ESG Regulatory agenda 2026: are you up-to-date and well prepared?

While regulatory frameworks continue to evolve and, at times, create uncertainty, the underlying demand for ESG (environmental, social and governance)-driven financial products remains robust. Investors’ interest in sustainability-related investments and consumer awareness have not diminished creating market appetite and commitment to ESG integration. As example, the green bonds market is anticipated to have the fastest growth in the ESG investing space with projections indicating that issuance would surpass USD 1 trillion¹. 2025 has also witnessed advancements in carbon pricing mechanisms, rise in defense investments and trading markets. These developments are considered critical for achieving global climate targets and are expected to play a central role in sustainable finance strategies. 

In parallel with these market trends, the regulatory landscape for sustainable finance continues to evolve. Several initiatives are underway or expected, with the aim of clarifying requirements, reducing administrative burden, and supporting the effective integration of ESG considerations across the financial sector. The following sections provide an overview of the most relevant regulatory developments and their anticipated timelines. 

Green Bonds and external reviews²

In April 2025, the European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, published its Consultation Paper on the remaining Regulatory Technical Standards (RTS) for external reviewers under the European Green Bonds Regulation. These RTS are intended to enhance the transparency, quality, and reliability of external reviews, which play a critical role in ensuring that green bonds genuinely contribute to the green transition. The standards set out requirements for the independence, methodology, and disclosure practices of external reviewers, aiming to underpin investor confidence that their capital is being allocated to projects with real environmental benefits. The regulatory framework also introduces stricter reporting and post-issuance obligations for issuers, including the need to demonstrate ongoing alignment with the EU Taxonomy and to provide regular updates on the use of proceeds and environmental impact. These measures are expected to further harmonize the European green bond market, reduce the risk of greenwashing, and support the EU’s broader sustainable finance objectives. 

ESMA Final report on 2023–2024 Common Supervisory Action on sustainability³

In June 2025, ESMA published its final report on the 2023–2024 Common Supervisory Action (CSA) on sustainability, which assessed how asset managers integrate sustainability risks and comply with the Sustainable Finance Disclosure Regulation (SFDR) disclosure requirements. The review found that while most managers have made progress in embedding ESG factors into their investment processes, there remain significant differences in the depth and quality of integration. Supervisors highlighted recurring issues such as inconsistent or vague disclosures, insufficient documentation of the ESG risk integration, and limited resources dedicated to sustainability in smaller firms. The report provides a set of good and poor practices and sets out expectations for national authorities to follow up with targeted supervisory actions. Asset managers are expected to enhance their documentation, ensure alignment across all SFDR disclosures, and strengthen governance and remuneration frameworks linked to sustainability objectives. 

Thematic notes on clear, fair and not misleading sustainability-related claims⁴

In July 2025, ESMA promoted clarity in sustainability-related communications and published a thematic note on sustainability-related claims used in non-regulatory communications. This publication outlines four guiding principles on making sustainability claims, aligned with previous publications from the European Insurance and Occupational Pensions Authority (EIOPA) and the European Banking Authority (EBA), and offers practical do’s and don’ts, illustrated through concrete market examples. Firms are encouraged to apply these principles consistently, particularly when using ESG labels, awards, or external ratings, and to ensure that communication is transparent and not misleading. The note aims to reduce greenwashing risk and promote consistent, reliable information for investors. 

Supervisory cooperation⁵

In August 2025, ESMA and the European Environment Agency (EEA) signed a Memorandum of Understanding (MoU) to strengthen cooperation in sustainable finance. The MoU focuses on environmental factors and their integration in the EU sustainable finance framework, including the supervision of the framework. The MoU also outlines how ESMA and the EEA will exchange expertise, information and data with one another and support mutual capacity building activities. 

