Sustainability Assembled
The first quarter of 2025 has been a time of rapid change – simplification of sustainability-related regulation, roll-back on DEI commitments, restructuring of global initiatives and possibly even the demise of the term “ESG”.
Against this backdrop, what is clear, more than ever before, is the multi-faceted and complex nature of the sustainable finance and investment sector. Effective mobilisation of sustainable finance will depend on a broad range of factors including how the market responds to the geopolitical landscape, macroeconomics and shifts in market sentiment to ESG factors.
In February, the Commission published the much anticipated EU Omnibus package of measures aimed at simplifying sustainability-related regulation (Omnibus Package). The Commission emphasises the need for an effective strategy which fosters the role of public and private finance in supporting the transition and secures the “EU’s long-term economic prosperity, resilience and competitiveness”. The Commission has asked co-legislators to “fast-track” specific proposals included in the Omnibus Package. It is, however, becoming clear that divisions within EU Parliament, the Council and between member states may yet delay implementation and/or amend the proposals. In addition, market response to the package of measures is mixed with significant pushback from some stakeholders.
Uncertainty (and some confusion) remains therefore as market participants and corporates consider whether, and to what extent, they should change sustainability strategies and approach to reporting and due diligence. A dual approach of continuing to comply with existing legislation whilst also attempting horizon scanning regarding the Omnibus will require additional time and resource
In the UK, in March, both the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA) indicated that they will no longer be progressing their DEI initiatives and the FCA published a statement in relation to sustainability regulations and UK defence. Globally, market participants have been rowing back on their ESG commitments with a number recently exiting groups such as the Glasgow Financial Alliance for Net Zero and the Net-Zero Banking Alliance.
What is clear is that 2025 will be a year of significant change and uncertainty as the EU Omnibus package is considered by co-legislators and the market consider the impact on other legislation and on investment strategies, policies and portfolios.
Boosting EU Competitiveness
EU Commission’s Work Programme
Following the Draghi Report (see previous publication of Horizons), the Commission published its Work Programme for 2025 (2025 Work Programme) setting out the Commission’s ambition to “boost competitiveness, enhance security, and bolster economic resilience” in the EU by focusing on increasing opportunities, innovation, and growth. The 2025 Work Programme was accompanied by the Communication on Implementation and Simplification outlining the Commission’s roadmap to achieve its objectives over the next five years.
The overarching focus of the 2025 Work Programme is on simplification (including in relation to sustainable finance reporting, sustainability due diligence and taxonomy).
Key deliverables of the 2025 Work Programme include (but are not limited to)
“EU companies will benefit from streamlined rules on sustainable finance reporting, sustainability due diligence and taxonomy. This will make life easier for our businesses while ensuring we stay firmly on course toward our decarbonisation goals. And more simplification is on the way.”
President Ursula von der Leyen
Europe’s Clean Industrial Deal: the EU’s plan for competitiveness and decarbonisation to 2030
On February 26, 2025, the European Commission published its new Clean Industrial Deal its “business plan” to accelerate the rollout of renewable energy, deploy industrial decarbonisation and ensure sufficient manufacturing capacity of clean tech in the European Union. The Clean Industrial Deal is part of a broader agenda to simplify and streamline EU regulations, which was anticipated by the report, “The future of European competitiveness” issued September 2024 by former European Central Bank President Mario Draghi and the resulting EU Competitiveness Compass.
The Clean Industrial Deal focusses on six key areas
- Ensuring more affordable energy in the EU
- Creating demand for clean products through lead markets
- Enhancing access to financing
- Securing access to raw materials and improving the circular economy
- Cultivating strategic trade relationships and deploying trade protection measures
- Fostering EU skills and jobs
For a more detailed overview of the Clean Industrial Deal and the Commission’s policy priorities, see this overview.
Omnibus: Simplification or De-regulation?
Carbon Border Adjustment Mechanism
As part of the 26 February 2025 first simplification Omnibus package, the Commission has proposed simplifying the Carbon Border Adjustment Mechanism (CBAM).
