A fireside chat with the UK Financial Conduct Authority (FCA) on sustainable finance, the transition to net zero, sustainability reporting and defence

We share our main takeaways from the session below for those who missed it.  The FCA has been clear on its priorities for 2025 and 2026 so there are no surprises!

The discussion included the transition to Net Zero which falls within the FCA's remit. The FCA has been active within the Transition Finance Council and has been running a Transition Finance pilot.  Although there is no single lever to unlock transition finance in the UK, the FCA is collaborating with the Prudential Regulation Authority and the Green Finance Institute to identify barriers to scaling finance for climate solutions and explore practical ways to ensure all the right components are connected.  There was also discussion about nature and adaptation and integration into UK legislation, but we should expect to see more on this until next year.  A key consideration on integrating these concepts will be ensuring interoperability with other jurisdictions.

Defence is a topic which few of us imagined would sit within sustainable finance a couple of years ago but in a world where security is uncertain the FCA has clarified that its ESG rules do not preclude defence investments.  There is an interesting cross-over between ESG and defence which is being explored by many market participants in an increasingly security conscious world. The FCA reiterated that nothing in its regulatory approach will unnecessarily prevent investment in defence and recognises that finance and defence are closely intertwined and are also examining what blockers to growth affect SME funding in the defence and defence-related industries. Indeed the financial institutions are not themselves immune to attack as systemic infrastructure.

Sustainability reporting regulation is developing quickly in the UK, for example the Department of Business and Trade launched a consultation on (i) endorsing ISSB standards in the form of the draft UK Sustainability Reporting Standards (UK SRS) and (ii) an oversight regime for assurance of sustainability-related financial disclosures and the Department of Energy & Net Zero launched a consultation on transition plans. The FCA will consult soon on how listed companies will adopt the UK SRS. Separately, the regulator is beginning work on streamlining and enhancing the UK sustainability reporting framework for asset managers and FCA-regulated asset owners to ensure that the regime is as optimised as much as possible.

Rita and Alicia also discussed the importance of ESG ratings in the investment and capital markets. Although ESG ratings can influence the pricing and success of bonds, loans and investments, the perceived issues of conflict of interest and lack of methodology transparency raises concerns from investors and market participants alike. At the time of the conversation, the UK government had published proposed draft legislation giving the FCA the powers to regulate ESG ratings providers and the FCA had welcomed this development. On 1 December 2025, the FCA launched a consultation on its proposed approach to ESG ratings regulation.  Any firm wishing to provide certain types of ESG ratings in the UK after 29 June 2028 will need FCA authorisation. We expect to see more on this in 2026 as the consultation closes on 31 March 2026.

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.

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This note is intended to be a general guide to the latest ESG developments. It does not constitute legal advice.

Authored by Rita Hunter and Emily Julier.