ESG Market Alert UK – April 2025

The UK’s seventh carbon budget

On 26 February 2025, the Climate Change Committee (CCC) released its recommendations for the UK’s seventh carbon budget (covering 2038-2042). This fulfils the CCC’s duty under the Climate Change Act to advise the UK Government on formulating carbon budgets to achieve the UK’s emissions targets, including its commitment to reach “net zero” by 2050. The report outlines 43 recommendations focusing on five key areas of decarbonisation:

1. Electrification: Expanding clean electricity (wind and solar) and accelerating electric vehicle adoption (aiming for 75% of cars/vans and 65% of heavy goods vehicles to be electric by 2040).
2. Low carbon fuels & CCS: Developing low-carbon fuels for sectors where electrification is not yet feasible (e.g., aviation or shipping), and scaling up carbon capture and storage (CCS) for industrial emissions. CCS will be essential for reducing emissions arising from cement and chemicals manufacturing, as well as power generation.
3. Nature-based solutions: Extracting CO2 from the atmosphere by enhancing carbon sinks, through doubling tree planting (raising UK woodland cover to 16% by 2040, up from 14.5%) and restoring 55% of peatlands.
4. Engineered removals: Bioenergy with CCS and direct air capture to be deployed to offset residual emissions, particularly from aviation.
5. Demand reduction: Promoting energy efficiency and low-carbon consumer choices. While these measures require high upfront investment, long-term savings (e.g., from electric vehicles) are expected, and it is vital that policies relating to the energy transition remain affordable for low-income households.

The next steps will involve the UK Government presenting its plans and strategies to achieve the UK’s climate targets, as well as proposing a budget level for the seventh carbon budget to Parliament by 30 June 2026, with Parliament tasked with approving or rejecting the proposal. Businesses should anticipate policy measures aligned with these priorities as the UK finalises its carbon budget trajectory.

Scottish court finds consents for new oil and gas fields were unlawful for failing to take into account downstream emissions

Scotland’s Court of Session invalidated the UK Government’s consent for two major North Sea oil and gas projects after finding that regulators failed to consider downstream emissions. Environmental groups, including Greenpeace challenged the approvals (which were received in 2022 and 2023), invoking the UK Supreme Court’s 2024 Finch v Surrey County Council ruling. That landmark case established that environmental impact assessments must cover greenhouse gas emissions from the eventual use of extracted oil and gas, and not just emissions from the extraction process itself.

The Court, in line with Finch, declared the consents granted for the projects unlawful for omitting these indirect emissions. The judges acknowledged the developers’ interests and the projects’ importance to UK energy security, but held that lawful decision-making – especially on climate grounds – takes priority. In effect, the court prioritised compliance with climate assessment requirements over industry concerns.

As a result, neither project can commence production until a new approval is secured that accounts for all emissions impacts (though preparatory work can continue in the interim). The decision has prompted the UK Government to re-examine its approach to new oil and gas projects, as well as how downstream emissions are accounted for, in order to provide greater certainty to the industry. Looking ahead, any future oil and gas development will face greater scrutiny in regard to its total carbon footprint before getting the green light, underscoring increased regulatory risk in this area.

FCA and PRA publish Climate Adaptation Report

On 28 January 2025, the Financial Conduct Authority (FCA) released its Adaptation Report 2025, which assesses the climate adaptation challenges faced by financial services firms and the related adjustments needed in risk management. It emphasises that banks, insurers, and asset management firms must update practices – from insurance underwriting and lending criteria to investment due diligence – to manage climate risks.

The report identifies three major climate adaptation challenges for the financial services industry:

1. Data and modelling gaps: A lack of high-quality data and modelling to help financial services quantify and manage climate risks.
2. Underwriting constraints: Barriers in insurance underwriting for climate risks impact lending and investment decisions, limiting financing for climate adaptation.
3. Capital for adaptation: Obstacles to allocating capital to climate adaptation projects slow progress.

The report endorses an Aim-Build-Contingency (ABC) response, which encourages firms to integrate climate scenario analysis and contingency planning into short-, medium-, and long-term strategies. The model encourages firms to define objectives, develop plans based on available data, and prepare for uncertainty through scenario analysis and contingency planning.

The FCA cautions that the financial sector cannot tackle climate risk alone. The resilience of financial services depends also on broader societal adaptation – improvements in infrastructure, planning, and public policy. Persistent data gaps and the lack of standard adaptation metrics mean cross-industry collaboration and information-sharing are critical to maintaining financial stability as climate impacts intensify.

Firms across the financial services sector should review and reinforce their climate risk frameworks, prioritising forward-looking scenario planning, investment in climate data, and integration of climate adaptation into strategic decision-making.

FCA’s update on diversity and inclusion initiatives

In March, the FCA announced important updates to its regulatory and enforcement approach. Notably of these, the FCA and PRA have axed plans to impose rules for diversity and inclusion in the financial services sector.

The decision follows a consultation with the PRA launched in September 2023 (see our summary of the consultation here), which proposed a framework to establish minimum diversity and inclusion standards and give firms a better understanding of regulatory expectations. According to the FCA, such a framework would enable greater consistency and transparency on approaches to diversity and inclusion.

The FCA has justified the decision stating that whilst regulators have a role to play on the issue, there is already an ongoing “policy and legislative agenda, including on employment rights, gender action plans and ethnicity pay gap reporting”. On that basis, the FCA wish to avoid duplication and the unnecessary costs associated with developing its own framework.

China to issue first sovereign green yuan bonds in the UK

Following discussions during the China-UK Economic and Financial Dialogue in January this year, China’s Finance Ministry announced on 19 March that it will issue its first-ever yuan-denominated sovereign green bond in London in 2025. This landmark issuance, part of a broader programme of Chinese green sovereign bond issuances in London with an aggregate value of up to 6 billion yuan (c. £640 million), marks China’s debut overseas issuance of such bonds.

The UK Government had previously recognised the proposed issuance in a statement following the China-UK Economic and Financial Dialogue and noted that the “UK and China reiterate their recognition of each other as primary partners in green finance” and both “recognise the important role that sustainable government financing can play in combatting climate change and tackling environmental challenges”. In a February framework paper, China’s Finance Ministry stated that these bonds aim to “attract international funds to support domestic and low-carbon development”, signalling a growing market for green investments.

The decision to list the bonds in London signals confidence in its regulatory and market infrastructure to support green capital flows, positioning London as an important hub for such transactions.

ESG Counsel

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Authored by Nicola Evans, Rory Hazelton, Aun Hussain, Adam Barratt, Aimee Fullen, Ashali Herai, Oliwia Puto, Nikita Rajkumar, Joe Viles, and Rolando Virardi.