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ESG Focus: UK/EU/International ESG Regulation Monthly Round-Up – January 2025
04 February 2025
In the EU, many of the ESG regulatory developments so far in 2025 have centred around the EU’s omnibus simplification package. We expect to hear more on how the EU intends to simplify and reduce regulatory burden in the next few weeks, with the biggest date in the diary being 26 February. ESG regulatory news has been quieter in the UK but we have seen the publication of PRA and FCA reports on climate adaptation. In addition, this month we have launched a new ESG Tool to help keep you updated on ESG Regulatory news in 2025 and beyond.
Chapter 1
1ESG Regulatory Alerts Tool
We have expanded our award-winning suite of ESG resources with a new tracker designed to ensure our clients stay updated on regulatory developments.
Sign up here for curated alerts on the latest ESG regulatory developments, monthly round-ups and thought leadership.
Chapter 2
2EU and International Developments
2.1 EU Commission publishes a Competitiveness Compass for the EU
On 29 January 2025, the EU Commission published a Competitiveness Compass for the EU. President of the European Commission, Ursula von der Leyen, announced that Europe must fix its weaknesses (alluding the a persistent gap in productivity growth) to regain competitiveness enacting ‘the excellent recommendations of the Draghi report into a roadmap’.
The Competitiveness Compass identifies the main areas for action as: closing the innovation gap, a joint roadmap for decarbonisation and competitiveness and reducing excessive dependencies and increasing security.
It identified five horizontal enablers to underpin the areas for action. From an ESG regulation perspective, “simplification” is the most relevant enabler and an example of this is the omnibus simplification package discussed below.
2.2 Omnibus Simplification Package
As a response to competitiveness concerns highlighted above and in the Draghi Report, in November 2024 Ursula von der Leyen announced that the European Commission will look at an omnibus package which aims to cut red tape and eliminate overlaps and contradictions in sustainability reporting requirements whilst maintaining its high standards. Current wisdom sees at least the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CS3D) and the Taxonomy Regulation (EU Taxonomy) being affected. But there is no clarity as to how wide-ranging these changes to ESG regulation might be, how the changes will be made (at Level 1 or Level 2 level) or when these changes will come into force. Read more here and here.
2.3 Climate-related risk
(a) EBA publishes guidelines on the management of ESG risks
On 9 January 2025, the European Banking Authority (EBA) published its final report on the Guidelines on the management of ESG risks (as mandated under Article 87a(5) of the Capital Requirements Directive). The guidelines set out the requirements for the identification, measurement, management and monitoring of ESG risks.
The guidelines state that institutions should ‘incorporate material ESG risks and their impacts on financial risk categories into their internal capital adequacy assessment process (ICAAP) to assess, and maintain on an ongoing basis, the amounts, types and distribution of internal capital that they consider adequate to cover the nature and level of ESG risks, taking into account the short, medium and long term.’
The guidelines will apply from 11 January 2026 except small and non-complex institutions for which the guidelines will apply at latest from 11 January 2027.
(b) EBA publishes a consultation paper on draft guidelines on ESG scenario analysis
On 16 January 2025, the EBA published a consultation paper on draft guidelines on ESG scenario analysis. The draft guidelines set out expectations for credit institutions when adopting forward-looking approaches and incorporating the use of scenario analysis as part of their management framework to test financial and business model resilience. The consultation closes on 16 April 2025.
(c) BaFin – Risks in Focus 2025
On 28 January 2025, Germany’s financial regulator, BaFin published its Risk in Focus 2025 report. BaFin has made physical risk one of its key enforcement and supervision priorities this year, noting the increase in physical risks due to climate change such as the devastating rainfall and flood in Spain as well as transition risks such as sudden market price connections. It noted that a joint stress test of smaller banks and a survey of insurers showed that there was focus on physical and transition climate risk but there was room for improvement.
BaFin also recognised the difficulty in assessing which institutions bore climate risk as risk was transferred to insurers and reinsurers and ultimately to capital markets.
(d) FSB publishes report on the Relevance of Transition Plans for Financial Stability
On 14 January 2025, the Financial Stability Board (FSB) published a report on the Relevance of Transition Plans for Financial Stability. The report reviews the role of climate transition plans for both financial and non-financial firms on financial stability and provides a forward-looking perspective on how firms might adjust their response to climate risks.
The report stresses that continued efforts towards standardisation and broader adoption of transition plans are key to enhancing effective financial risk monitoring. It also notes that the use of transition plans for financial stability and macroprudential purposes remains in the early stages, as currently transition plans are primarily designed for the purpose of business strategy and target setting.
