ESG View - December 2025

Welcome to our December edition of ESG View!

The least we can say is that 2025 was a difficult year for ESG momentum. Across the United States and Europe, political and market pushback has dented previously growing support for sustainability and social inclusion initiatives. In the US, major corporations have scaled back diversity, equity and inclusion (DEI) programmes amid broader criticism and shifting political sentiment, while some financial institutions have exited voluntary climate alliances under political pressure. At the same time, capital that might once have flowed into ESG strategies has increasingly been redirected towards national defence and security priorities, with governments prioritising weapons systems and strategic deterrence in response to geopolitical uncertainty - a trend reflected in rising defence spending across both NATO and EU member states.

This challenging backdrop has also translated into a marked rise in ESG-related disputes in 2025, spanning climate litigation, greenwashing claims, shareholder actions and regulatory enforcement. ESG is no longer a soft policy discussion but an area of real legal, financial and reputational risk, firmly embedded in boardroom agendas and dispute resolution strategies.

Yet 2025 was not without meaningful progress. Investor demand for sustainable finance has proven resilient, with green bond issuance continuing to grow strongly, reinforcing the role of capital markets in financing the transition even amid political headwinds. On the multilateral front, the BBNJ Agreement (High Seas Treaty) moved closer to implementation, marking a significant step forward for global ocean governance and biodiversity protection beyond national jurisdictions - a reminder that international cooperation on ESG issues remains possible. More broadly, Asia accelerated its ESG agenda, with governments and corporates doubling down on sustainability policies, investment frameworks and disclosure standards, increasingly viewing the energy transition and sustainable finance as sources of long-term competitiveness and strategic advantage.

Taken together, 2025 underscored both the fragility of ESG momentum in certain regions and the depth of its structural foundations globally. Progress may have been uneven, but it has not stalled. As we close the year, we turn to 2026 with cautious optimism, ready to see what the next chapter of ESG regulation, markets and disputes will have in store.

Best,

Robert Allen
Partner - Global Head of ESG
robert.allen@simmons-simmons.com

1. EFRAG delivers draft simplified ESRS to the Commission amid EU simplification push (multi-sector)

What: On 3 December, the European Financial Reporting Advisory Group (EFRAG) submitted its draft simplified European Sustainability Reporting Standards (ESRS) to the European Commission. The revised package represents a substantial recalibration of the EU sustainability reporting framework, reducing the number of mandatory data points by approximately 70%, from 1,073 to around 320.

The simplified ESRS respond to sustained political, regulatory and market pressure to reduce reporting burden, improve usability and address implementation challenges identified during early Corporate Sustainability Reporting Directive (CSRD) preparation.

Key details:

• Quantitative and qualitative simplification - Simplification has been achieved not only through the removal of a substantial number of data points, including the complete deletion of all voluntary disclosures, but also through a comprehensive editorial review of the standards. The revised ESRS aim to improve clarity, consistency and readability, and to facilitate integration into management reporting rather than operating as a standalone compliance checklist.

• Revised double materiality assessment (DMA) - The DMA framework has been significantly reworked. EFRAG introduces a clearer, more top-down approach, anchored in business strategy and context, rather than exhaustive bottom-up data mapping. Documentation requirements are reduced, alignment with audit expectations is strengthened, and companies may carry forward DMA documentation from prior years unless significant changes occur. These changes are intended to address one of the most challenging aspects of the original ESRS.

• Expanded proportionality mechanisms and reliefs - In addition to the "undue cost or effort" exemption, the draft simplified ESRS introduce broader flexibility mechanisms, including flexible granularity of disclosures, phased-in requirements for particularly complex or forward-looking information (with some topic-specific phase-ins extending to 2029 for Wave 1 companies), and the removal of a systematic preference for direct value chain data. While these measures aim to improve proportionality, they increase reliance on judgement and may raise questions around consistency and supervisory oversight.