SFDR 2.0 and consolidated questions and answers (Q&A) on the SFDR (Regulation (EU) 2019/2088) and the SFDR Delegated Regulation⁶

The official legislative proposal for a review of SFDR level 1 (“SFDR 2.0”) is expected to be published within November 2025, covering simplification in entity-level disclosures and setting up new categories for sustainability-related financial products. In the meantime, the European Supervisory Authorities (ESAs) published an updated consolidated Q&A on the SFDR and its Delegated Regulation in August 2025. The Q&A addresses key topics such as the definition of “sustainable investment,” calculation of Principal Adverse Impact (PAI) indicators, product-level disclosures, and the interaction with the EU Taxonomy. Recent clarifications include the treatment of water usage metrics, the calculation of energy consumption for real estate investments, and the application of minimum commitment thresholds for Article 8 and 9 products. In September 2025, the Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA – the ESAs) published their fourth annual report on the extent of voluntary disclosure of principal adverse impacts (PAIs) under the SFDR. The ESAs observed a steady improvement in the quality of PAI voluntary disclosures at both entity and product level. The 2025 report also includes recommendations for National Competent Authorities to support their supervision of PAI disclosures and for the European Commission to consider ahead of the forthcoming review of the SFDR. Asset managers are invited to review the updated Q&A and supervisory recommendations to ensure their disclosures and methodologies are fully aligned with regulatory expectations. 

Omnibus simplification package 

The European Commission adopted the Omnibus Simplification Package on 26 February 2025 as part of its strategy to reduce administrative burdens and boost EU competitiveness. The initiative aims to simplify sustainability-related legislation, including the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CS3D), the EU Taxonomy Regulation, and Carbon Border Adjustment Mechanism (CBAM). Key objectives include streamlining reporting requirements, raising thresholds to remove around 80% of companies from CSRD scope, and introducing voluntary SME standards. These changes are designed to maintain the integrity of the EU’s sustainability framework while making compliance more proportionate and efficient.⁷

A) Zoom in Corporate Sustainability Reporting Directive (CSRD) 

The “Stop-the-Clock” Directive, which temporarily paused the application of certain CSRD reporting obligations to give companies and regulators more time to prepare, was published in the Official Journal on 16 April 2025 and must be transposed into national law by Member States by 31 December 2025.  Meanwhile, the “content” part of the Omnibus Directive is still being discussed. The Commission has also indicated that it aims to issue a recommendation on SMEs and voluntary reporting as soon as possible. Regarding the revision of reporting standards, EFRAG, the European Financial Reporting Advisory Group is expected to deliver its final technical advice to the European Commission, due by 30 November 2025.⁸  

Legislative outlook: CSRD and CS3D⁹

On 13 October 2025, the European Parliament’s Legal Affairs Committee (JURI) approved a new position on the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CS3D), which would simplify reporting and due diligence requirements. However, this position was rejected by the full Parliament in late October, meaning the file is expected to return to plenary in November for a new vote and a new deadline for amendments. As a result, the final scope and timing of both directives remain subject to further negotiation and may still change. Market participants are advised to monitor developments closely and be proactive in anticipating the preparation for the upcoming ESG requirements. 

B) EU Taxonomy of sustainable economic activities^{10, 11}

On 4 July 2025, the European Commission adopted a set of measures to simplify the application of the EU Taxonomy, the EU’s classification system for sustainable economic activities and investments. The changes are designed to reduce administrative burden for companies while preserving the framework’s core objectives. 

Key simplification measures include: 

• Materiality thresholds: Non-financial undertakings are exempt from assessing EU Taxonomy eligibility and alignment for economic activities that are not financially material for their business. Activities are considered non-material if they account for less than 10% of total turnover, capital expenditure (CapEx), or operating expenditure (OpEx). This assessment is made for each KPI independently. Non-material activities must still be reported, but only in summary, and companies must provide contextual information and explanations for non-materiality.  
• Simplified reporting templates: The number of data points required in EU Taxonomy reporting templates will be reduced. New summary tables are introduced, and the templates for gas and nuclear activities are deleted. For credit institutions, reporting on the trading book and fee and commission income is only required from 2027.  
• Do No Significant Harm (DNSH) criteria: The Delegated Act simplifies the generic DNSH criteria for the pollution prevention and control objective, particularly regarding the use and presence of chemicals. 
• Flexible reporting for financial firms: Financial institutions can exclude exposures to entities not required to report under the EU Taxonomy, include exposures to entities that report voluntarily or where the use of proceeds is known, and delay reporting on certain KPIs until 2028. They may also opt out of detailed EU Taxonomy KPI reporting for two years if they do not claim EU Taxonomy alignment, instead making a statement to that effect in their management report.  

These changes are expected to enhance EU competitiveness while maintaining the integrity of the EU Taxonomy framework and supporting the EU’s climate and environmental goals. The Commission has also published illustrative examples and templates to help companies and financial institutions understand and implement the new requirements. For further details, the Commission’s official Q&A provides additional clarifications on the application of the new rules.  

