Environmental, social and governance | UK Regulatory Outlook January 2025

Businesses have a preparation window for the EU Deforestation Regulation

The EU Deforestation Regulation (EUDR) was initially set to take effect from 30 December 2024. The EUDR mandates that companies placing specific commodities - cattle, cocoa, coffee, oil palm, rubber, soya and wood - and related products on the EU market must demonstrate these products are deforestation-free and provide a due diligence statement.

On 2 October 2024, the European Commission published a proposal to amend the EUDR, delaying its application to 30 December 2025 for large companies and 30 June 2026 for SMEs. The proposal also offers guidance on the functionality of the information system, key definitions, traceability obligations and penalties. This was formally adopted by both the European Parliament and Council and published in the Official Journal on 23 December 2024.

The delay aims to ensure companies can effectively comply with the regulation. To assist with this, an additional FAQs document has been published. Companies obligated under the EUDR should now use 2025 to prepare for its implementation.

As part of this preparation, businesses should register on the EUDR information system (Deforestation Due Diligence Registry), which allows operators, traders, and authorised representatives to submit their due diligence statements. Registration opened on 4 December 2024 following a publication in the Official Journal. This additional 12-month period provides businesses with a window to prepare before the EUDR obligations commence on 30 December 2025.

First reports due under the EU Corporate Sustainability Reporting Directive

The Corporate Sustainability Reporting Directive (CSRD) expands the existing requirements under the Non-Financial Reporting Directive 2014/95/EU (NFRD). Mandating a broader range of EU-based large and listed companies as well as non-EU companies if they generate over €150 million trading in the EU, to report on sustainability annually. This directive will consequently impact global markets and supply chains.

The CSRD is currently being transposed across the European Union, with varying degrees of national implementation. However, the European Commission has initiated infringement procedures against 17 Member States that have not yet transposed the CSRD. Businesses should view this as a warning and take proactive measures to prepare for CSRD requirements, even in regions where it has not been fully implemented.

The CSRD will become particularly significant from 2025, as the first companies (those already subject to the NFRD) will be required to report in line with the CSRD for the financial year 2024, with large undertakings not already subject to the NFRD being obligated from 2026. Companies subject to the CSRD will need to be ready to meet these obligations.

Will the introduction of the Corporate Sustainability Due Diligence Directive lead to an omnibus legislation?

The Corporate Sustainability Due Diligence Directive (CS3D) entered into force on 25 July 2024, establishing a due diligence duty on large companies to identify, address , report and mitigate adverse human rights and environmental impacts identified across their global value chains. Similar to the CSRD, this directive applies to EU companies and large non-EU companies. The obligations will not start applying to companies until 2027, and Member States have until 26 July 2026 to transpose the directive into national law.

While these obligations may seem distant, the EU has recently announced its intention to merge the CSRD, the CS3D and the Taxonomy into one "omnibus" regulation. Therefore, moving into 2025, companies who fall within these obligations should look out for any advancements in this consolidating piece of legislation. The omnibus regulation is expected to maintain substantive reporting requirements while simplifying the process.

The European Commission and the European Financial Reporting Advisory Group (EFRAG) are likely to continue providing practical guidance and implementation support to help companies navigate the new regulatory landscape. This support will be essential in ensuring that businesses can effectively comply with the consolidated reporting requirements.

Will a green taxonomy be introduced in the UK?

In the EU

The EU Taxonomy is a classification system that enables financial and non-financial companies to share a common definition of economic activities deemed environmentally sustainable. This system is closely aligned with the goal of achieving net zero emissions by 2050, aiding the EU in meeting its climate and energy targets for 2030. The EU Taxonomy came into force on 12 July 2020.

Businesses that comply with this regulation should stay informed about the aforementioned omnibus legislation, as it may alter their future obligations.

UK Green Taxonomy

The UK is currently consulting on its own UK Green Taxonomy, having released a consultation on 14 November 2024. The consultation seeks input on whether this implementation would support investment in activities aligned with sustainability goals and help mitigate greenwashing.