• Terminology and structural adjustments - Certain structural elements have been streamlined, including the renaming of Minimum Disclosure Requirements (MDRs) as General Disclosure Requirements (GDRs) within ESRS 2, with consistent terminology applied across the standards.

• Focus on usefulness and fair presentation - The revised ESRS place greater emphasis on the usefulness of information and fair presentation, shifting away from a purely prescriptive approach. Companies are afforded more flexibility in how sustainability information is presented, including the use of executive summaries, appendices and cross-references, with the stated objective of improving decision usefulness for users.

• International interoperability - EFRAG has sought closer alignment with international frameworks, including IFRS S1, ISSB standards and, to a degree, GRI. At the same time, certain ESRS-specific reliefs go beyond international equivalents, which may require careful coordination for companies reporting under multiple standards.

• Implementation support and guidance - To support practical application, EFRAG has launched the ESRS Knowledge Hub, an interactive platform intended to improve navigation and consistency across the ESRS framework. EFRAG is also expected to deliver accompanying explanatory documents, including a Basis for Conclusions and a cost-benefit analysis, by the end of December 2025.

Next steps- The draft simplified ESRS are now with the European Commission, which will conduct internal and external consultations and engage with the European Parliament and the Council. This process is expected to take approximately six to nine months, after which the standards would be adopted via a Delegated Act.

The current objective is for the revised ESRS to apply from financial year 2027, with the possibility of voluntary early application from FY 2026, subject to confirmation. These developments sit alongside the wider Omnibus I process and ongoing variations in national CSRD implementation timelines across Member States.

Our view: EFRAG's mandate was particularly challenging: to deliver a substantial simplification of the ESRS without diluting their core objectives, and to do so under significant political and time pressure. This was never likely to result in a frictionless outcome. The revised standards reflect those tensions. They represent a meaningful step forward in addressing some of the most acute implementation challenges, while also embodying compromises that raise new questions around consistency, comparability and supervisory expectations. In particular, the expanded use of reliefs and judgement-based exemptions will require careful governance to ensure they remain exceptional rather than routine.

2. Human rights and environmental complaint renders future of LNG project uncertain

What: The future of an LNG project in Mozambique has been thrown into doubt weeks after TotalEnergies announced that it would seek to restart the project.

Key details:

• On 17 November 2025, the European Centre for Constitutional and Human Rights (ECCHR) filed a criminal complaint with the Office of the French National Anti-Terrorism Prosecutor against TotalEnergies, accusing it of complicity in war crimes, torture, and enforced disappearance in Mozambique in connection with the development of the project. According to the ECCHR, internal documents obtained via freedom-of-information requests to parties financing the project show that TotalEnergies was aware of prior human rights abuses by Mozambican forces, yet continued to materially support them (providing accommodation, equipment, food, bonuses, etc.). In a press release following the filing, TotalEnergies strongly rejected the allegations, stating it had not been formally served with the complaint and denied any wrongdoing.

• On 1 December 2025, the UK and Dutch governments announced that they would withdraw their backing to the project via their export finance authorities (totalling $2.2 billion). The UK's decision was based on a reassessment of risk that "the risks around the project ... have increased since 2020," and that continued UK financing would no longer serve the interests of UK taxpayers. In a statement to the Dutch parliament, Dutch Finance Minister Eelco Heinen cited a human rights report commissioned by the Dutch government that confirmed the occurrence of the human rights abuses by members of Mozambican forces.

Our view: These developments highlight the continuing shift in the political, legal, and financial environment facing large fossil-fuel projects. For firms involved in fossil fuel projects (including developers and financiers) the Mozambique LNG project provides a stark example of the risks that can arise from projects in high-risk jurisdictions, including:

• Heightened legal and reputational risk: The ECCHR complaint demonstrates that companies sponsoring projects in high-risk jurisdictions could face liability for adverse environmental and human rights impacts of those projects. Even before any prosecutorial decision, such complaints can trigger investigations, litigation, complaints, and significant reputational damage.