2.4 US Executive Order targets private-sector DEI policies and practices
On 21 January 2025, President Trump signed an Executive Order titled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity rolling back allegedly illegal diversity, equity, and inclusion (DEI) policies.”
This Order explicitly targets the private sector. It directs federal agencies to take certain steps to “combat” private-sector DEI initiatives, including compiling lists of “egregious and discriminatory DEI practitioners” by sector and requiring each agency to “identify up to nine potential civil compliance investigations” of “publicly traded corporations, large non-profit corporations or associations, foundations with assets of 500 million dollars or more, State and local bar and medical associations, and institutions of higher education with endowments over 1 billion dollars.” Read here for more information.
2.5 GFANZ shifts its focus to addressing barriers to mobilising capital
On 2 January 2025, the Glasgow Financial Alliance for Net Zero (GFANZ) announced that it has shifted its focus to addressing barriers to mobilising capital to support the transition to a net-zero economy. GFANZ will look at closing the “investment gap”, that is the barriers to investment in areas critical to the global transition. The intention is to unlock the $5 trillion plus a year opportunity created by countries modernising their energy systems and transitioning to a low-carbon economy.
GFANZ says that it will transition to an independent CEO-led group with leaders from financial institutions acting to address barriers faced in mobilizing capital for the global transition. GFANZ will also concentrate on mobilizing finance through public-private partnerships.
Chapter 3
3UK Developments
3.1 UK financial regulators publish adaptation reports
Both the UK Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have published climate change adaptation reports following invitation from Department for Environment, Food and Rural Affairs (DEFRA).
- On 28 January 2025, the FCA published its report discussing the three major issues it has identified as affecting climate change adaptation in the financial services industry:
- Data and modelling for quantification and management of climate risks;
- Barriers and enablers to insurance underwriting for climate risks and in consequence of lending and investment; and
- Barriers and enablers to financial services in allocating capital to adaptation.
- It looks at the risks that climate change adaptation may pose to the market considering three economically critically core functions: credit and payment services, investment markets and insurance. It notes that adaptation challenges ‘will likely require firms to adequately assess changing risk, promote climate resilience and modify their operations accordingly.’
- On 30 January 2025, the PRA published its report. The PRA notes that climate change and the transition to net-zero create operational and financial risks and economic consequences for monetary and financial stability. The PRA observes that banks and insurers have taken positive steps to implement the supervisory expectations set out in SS3/19 but levels of readiness and embedding vary and further progress by all firms is required. It specifically notes that in general, scenario analysis capabilities are still not sufficiently well developed to support effective strategic and business decision-making.
The PRA notes that it expects to publish a consultation for the update of SS3/19 on enhancing banks' and insurers' approaches to managing the financial risks from climate change (and to publish the update) in 2025. It noted that insurance firms are yet to embed the PRA’s climate expectations (see SS3/19 which the PRA has confirmed it will be updating this year and here) and progress is needed especially on scenario analysis and risk management.
3.2 PRA sends Dear CEO letters on climate risks
On 9 January 2025, the PRA published a CEO letter it had sent to a number of insurers setting out key insurance supervision focus areas for 2025.
The PRA highlighted that the financial risks from climate change continue to be important, particularly for underwriting strategies and risk management approaches.
3.3 UK Parliament holds second reading of the Climate and Nature bill
On 24 January 2025, the UK Parliament held its second reading of the Climate and Nature bill.
The bill aimed to ensure that policy and action on the climate and nature crises is science-led and people-oriented, creating a duty for the Secretary of State to ensure that the UK implements and achieves new climate change and nature targets and for the UK to achieve climate and nature targets connected to reducing emissions in line with Paris Agreement commitments and halting biodiversity loss in line with the UK’s commitments.
It is reported that the government won a motion 120-7 to end the debate of the bill, meaning that it will not return to the House of Commons until July and is unlikely to become law.
Our global Sustainable Finance & Investment group brings together a multidisciplinary global team that provides clients with best-in-market support. We are following developments relating to the ESG regulation, so please get in touch if you would like to discuss.
Stay ahead with timely curated developments, insights and thought leadership on ESG regulation with our ESG Regulatory Alerts tool.
This note is intended to be a general guide to the latest ESG developments. It does not constitute legal advice.
Authored by Rita Hunter, Julia Cripps, Emily Julier, Dominic Hill and Jessica Dhodakia.
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