The consultation window is still open, and those with opinions on whether this addition would complement existing sustainable finance policies should participate. The consultation closes on 6 February 2025.

Regulating ESG rating providers

On 19 November 2024, the Council of the EU adopted a new regulation on ESG rating activities. This regulation aims to make rating activities within the EU more consistent and transparent, thereby boosting investor confidence in sustainable financial products. Although the regulation will only apply 18 months after its entry into force, it signifies a more serious effort towards the regularisation and integration of ESG principles.

In the UK, at end of last year, the government published its consultation response on the future regulatory regime for ESG ratings providers which was accompanied by draft regulations which would implement the regime. Comments can be made on the draft regulations by 14 January. The government will finalise the legislation in 2025 and the Financial Conduct Authority will then consult on the specific requirements. ESG rating providers should follow the developments of this reform closely in order to start preparing for compliance when necessary.

Taskforce on Nature-related Financial Disclosures

The Taskforce on Nature-related Financial Disclosures (TNFD) has developed a set of disclosure recommendations and guidance that encourage and enable businesses to assess, report and act on their nature-related dependencies.

On 27 October 2024, the TNFD published a discussion paper on nature transition plans. The paper is open for consultation until 1 February 2025.

It outlines what should be included in a transition plan, such as an organisation's goals, targets, actions, accountability mechanisms, and intended resources to address the Kunming-Montreal Global Biodiversity Framework.

Those wishing to respond to the consultation should do so by early 2025.

UK Corporate Governance Code

The FRC's new UK Corporate Governance Code, published last year, will apply to all companies listed in the commercial companies category or the closed-ended investment funds category on the London Stock Exchange for financial years beginning on or after 1 January 2025. The only exception is the new requirements to report annually on the effectiveness of risk management and internal controls (Provision 29) which will apply to financial years beginning on or after 1 January 2026. See our Insight for more details.

The Audit Reform and Corporate Governance Bill

The King's Speech, delivered to Parliament on 17 July 2024, included the draft Audit Reform and Corporate Governance Bill designed to strengthen audit and corporate governance.

The bill aims to introduce a new accounting regulator, the Audit, Reporting and Governance Authority (ARGA), to replace the Financial Reporting Counsel. ARGA will have a range of new statutory responsibilities and powers. The government has stated that it intends that the revamped regulator will uphold standards and independent scrutiny of companies’ accounts, as well as accountability for company directors. Ultimately the bill will lead to greater director accountability, with the regulator having the power to investigate and sanction company directors for serious failures in relation to their financial reporting and audit responsibilities. While there is no official timeline for implementation of the bill, a draft may be available by the end of 2025.

Carbon Border Adjustment Mechanism: looking ahead

The Carbon Border Adjustment Mechanism (CBAM) is a tool designed to tackle carbon leakage and ensure that the carbon emissions associated with the production of carbon-intensive goods are fairly priced. This will affect the aluminium, cement, fertiliser, hydrogen and iron and steel sectors. At present, CBAM only applies to goods entering the EU. However, starting in 2027, this mechanism will also be implemented in the UK. It is crucial for companies to consider the carbon-intensive goods within their supply chain in preparation for the introduction of UK CBAM and as the transition period for EU CBAM comes to a close.

EU CBAM

In the European Union, CBAM has been in force since 1 October 2023. Since then, importers have been subject to phased obligations during a transition period that lasts until 31 December 2025. Currently, importers to whom CBAM applies must report quarterly to the European Commission, detailing the quantity of goods, embedded emissions, indirect emissions, and the carbon price due.

From 31 December 2024, importers will need to fulfil an additional requirement: they must complete their applications to become authorised CBAM declarants by 1 January 2026. Failure to meet this deadline will result in a prohibition on importing goods into the EU after that date. Therefore, those intending to import in scope goods into the EU from 2026 should use the year 2025 to complete the registration process.