• Pressure on public and export-credit financing: The decisions by the UK and Dutch governments to withdraw funding underscores increasing caution among public export-credit agencies when dealing with fossil-fuel projects exposed to environmental and/or human rights risks. Given the size of the UK and Dutch commitment, such decisions can materially affect project financing plans, although TotalEnergies has confirmed that the project remains viable without their funding. However, note that a case brought by Friends of the Earth U.S. is currently pending before the District Court for the District of Columbia which seeks to challenge the US export financing authority's decision to provide $4.7 billion of financing to the project.

A ripple effect on investor and lender confidence: As governments re-assess their roles, we have already seen private financial institutions facing increasing pressure from civil society, regulators, and markets to do the same. This can reduce the pool of willing funders, or make financing more costly, especially when human rights and environmental due diligence is applied. Whilst this new combination of legal risk and funding gaps may not necessarily result in outright project cancellation, it could still force renegotiation, delay, or even reconsideration of the project's feasibility

3. EU formally approves provisional Omnibus I deal on sustainability reporting and due diligence (multi-sector)

What: On 16 December 2025, the European Parliament formally approved the provisional political agreement reached with the Council on 9 December 2025, finalising the EU's Omnibus I simplification package for corporate sustainability reporting and due diligence. The package amends the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) with the objective of reducing compliance burdens while supporting EU competitiveness.

The legislation will now be published in the Official Journal and enter into force, with specific transitional timelines and thresholds as agreed.

Key details

• CSRD scope narrowed - Sustainability reporting is required primarily for companies with more than 1,000 employees and net turnover above €450 million. Smaller entities, including SMEs, are largely exempt from mandatory reporting but may voluntarily disclose sustainability information.
• CSDDD application limited to very large companies - Due diligence obligations now target firms with over 5,000 employees and net turnover exceeding €1.5 billion, including equivalent thresholds for non‑EU companies operating in the EU. The requirement for mandatory climate transition plans has been removed.
• Risk‑based due diligence - Companies may apply proportionate, risk-based approaches to identifying and addressing adverse impacts, focusing on material risks supported by reasonably available information. Detailed value-chain mapping obligations have been relaxed.
• Reporting simplification and digital facilitation - Sector-specific reporting is largely voluntary, supported by a digital portal with templates and guidance, and the focus is on quantitative indicators to streamline compliance.
• Transitional arrangements and enforcement - Transposition for the amended CSDDD is set for 26 July 2028, with compliance expected in July 2029. EU-wide civil liability has been removed; enforcement will rely largely on national frameworks, with penalties capped (e.g., up to 3 % of net worldwide turnover).

What's next: Following publication in the Official Journal, companies falling within the revised thresholds should review sustainability reporting and due diligence processes, updating internal policies and governance structures as required. Guidance from the European Commission and national authorities is expected in the first half of 2026 to support implementation.

In our view: The formal approval on 16 December 2025 cements a significant shift in the EU's sustainability regulatory landscape. Raising thresholds and narrowing obligations for both CSRD and CSDDD will ease compliance burdens for mid-sized companies while concentrating regulatory focus on the very largest firms. The removal of mandatory climate transition plans and detailed value chain mapping reflects strong business and political pressure for proportionality.

However, these simplifications may reduce transparency and comparability for investors and stakeholders, and the reliance on risk-based due diligence will require firms to establish robust internal governance and documentation to demonstrate compliance. The review clause retained in the legislation signals that future adjustments to scope or obligations remain possible.

4. Decree on Packaging and Extended Producer Responsibility (EPR)

What: As part of efforts to combat waste and promote the circular economy, France continues to adapt its legislation in line with European developments in waste management. Decree No. 2025-1081 of 17 November 2025 follows the Law of 10 February 2020 on combating waste and promoting the circular economy and, in particular, transposes the requirements of Regulation (EU) 2025/40 on packaging and packaging waste.
Its objective is to strengthen extended producer responsibility (EPR) for packaging consumed or used by professionals, in addition to the existing schemes applicable to household packaging.