The main changes proposed by the Commission to the CBAM
- Introduce a de minimis exemption so that importers of smaller volumes of goods do not have to comply with the CBAM
- Simplify some of the rules relating to authorisation of CBAM declarants and reporting of emissions
- Anticipates a full review of the CBAM (which was already contemplated) and a new legislative proposal in early 2026 to extend the scope of CBAM to include further downstream finished goods as well as other ETS sectors, amongst other things
For a brief additional overview of the proposed changes to the CBAM see the relevant sections in this overview.
CSRD and CSDDD
The Omnibus Package sets out proposals to postpone CSRD and CS3D for companies not yet in scope as well as amend reporting and due diligence requirements. The Commission has asked the European Parliament and Council to fast-track the proposals however timing remains uncertain.
The Commission estimates that the above changes made to align CSRD to CS3D would remove around 80% of companies from CSRD reporting.
What Next for the EU Taxonomy?
Omnibus: EU Taxonomy
As part of the Omnibus Package, the European Commission has published proposals amending the Taxonomy Disclosures Delegated Act, Taxonomy Climate Delegated Act and Taxonomy Environmental Delegated Act.
The draft act is open for feedback for a period of 4 weeks until the end of March with adoption of the act planned (at present) as early as the second quarter of 2025 with the aim of applying from 1 January 2026.
The main changes include:
- Amendments to CSRD regarding Taxonomy reporting as a derogation to Article 8 Taxonomy Regulation and proposals to amend the Taxonomy Disclosures, Climate and Environmental Delegated Acts;
- Voluntary Taxonomy reporting for companies within the future scope of CSRD (i.e. large companies with more than 1,000 employees) with a net turnover up to €450 million;
- Stronger emphasis on transition finance by introducing the ability for companies to voluntarily report on partial Taxonomy-alignment enabling them to demonstrate existing efforts as well as progress;
- Financial materiality threshold for Taxonomy reporting by introducing a materiality threshold to make disclosure of alignment for companies with less 10% eligible activities not mandatory;
- Reporting templates are simplified leading to a reduction of data points by almost 70%,
- Simplification and revision of the “Do no Significant harm” (DNSH) criteria with two options included for pollution prevention and control related to the use and presence of chemicals that apply horizontally to all economic sectors under the EU Taxonomy; and
- Adjustments to the Green Asset Ratio (GAR) allow banks to exclude from the denominator of the GAR any exposures that relate to undertakings which are outside the future scope of the CSRD (i.e. companies with less than 1000 employees and €50m turnover).
Next steps
The intention is that the draft Delegated Act amending the existing delegated acts under the Taxonomy Regulation will be adopted after public feedback.
Building Resilience
EBA Final Report on ESG Risk Management
Following consultations on a draft version last year, on 9 January 2025, the European Banking Authority (EBA) published "Guidelines on the management of ESG risks" in accordance with Article 87a(5) of Directive 2013/36/EU (CRD VI Directive) (Guidelines). These Guidelines set out comprehensive requirements for institutions to identify, measure, manage, and monitor ESG risks, ensuring the resilience of their business models and risk profiles over time.
The Guidelines indicate the robust governance arrangements that financial institutions need to have in place and aim to support institutions' preparedness for the transition towards climate neutrality by 2050.
In particular, the Guidelines provide for
- Minimum standards and methodologies for identifying, measuring, managing, and monitoring ESG risks;
- Scope of assessments should reflect the institution's nature, complexity, and size, considering the impact of ESG risks on all traditional financial risk categories;
- Regular materiality assessments of ESG risks depending on the size and complexity of the institution;
- Robust management approaches to mitigate ESG risks over short, medium, and long-term horizons (at least 10 years); and
- Monitoring and reporting of ESG risk metrics and indicators, with robust internal reporting systems to inform senior management and the management body.
The Guidelines also outline the content of prudential transition plans to be prepared by the management body, including specific timelines, intermediate quantifiable targets, and milestones.
Institutions can expect further complementary guidance on scenario analysis related to ESG factors by the EBA in due course.