UK CBAM

Following closely behind, HM Treasury and HM Revenue & Customs have published the government response to the March 2024 consultation on the design and administration of the proposed UK CBAM. The response confirms that UK CBAM will be introduced on 1 January 2027 and will likely replicate a lot of the EU CBAM obligations. There are a few noticeable differences, including the omission of electricity from the product scope and the use of emissions certificates.

Therefore, we recommend that UK businesses consider the EU CBAM obligations and prepare their operations for the 2027 implementation, as well as staying informed as to the introduction of UK CBAM legislation.

UK Sustainability Reporting Standards to be consulted on in Q1 2025

In 2021, the International Sustainability Standards Board (ISSB) was established to create global standards serving as a baseline for sustainability reporting. These standards were introduced to provide investors with a more regulated perspective on the sustainability practices of companies. In 2023, the ISSB unveiled two new standards: IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures).

The UK government has previously announced its intention to introduce its own sustainability framework, initially referred to as the UK Sustainability Disclosure Standards, but now renamed the UK Sustainability Reporting Standards (UK SRS). The UK SRS are modelled on IFRS S1 and S2, aiming to establish standard requirements for UK-listed companies to report sustainability-related information to their investors. These standards are currently awaiting approval, with the government planning to consult on the draft UK SRS in the first quarter of 2025.

European Commission finalises EU-Mercosur trade deal

The European Commission has announced that negotiations for a EU-Mercosur partnership agreement have concluded. The aim of this agreement is to enhance sustainability, boost trade and investment, support EU farmers, and increase the competitiveness of EU companies.

Measures included in the agreement include removing non-tariff barriers to trade in goods, ensuring the Paris Climate Agreement is effectively implemented, lowing tariffs on critical raw materials and derived products to incentivise Mercosur exports to the EU and cheaper imports for the EU. It also contains a commitment to halt deforestation by 20230.

Over 350 EU products are protected in the agreement by a geographic indication to ensure EU food and drink producers can market their distinctive regional products. Further the agreement maintains the EU's food safety standards, allowing both sides to adopt protective measures for human, animal, and plant health, including in situations when scientific information is inconclusive. It also addresses antimicrobial resistance, promotes animal welfare standards, and enhances information flow to prevent unsafe products from entering the market.

Read questions and answers on the agreement.

This agreement underscores the EU's commitment to further sustainable trade by incorporating the Paris Climate Agreement as an essential element, implementing concrete measures to preserve biodiversity and tackle deforestation, and ensuring high sustainability standards in critical raw materials trade and investment.

The UK’s Sustainable Disclosure Requirements

With the Sustainable Disclosure Requirements and investment labels regime (SDR), the Financial Conduct Authority (FCA) has introduced a package of measures designed to clamp down on greenwashing in the financial sector. Initially introduced to cover fund managers and in some instances distributors, the regime is now expanding to encompass firms providing portfolio management services (meaning investment firms, operating under a MiFID authorisation).

The rules stand side-by-side with the new anti-greenwashing rule that applies to all firms with a FSMA Part 4A permission, and the detailed general guidance provided by the regulator on the rule, setting out what firms should take into account when making sustainability claims.

The SDR has introduced rules relating to:

• the use of four official sustainable investment labels;
• restrictions on the use of sustainability-related terms in product naming and marketing;
• the provision of detailed information for investors in precontractual, ongoing product-level and entity-level disclosures;
• the provision of consumer-facing information relating to the key sustainability features of a product; and
• requirements for distributors relating to product-level information.

The FCA had proposed earlier in 2024 that portfolio management firms would be subject to SDR’s marketing and labelling rules, which would apply from 2 December 2024, and that the periodic and entity-level disclosures would follow the same implementation timetable as applies to asset managers. However, the regulator has had to backtrack, and the implementation dates for portfolio managers are no longer definitive. Recognising the practical challenges portfolio managers will have in implementing the regime, the FCA is now planning to publish a policy statement, including the final rules, in Q2 2025.