Key Elements
The decree sets out the conditions under which packaging producers (manufacturers, importers and distributors) are required to contribute to, or organise, the collection, reuse and recycling of packaging waste. In particular, it provides for:

• the extension of EPR to packaging used by professionals, with a clear distinction between household packaging and professional packaging;

• an obligation for approved eco-organisations to cover the costs of managing both professional and household packaging waste collected from professionals, based on cost-effectiveness criteria;

• the establishment of a common traceability system to monitor the sector where several eco-organisations are approved;

• specific provisions applicable to oil and chemical product containers, as well as to packaging intended for reuse;

• the exclusion of certain sectors (including oils, hazardous chemicals, construction and agricultural supplies) that are already covered by other EPR schemes.

Next Steps: The decree will enter into force on 1 January 2026. However, contracts in force between approved eco-organisations and producers as at 1 January 2026 will remain applicable until their expiry.
In addition, the operating rules for eco-organisations managing packaging waste from the catering sector will continue to be governed by the previous regulatory framework until new approvals are granted. Further ministerial orders may be adopted to clarify certain implementation criteria, in particular those relating to the categorisation of packaging.

5. EU Commission publishes environmental simplification package (multi-sector)

What: On 10 December, the European Commission presented a package of simplification measures for EU environmental and sustainability legislation, collectively referred to as the Environmental Omnibus. The initiative is intended to reduce administrative burdens, enhance competitiveness, and streamline compliance with existing environmental and sustainability rules.

Key details: This package is composed of six legislative proposals.

• Environmental reporting and digitalisation - Simplifying reporting obligations and promoting digital submission of environmental information.

• Spatial and environmental assessments - Streamlining environmental and strategic assessments, reducing duplication and administrative burden.

• Corporate Sustainability Reporting Directive (CSRD) Adjustments - Proposals to simplify reporting requirements and thresholds.

• Corporate Sustainability Due Diligence Directive (CSDDD) Adjustments - Introducing proportionate, risk-based due diligence approaches.

• Waste and circular economy rules - Targeted simplifications to reporting, permitting, and record-keeping obligations.

• Sector-specific environmental legislation - Minor legislative amendments to reduce unnecessary administrative burdens across environmental sectors.

These six proposals reflect targeted simplifications informed by the call for evidence launched on 22 July 2025, which gathered more than 190,000 responses. The Commission emphasises that the package does not compromise environmental or sustainability objectives, but aims to reduce administrative burdens and improve the usability of regulatory requirements.

Next steps: These proposals now enter the ordinary legislative procedure and must be negotiated and adopted by the European Parliament and Council through 2026.

6. Bank of England (BoE) enhances climate risk disclosure framework for banks and insurers (financial services)

What: On 3 December, the Bank of England's Prudential Regulation Authority (PRA) published an updated Supervisory Statement (SS5/25) on enhancing banks' and insurers' approaches to managing climate‑related risks. The revision sets out the PRA's expectations for firms to strengthen their long‑term resilience as climate risks intensify, while taking a proportionate and practical approach to implementation.

The updated guidance spans governance, risk management, climate scenario analysis, data and disclosures, and includes banking‑ and insurance‑specific context. It reiterates that climate‑related risks are a source of both financial and strategic risk for regulated firms and must be managed on a forward‑looking basis.