While finalization is anticipated by year-end (Q4 2025), the scrutiny period has been extended until 5 January 2026. Since the simplified rules are due to apply from 1 January 2026, this extension (coupled with audit and FY2025 closing schedules) poses a significant risk to financial institutions’ ability to apply these rules for FY2025 reporting, as encouraged by the Commission. Industry associations have petitioned the European Commission and ESMA to provide clarity and clear guidelines that financial institutions can apply the simplified rules for FY2025 disclosures, with appropriate forbearance if the Delegated Regulation does not come into effect on time. 

Recommendation (EU) 2025/1710 of 30 July 2025 on a voluntary sustainability reporting standard for small and medium-sized undertakings¹²

The Commission’s Recommendation (EU) 2025/1710 introduces a voluntary sustainability reporting standard (VSME) for non-listed SMEs. Developed by EFRAG, the VSME is designed to help SMEs respond efficiently to information requests from customers and lenders subject to CSRD. The Recommendation encourages larger companies and financial institutions to align their information requests with the VSME, reducing reporting fragmentation and administrative burden for SMEs. The VSME is expected to facilitate supply chain due diligence and access to sustainable finance for smaller companies. 

Defense and sustainable finance 

In June 2025, the European Commission published a Notice¹³ clarifying that the EU sustainable finance framework and the Corporate Sustainability Due Diligence Directive do not prohibit investment in the defense sector. The Notice confirms that defense activities should be assessed individually, and only certain controversial weapons are specifically addressed by the SFDR. The Commission also highlights the sector’s potential contribution to social sustainability, such as supporting peace and security objectives. This clarification aims to reduce uncertainty for financial institutions and facilitate access to finance for companies operating in the defense industry, provided they comply with existing sustainability standards and disclosure requirements. The Notice is effective immediately as interpretative guidance, and Member States are expected to align their practices accordingly, while related legislative proposals under the Defense Readiness Omnibus package will proceed through the EU’s rulemaking process in the coming year. 

Transition Finance 

Transition finance has become a central topic in 2025, with new EU-level guidance, market initiatives and more robust methodologies for the ESG risk quantification. The EU Platform on Sustainable Finance published recommendations on assessing corporate transition plans, emphasizing the need for credible, science-based targets and transparent reporting¹⁴. The European Commission adopted measures to simplify EU Taxonomy disclosures, including materiality thresholds and streamlined templates, making it easier for financial institutions to support companies on decarbonization pathways¹⁵. In Luxembourg, the Stock Exchange launched the Transition Finance Gateway¹⁶, providing investors with access to climate transition data for over 500 issuers. These developments are designed to help channel capital towards companies committed to reducing their environmental impact and achieving net zero targets by 2050. 

Expectations for 2026 

The evolving regulatory landscape and the anticipated review of key European regulations and directives signal a period of significant transition for financial institutions and market participants. While legislative timelines may shift, proactive preparation remains essential to ensure compliance and maintain investor confidence. 

Looking ahead to 2026, it is important to stay up to date and: 

• Monitor regulatory developments closely: stay informed on SFDR 2.0, Omnibus package developments to anticipate changes early. 
• Embed sustainability in risk management frameworks: integrate ESG factors into credit, market, and operational risk assessments to align with supervisory expectations. 
• Strengthen governance and data infrastructure: establish robust governance structures, escalation process, enhance data collection processes, and invest in data quality to support accurate and timely reporting. 
• Plan ahead of the CSRD reporting obligations: remember that CSRD report requires data to be ready for limited assurance. Begin preparing methodology, data sources, targets, actions and processes well in advance. 
• Dedicate time to climate transition planning and decarbonization: develop a clear roadmap for your decarbonization journey, including quantification of emissions, identification of strategic levers, and integration into business planning. 
• Leverage technology for efficiency: explore digital tools and AI potential for ESG data management, scenario analysis, and automated reporting to reduce administrative burden and improve accuracy. 

In conclusion, sustainable finance is scheduled for further growth and transformation in the coming years. The developments of 2025 and before established a strong foundation, and the expectations for 2026 suggest that sustainability is integral to financial decision-making, ultimately leading to a more resilient and equitable global economy.