The Guidelines will apply from 11 January 2026, except for small and non-complex institutions for which the guidelines will apply at the latest from 11 January 2027.
In February, the Financial Stability Board (FSB) published a letter to G20 Finance Ministers and Central Bank Governors which outlined the FSB’s workstreams for the year and relevance to international financial stability. This includes climate-related financial risks.
“The impact of climatic events and developments poses risks to the financial system, and it is therefore essential to incorporate these risks into our financial stability assessments and policy frameworks.”
The EU Platform on Sustainable Finance Report
In January 2025, the EU Platform on Sustainable Finance published a report “Building trust in transition: core elements for assessing corporate transition plans” (the “Report”). The Report emphasises the importance of transition plans as a way to plan, ensure transparency and to raise and grant transition finance and investment.
In order for market participants to provide transition finance which is effective, the underlying investments themselves must be supported by robust transition plans and science-based targets.
The Report sets out recommendations to the Commission regarding the development and assessment of just transition plans, the core elements which can be taken into account when considering and assessing these plans and how the Commission can enhance the effectiveness of its policy frameworks. The importance of collaboration across stakeholder groups is emphasised with market participants urged to ensure that transition plans used to inform investment decisions are both credible and robust.
The Report also sets out core elements for financial market participants to consider when assessing corporate transition plans in the EU. This includes guiding principles for transition plan assessments, core elements for corporate transition plans, recommendations relating to adaptation and resilience planning, just transition considerations and DNSH to wider environmental objectives.
FCA’s Adaptation Report
In January 2025, the Financial Conduct Authority (FCA) published its 2025 Adaptation Report (Report) providing an overview of climate change adaptation challenges faced by the financial services firms.
The Report focuses on the following:
- risk management adjustments that firms need to make due to climate change including in response to changes to insurance and loan underwriting practice and due diligence in investment markets;
- changes made by firms to manage the exposure to physical climate risk that could affect consumers and wider market stability; and
- the importance of financial products in enabling and supporting adaptation and transition in the wider economy including allocating capital to activities that support adaptation and underwriting risks.
Chapter 4 of the Report sets out adaptation risks in the banking sector which includes the direct physical impact of climate-related events on people and property and increased risks to lenders as a result of long-term climate-related risks on business models. Issues impacting climate change adaptation in the financial services industry include (i) data and modelling to help financial services quantify and manage climate risks; (ii) barriers and enablers to insurance underwriting for climate risks and in consequence lending and investment; and (iii) barriers and enablers in allocating capital to adaptation.
The Report also states that firms must protect their critical infrastructure, in particular IT systems, while making sure that net-zero transition plans consider necessary adaptation.
The Report is not intended to be a comprehensive assessment, and further research is required. The FCA states that the Report does not set out regulatory expectations for firms.
The Prudential Regulation Authority PRA has also released its adaptation report.
“Climate adaptation relates to actions that protect us against the impacts of climate change. This includes reacting to the changes we have seen already, as well as preparing for what will happen in the future,”
Definition of climate adaptation in the 3rd National Adaptation Programme.
Spotlight on DEI
The headlines in the first quarter of 2025 would lead us to believe that there has been and will continue to be a significant roll-back on DEI initiatives. Indeed, very recently, both the PRA and FCA announced separately that they will not be progressing their work on diversity and inclusion. In 2023, the PRA and FCA consulted on proposals to improve DEI in firms. However work is continuing and commitments are being made. In early March 2025, the Commission adopted its Roadmap for Women's Rights and presented the 2025 Report on Gender Equality. And the Parker Review Committee published a report sets out the results of its survey on the ethnic diversity of boards and senior management of FTSE 350 companies and large private companies.
“There is no reason why a woman should be paid less than a man. Or why she should have lower health standards or face violence, because of her gender. We know that societies where women and men are treated equally are better, fairer and more successful. So let us tap into the vast reservoir of talents and skills of everyone, men and women alike. Today's Roadmap shows our strong commitment to continue building a European Union of gender equality and women's rights.”
President of the European Commission, Ursula von der Leyen
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