ESG Focus: UK/EU/International ESG Regulation Monthly Round-Up – May 2026

In this issue: 

Chapter 1: UK developments

Chapter 2: EU Developments

Chapter 3: International developments

Chapter 1: UK developments

This month, we have seen DESNZ publish a review of the SECR regulations, the FCA has published research setting out findings from the Transition Finance Pilot and the UK Climate Change Committee published its fourth independent assessment of UK climate risk.

1. DESNZ publishes post-implementation review of the SECR regulations

On 26 May 2026, the UK Department for Energy Security and Net Zero (“DESNZ”) published research examining how effective the Streamlined Energy and Carbon Reporting (“SECR”) regulations have been in increasing transparency on organisational energy use and emissions. The report reviews how SECR was implemented and whether it achieved its objectives, and also assesses which objectives remain appropriate, what unintended consequences there may have been, whether government intervention is still required and the scope for simplification, improvement or deregulation.

2. UK FCA publishes Financing Climate Solutions: Exploring findings from the Transition Finance Pilot

On 21 May 2026, the UK Financial Conduct Authority (“FCA”) published research notes which set out its findings from the Transition Finance Pilot. The Pilot was established to examine barriers to scaling finance for climate solutions and identify how to address them. The FCA’s secondary objective is international competitiveness and medium- to long-term growth and the FCA sees closing the climate investment gap as a strategic growth opportunity. See our Climate Transition Focus article here for a longer of summary of the content of this paper.

3. UK Climate Change Committee (“CCC”) publishes adaptation report

On 20 May 2026, the CCC published the fourth independent assessment of UK climate risk. The report explains that currently not enough is being done to adapt the UK to climate change. It acknowledges that adaptation is not just for the government but that the government is able to make policy and make market signals driving investment. How much adaptation is done depends on the public, what is valued and how much they want to pay but they found that the public would like to limit risk to the current level, acknowledging the costs of going further. It is acknowledged that investment is needed from both the public and private sectors.

Chapter 2: EU developments

This month we have seen a number of updates and publication of revised legislation and research, including on climate and nature risk and resilience, as well as supervision and enforcement actions. There have also been updates in relation to the EU ESG rating regulations, MiFID II sustainability requirements, SFDR and the EU Deforestation Regulation.

On 26 May 2026, the European Commission adopted a delegated regulation (RTS) which supplements the EU ESG ratings regulation specifying information which needs to be included in applications for authorisation or recognition of an ESG ratings provider.

The delegated regulation comes into force from 2 July 2026.

On 18 May 2026, the European Commission published its responses to its consultation on the European Climate Resilience and Risk Management – Integrated Framework.

There was overall support for the initiative.  The most frequent priorities (mentioned in at least 60% of the responses) related to:

• Stable, predictable, long-term EU funding and blended-finance tools for adaptation;
• Harmonised risk-assessment standards with shared climate scenarios;
• “Resilience-by-design” criteria for all public spending and procurement;
• Nature-based solutions as default first line of defence; and
• Systematic integration of health, incl. heat-health, into all plans.

Respondents considered the public sector’s role in climate resilience and identified several key obstacles to scaling up investments in climate resilience in relation to finance and insurance. These include high upfront costs and weak incentives, lack of reliable and harmonised climate risk data, difficulty measuring and monetising resilience benefits, regulatory complexity and policy uncertainty and insufficient capacity and limited private-sector engagement.

Respondents identified measures to overcome the above obstacles as:

• harmonising methodologies, metrics and data;
• de-risking mechanisms and financial instruments as well as targeted public funding;
• harmonising regulatory frameworks and make them clearer and more stable to have long-term policy certainty;
• integrating resilience into public policy and investment rules; and
• improving pricing of risk and incentives.

3. BaFin publishes Annual Report including information on sustainability risk enforcements

On 12 May 2026, Germany’s Federal Financial Supervisory Authority (“BaFin”) published its Annual Report 2025.

BaFin sees sustainability as a key issue for the financial sector and BaFin in 2025 and conducted a survey of selected insurers and less significant credit institutions on the physical risks of climate change. Half of these insurers reported that these factors have a substantial influence on their analyses (compared with only 10% of the credit institutions surveyed). 60% of insurers and 70% of the banks surveyed considered lack of available data on physical risks to be a problem.