In due course, the FCA is expected to extend the regime to encompass pension and other investment product providers and financial advisers. It may also eventually cover overseas funds that market into the UK, but this will depend on HM Treasury, which may have different priorities given its different statutory objectives.

The depth of the regime is also expected to expand over time, providing for more disclosures and transparency as the eco-system for underpinning ESG and sustainability reporting develops.

Firms providing portfolio management services should track these developments as they progress to ensure they are aware of any changes that may affect them.

The EU’s Sustainable Finance Disclosure Regulation

The EU’s Sustainable Finance Disclosure Regulation (SFDR) imposes harmonised transparency and disclosure requirements on financial market participants and financial advisers. In-scope firms must comply, including considering how sustainability risks are incorporated into their investment decision-making processes and how the remuneration of individuals is consistent with sustainability issues.

This year, the regime has been subject to a wholesale review following a consultation on SFDR that closed on 22 December 2023 and, potentially, a major overhaul could take place.

Status of reforms

The key points the consultation raised were:

• whether the current requirements of the SFDR are fit for purpose;
• the interaction with other sustainable finance legislation;
• what potential changes to the disclosure requirements for financial market participants might be relevant;
• whether the establishment of a categorisation system for financial products, potentially akin to the UK’s SDR labelling regime, would be helpful; and
• whether all financial products should be subject to uniform disclosure requirements irrespective of sustainability claims.

The Commission had planned to publish a report on suggested reform of the SFDR in the second quarter of 2024, however, this is now tentatively expected in mid-2025.

Principal Adverse Impacts updates

A PAI is any impact of investment decisions or advice that results in a negative effect on sustainability factors, such as environmental, social and employee concerns, respect for human rights, anti-corruption, and anti-bribery matters. Their application under the SFDR is one of the most vexing issues in practice.

In October, the European Supervisory Authorities (ESAs) published a final report on PAI disclosures under the SFDR. PAI disclosures aim to show the negative impact of financial institutions’ investments on the environment and people, and the actions taken to mitigate them. The ESAs have assessed both entity and product-level PAI disclosures.

Overall, the ESAs noted positive progress on several elements compared to previous years. For example, improvements on the level and quality of disclosed information were identified. In particular, significant improvements were identified in product PAI disclosures, although the share of products disclosing PAI information remains quite low. However, the overall level of compliance with the SFDR provisions is still not yet fully satisfactory, according to the ESAs.

ESMA’s guidelines on funds’ names using sustainability-related terms

Meanwhile, in a significant development, ESMA has issued comprehensive guidelines for funds that use ESG or sustainability terms in their names. The guidelines are intended to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names. They also provide asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names.

Despite these being “guidelines”, they go further than you might assume. They are far reaching and include substantial provisions that have an impact on how to manage portfolios. For example, the ESG names or sustainability-related terms are not a finite list. It is a case-by-case assessment of which funds are in-scope which will cause interpretational uncertainty as to the reach of the guidelines. Where in-scope, they have a material impact on how the fund’s portfolio must be managed.

The guidelines apply to new funds created on or after 21 November 2024. There is a transitional period for funds existing before the application date that lasts until 21 May 2025. The general consensus is that the guidelines also apply to non-EEA AIFs marketed by non-EEA AIFMs via national private placement regimes into EU Member States.

EEA NCAs had to notify ESMA of the extent to which they intend to comply with the guidelines by 21 October 2024. While ESMA has not published the results of these notifications, we are aware that at least 13 Member States have done so. Whether the guidelines should have been issued as Level 1 regulation, rather than Level 3, is potentially open to challenge.

Firms should track these developments as they unfold to ensure they are aware of any changes that may affect them.

New climate finance goal from COP 29

Please see Environment.

Developments to the UK Emissions Trading Scheme

Please see Environment.

EU Regulation prohibiting products in the Union market made using forced labour enters into force

Please see Modern slavery. 

Modern slavery in public procurement

Please see Regulated procurement.

Please also see our latest international ESG Knowledge Update, for a round-up of legal, regulatory and market news.