is expected to consult imminently on SRS-aligned and transition plan disclosure requirements for UK listed companies.
Measures are also advancing to improve transparency and integrity in capital markets. HM Treasury (HMT) has now laid down draft legislation to bring ESG ratings providers within the FCA’s regulatory remit. The FCA is consulting until 31 March 2026 on its proposed approach, with a final policy statement expected in H2 2026 – firms wishing to provide certain types of ESG ratings in the UK will need FCA authorisation from 29 June 2028. ESMA has published technical standards for regulating ESG ratings providers in the EU, with the EU regime applying from July 2026. IOSCO’s recent report on ESG benchmarks emphasised the need for strong governance, accountability and methodological integrity, noting that existing principles require adaptation to address the evolving nature of ESG data and methodologies.
At a glance — areas to watch
To discuss any of the above, or KPMG Regulatory Horizon, in more detail, please reach out.
