ESG Market Alert UK – September 2025

UK Transition Finance Council releases Transition Finance guidelines

The UK Transition Finance Council (a partnership between the UK Government and the City of London Corporation) has released draft transition finance guidelines aimed at supporting capital allocation for entities transitioning to net-zero. The guidelines intend to provide a consistent framework with which stakeholders can assess whether entities are transitioning credibly and in a way that is financially viable.

The guidelines set out four guiding principles:

1. Credible ambition – entities should have clear targets, metrics and implementation actions consistent with an ambition to substantially reduce emissions.
2. Action into progress – entities should be capable of progressing the implementation actions in order to meet such targets and metrics.
3. Transparent accountability – entities should be transparent (whether through public disclosure or other means) on progress made towards such targets and metrics.
4. Addressing dependencies – entities should assess dependencies (including uncertainties or sensitivities) impacting the entities’ ability to meet their targets and metrics.

The guiding principles are supported by baseline “universal factors” applicable to all entities, and “contextual factors” that vary by entity size, sector and jurisdiction. Importantly, the guidelines are structured to align with broader initiatives, including the UK’s Transition Plan Taskforce, the ISSB disclosure standards, and the Net Zero Investment Framework.

A public consultation is open until 19 September 2025, with a second consultation planned later this year or early next year. Final guidelines are expected in March 2026.

These guidelines signal a growing international focus on transition finance and the expectation that high-emitting sectors demonstrate credible decarbonisation pathways. Companies, investors, and financial institutions may wish to engage with the consultation and assess how their transition strategies align with the proposed framework, which could influence future regulatory and disclosure requirements.

UK developments in sustainability and climate reporting standards

In June of this year, the UK government released exposure drafts of its new Sustainability Reporting Standards (UK SRS) which intends to create a framework to provide credible sustainability-related information to financial markets by introducing guidelines on climate-related risk and greenhouse gas emissions reporting. The draft standards (UK SRS S1 and S2) closely mirror the ISSB’s standards for sustainability and climate disclosures (IFRS S1 and S2) signalling UK regulators’ intent to align with the emerging international baselines for ESG reporting, rather than creating a divergent framework. Please see our article here for further details of the proposed amendments.

UK companies preparing climate or ESG disclosures under the ISSB guidelines can take some comfort that the UK requirements will be similar although with minor adjustments. Importantly, the consultation period for views on the exposure drafts ends today, 17 September 2025, with finalised versions expected to be released by December.

In parallel, regulatory changes are also being discussed in the EU where law makers are debating the European Commission’s recent Omnibus 1 package which, amongst other changes, proposes to reduce sustainability reporting requirements for companies under the Corporate Sustainability Reporting Directive (CSRD). Please see our latest article on this here. The proposed changes would raise the reporting thresholds to companies with more than 1,000 employees (up from the current 250-employee threshold) and either €50 million net turnover or a balance sheet above €25 million. It is estimated this will remove 80% of companies from the scope of CSRD. The proposed changes have drawn some criticism, with the European Central Bank President, Christine Lagarde, warning the proposal will weaken the EU’s ability to assess climate-related financial risks. Christine Lagarde stressed the importance of striking the right balance on sustainability reporting to ensure the European system obtains sufficient high-quality climate data to inform climate-related measures.

UK companies should continue to monitor both the UK and global legislative developments as the regulatory landscape for sustainability and climate reporting evolves.

UK government drops plans to develop a UK Green Taxonomy

The UK Government has shelved plans for a domestic Green Taxonomy (a classification system for environmentally sustainable activities) after a consultation revealed limited public support for the proposed framework.

In its consultation response, HM Treasury concluded that a UK taxonomy “would not be the most effective tool to deliver the green transition” and should not be part of the framework, noting that other policies (e.g., corporate transition plans, new UK sustainability reporting standards, and sectoral roadmaps) are higher priorities to facilitate the transition to net zero and tackle greenwashing.

This development comes as the EU scrutinises its own sustainability regulations, with the European Commission adopting recent measures to simplify the application of the EU Taxonomy. HM Treasury’s response indicates a lower regulatory appetite for sustainable finance that aligns with the European Commission’s streamlined reporting obligations for firms with EU operations.

EU proposes carbon tax exemptions for certain sectors

Amid shifting global trade dynamics and increased government spending on strategic industries, the European Commission has proposed exempting exports of certain energy-intensive goods – such as steel, cement, and aluminium – from EU carbon emission costs. The proposed relief would refund EU manufacturers for carbon costs on goods exported to markets in which competitors are not subject to equivalent levies, with funding being drawn from the revenue generated by the EU’s Carbon Border Adjustment Mechanism (CBAM).

The relief is intended to prevent “carbon leakage” – i.e., the relocation of emissions-intensive production to outside the EU – and to maintain the global competitiveness of EU manufacturers as climate policies tighten. For UK businesses, this proposal has dual implications: UK importers of affected materials may benefit from lower input costs if EU suppliers pass on savings, while UK exporters operating in global markets should be aware of potential cost advantages accruing to EU competitors under this policy shift.

EU rejects Deforestation Country Risk List

The EU Parliament voted against the European Commission’s proposed benchmarking system under the EU Deforestation Regulation (EUDR), which would have classified countries by deforestation risk (low, standard, or high). These classifications were intended to determine the extent of due diligence required for importers and exporters of key commodities such as cocoa, timber, and soy.

Lawmakers cited concerns that the proposal relied on outdated data, with insufficient risk tiers, and was too lenient toward deforestation hotspots. This pushback creates uncertainty for businesses preparing to comply with EUDR due diligence rules, which are set to take effect in December 2025 for large companies.

In the interim, companies may need to undertake more fulsome due diligence processes with respect to source countries. UK companies trading in forest-risk commodities should monitor developments, since EU market access will continue to depend on demonstrably “deforestation-free” supply chains, regardless of domestic regulatory divergence.

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Authored by Alastair Young, Rory Hazelton, Aun Hussain, Adam Barratt, Ashali Herai, Oliwia Puto, Archie Ragupathy, Nikita Rajkumar, Joe Viles and Rolando Virardi.