BaFin examined in routine and ad hoc inspections how institutions deal with sustainability risks in their risk management. These inspections revealed a number of shortcomings and BaFin asked institutions to rectify and regularly update BaFin on their progress. Those institutions are subject to higher capital requirements until rectified.

Overall BaFin found that risk management is developing well across the board and institutions’ awareness of the issues has increased significantly. However, BaFin still sees a clear need for improvement in the systematic tracking of parameters used to measure environmental and climate risks and precise quantification of climate risks.

On 8 May 2026, the ECB updated its compendium of good practices for climate and nature risk management and stress testing to support banks with know-how to close gaps in their risk management frameworks and address vulnerabilities in the evolving risk environment publishing the following:

• ECB report on good practices for climate and nature-related risk stress testing; and
• Good practices for climate and nature risk management.

5. ESMA publishes 2025 Report on corporate reporting enforcement and regulatory activities

On 7 May 2026, the European Securities and Markets Authority (“ESMA”) published its Report on 2025 Corporate reporting enforcement and regulatory activities (the “ESMA enforcement report”) – the report covers enforcement under financial, sustainability and digital reporting.  In this briefing we will concentrate on sustainability reporting and lessons learned as 2025 was the first year of corporate reporting under the European Sustainability Reporting Standards (“ESRS”). The report shows that many issuers have voluntarily reported under ESRS in the first year and recognises the period of upheaval reporters have gone through whilst the omnibus simplification package went through the political and legislative process. Read more here.

On 6 May 2026, the European Commission launched a consultation on its revised version of the ESRS reflecting some amendments to the version proposed by EFRAG in November 2025. Although further amendments are still possible, the Commission has stated that it plans to adopt a final version of the amended ESRS in the course of 2026 and these final amended ESRS could apply to financial years beginning on or after 1 January 2027, for reporting in 2028. On the same day the Commission launched a consultation on sustainability standards for voluntary use (“VESRS”), based on the voluntary sustainability reporting standard for small and medium-sized undertakings (“VSME”). Read more here.

On 6 May 2026, ESMA issued a statement presenting the results of its Common Supervisory Action (“CSA”) on how sustainability is integrated into firms’ suitability assessment as well as into processes and procedures for product governance.

The statement recognises that the CSA has been conducted at a time of change to the sustainable framework and highlights key themes emerging from the supervisory exercise and sets out high‑level interim supervisory expectations, notably in relation to:

• the collection and treatment of clients’ sustainability preferences;
• the categorisation and matching of products to those preferences;
• the application of the portfolio approach; and
• the target market assessment of products.

The results of this work will be considered for any future updates of the MiFID II Delegated Acts on sustainability and the related ESMA Guidelines, with the aim to simplify the framework and support more consistent and effective application.

On 4 May 2026, the European Commission published a simplification package for the EU Deforestation Regulation (“EUDR”), delivering on its commitment to the European Parliament and Council following the December 2025 revision of the Regulation. The package comprises a simplification review report, updated Guidance and FAQs, a draft Delegated Act on product scope and an updated Implementing Act on the Information System. The Commission confirmed there will be no postponement of the application date. Large and medium-sized companies must comply from 30 December 2026, with micro and small operators (outside the timber sector) following on 30 June 2027. For affected businesses, with the final clarifications available, the window to finalize supply chain mapping, documentation systems and supplier engagement is now open. Read more here.

On 4 May 2026, the European Parliament published a draft report on the Sustainable Finance Disclosure Regulation (“SFDR”) review – now being referred to as SFDR 2.0. The Report suggests a number of changes to the European Commission's proposal for SFDR 2.0, which are intended to enhance its effectiveness and reduce some of the burdens on financial market participants. Read more here.

We attended AFME’s Sustainable Finance conference this month along with EU regulators and others. The big themes included how SFDR should be amended and what labels should mean. There were also wide-ranging discussions about how CSRD and ESRS will be applied and implemented, and integration of climate and nature risk in businesses and corresponding supervisory expectations for financial institutions.

Chapter 3: International developments

This month we bring you some of latest articles on climate transition finance and climate litigation, international law updates and updates on Australian reporting requirements.

On 26 May 2026, the TISFD released its framework for consultation. The framework builds on the Task Force on Climate-related Financial Disclosures (“TCFD”) and the Taskforce for Nature-related Financial Disclosures (“TNFD”) using the same underlying pillars: governance, strategy, management, and metrics and targets.

The framework is intended to help firms evaluate and report on their people-related impacts, risks and opportunities.

On 21 May 2026, the Organisation for Economic Co-operation and Development (“OECD”) published a report setting out progress towards the goal set under the United Nations Framework Convention on Climate Change (“UNFCCC”) for developed countries to mobilise USD 100 billion annually for climate action. The goal was initially set to be reached by 2020 and was then extended through to 2025. The preceding OECD report showed that the goal was met for the first time in 2022 and the present report showed that the goal was also met in 2023 and 2024. The goal has now been superseded by the New Collective Quantified Goal (“NCQG”) on climate finance, which calls for developed countries to take the lead in delivering at least USD 300 billion annually for developing countries’ climate action by 2035 and for all actors to work towards mobilising USD 1.3 trillion in international climate finance over the same timeframe.

On 20 May 2026, the UN General Assembly passed a resolution following the International Court of Justice’s advisory opinion on climate change calling on all member states to “avoid causing significant damage to the climate and environment, including emissions produced within their borders, and to follow through on their existing climate pledges under the Paris Agreement”.

It states that “Governments are urged to cooperate in good faith and continuously coordinate efforts to tackle climate change globally and ensure that climate policies safeguard the rights to life, health, and an adequate standard of living.”

On 18 May 2026, the Australian Securities and Investments Commission (“ASIC”) published it early observations on sustainability reporting ahead of 30 June 2026.

Australia’s compulsory sustainability reporting regime applicable from 2025 aims to improve the quality, consistency and comparability of climate-related financial disclosures. ASIC has shared it observations in order to aid preparers of reports as they approach the 30 June 2026 reporting season.

ASIC notes that 259 sustainability reports were lodged for the financial year ended 31 December 2025 and the top five sectors represented were mining-related, construction, materials and manufacturing, financial markets and insurance, oil and gas and electricity and energy distribution/supply/retailing.

ASIC found an increase in the quantity and quality of sustainability reporting compared with voluntary climate-related disclosures with more consistency and comparability.

It identified the following opportunities to strengthen the quality of reporting:

• Disclaimers that conflict with the statutory framework and objectives of Chapter 2M sustainability reporting may confuse or mislead and are not permitted to be used.
• The ‘reasonable and supportable’ information available to entities to identify climate-related risks includes information about ‘past events, current conditions and forecast future conditions.’
• Reports should provide clear, effective and proximate disclosure of relevant judgements, assumptions and areas of measurement uncertainty.
• The disclosure of additional climate-related information must not obscure material climate-related financial information.
• When cross-referencing information outside the sustainability report, entities must ensure they meet disclosure requirements.
• When determining whether an entity has a ‘climate-related target’, entities are reminded that the definition of ‘climate-related targets’ in AASB S2 extends to targets that the entity is required to meet by law or regulation. This includes greenhouse gas emissions targets such as the Safeguard Mechanism.

ASIC may engage with reporters about their disclosures and aims to publish final observations from its reviews in Q2 2026.

In May 2026, Glasgow Financial Alliance for Net Zero (“GFANZ”) published Physical Risk & Climate Change Adaptation and Resilience: A Curated Guide for Financial Institutions. The guide provides a curated overview of adaptation and resilience finance resources from public and private entities, summarising core elements and arranging them in themes.

It is intended to be a practical entry point for financial institutions looking to systematically integrate physical risk assessment and adaptation and resilience into their activities.

Rising natural catastrophe losses, shifting underwriting strategies, and growing regulatory and political pressures are reshaping insurance markets while energy demand and infrastructure investment are accelerating. As insurers reassess risk appetite and coverage terms, insurance availability has become a strategic issue for energy projects across the value chain. Read more here.

7. Financing climate transition – Products, plans and prospects

The transition finance market is evolving at a rapid pace. We are now in a position where borrowers and issuers can benefit from labelled instruments – transition loans and transition bonds are taking off, supported by enhanced market standards, increased awareness and other broader transition movements in planning and reporting. In the article linked below, we look at recent growth trends and dive into the tools provided by the latest LMA, APLMA, and LSTA Transition Loan Guidelines and the ICMA Climate Transition Bond Guidance. Read more here.

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 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 Emily Julier, Rita Hunter, and Benjamin Garbett.