Key details

• Governance and senior leadership oversight - The PRA emphasises that boards and senior management must embed climate risk responsibilities into governance structures, risk appetite statements and strategic decision-making. Board committees should have appropriate expertise to challenge management assumptions, and firms should explicitly allocate accountability for climate-related risk management.
• Two-step proportionality and risk management frameworks - Firms are expected to first assess the materiality of climate risks within their business model, then tailor risk management responses accordingly. Risk frameworks should cover credit, market, operational and insurance risks, including integration of climate adjustments into lending, underwriting, capital planning and internal risk models.
• Climate scenario analysis - Firms should use both qualitative and quantitative scenario analysis over short, medium and long horizons to assess potential climate impacts. Scenario outputs should inform strategic planning, risk limits and capital allocation. The PRA expects firms to document methodologies, assumptions and judgements, ensuring transparency and auditability.
• Data, methodologies and capabilities - High-quality data and robust methodologies are fundamental. Firms must address gaps in data availability and comparability, invest in internal capabilities and maintain clear documentation of assumptions, models and outputs. Smaller or less complex firms may apply scaled approaches proportionate to their size and exposure, provided they justify and document these choices.
• Disclosure and alignment with international standards -  Firms are expected to align climate-related disclosures with evolving international frameworks, ensuring consistency, comparability and decision-usefulness for investors and stakeholders. While SS5/25 does not prescribe specific disclosure standards, it highlights the importance of robust governance, transparent methodology and proportional reporting.
• Banking‑ and insurance‑specific issues - For banks, the PRA highlights credit risk assessments, stress testing, and capital planning; for insurers, the focus is on underwriting portfolios, reserving, asset-liability management, and potential climate-related litigation or liability risks.

In our view: The updated supervisory statement underscores the PRA's position that climate risk is a core prudential concern, not just a disclosure or ESG matter. By emphasising a two-step proportionality approach, robust governance, scenario analysis, and transparent documentation, the PRA seeks to integrate climate risk into existing prudential frameworks while allowing proportionate approaches for smaller or less exposed firms.

Firms will need to ensure climate risk management is embedded across business strategy and risk management processes. Transparent documentation of methodologies, assumptions and judgements will be critical to satisfying supervisory expectations and to maintaining credibility with investors and stakeholders.

7. PCAF launches updated GHG accounting standard for financial institutions  (financial institutions)

What: On 2 December 2025, the Partnership for Carbon Accounting Financials (PCAF) published a major update to its Global Greenhouse Gas (GHG) Accounting and Reporting Standard for the Financial Industry. The revised Standard expands the scope and methodological coverage of GHG accounting for financial institutions, aiming to enable more comprehensive, consistent and transparent measurement and reporting of emissions associated with financial activities.

PCAF's Standard is widely used by banks, insurers, asset managers and other financiers to account for greenhouse gas emissions linked to their portfolios, in particular Scope 3 Category 15 (financed and insurance‑associated emissions).

Key details

• Broader methodological scope - The updated PCAF Standard introduces new GHG accounting methods to cover a wider range of financial instruments and exposures. Notably, it includes four new financed emissions methodologies for use‑of‑proceeds structures, securitisations and structured products, sub‑sovereign debt, and an optional methodology for undrawn loan commitments aligned with IFRS S1 and S2 reporting frameworks.
• Supplemental guidance on forward‑looking metrics - PCAF has also released supplemental guidance on financed avoided emissions and forward‑looking emission metrics, providing guardrails for separately reporting expected or potential future emission outcomes. This guidance seeks to increase transparency and avoid the aggregation of future estimates with historical financed emissions inventories.
• Insurance‑associated emissions - The update adds two new methodologies under Part C of the Standard for insurance‑associated emissions covering treaty reinsurance and project insurance, addressing previously recognised gaps in measurement capability for the insurance sector.
• Feedback‑driven improvements - A set of recommendations responding to stakeholder feedback on PCAF's 2024 discussion paper on inventory fluctuation has been incorporated, reflecting an iterative, industry‑led development process.
• Collaboration and implementation timing - The new Standard and guidance were developed by industry‑led working groups with global representation from more than 100 experts drawn from PCAF signatories. While the updated methods are available for use immediately, PCAF recognises the need for financial institutions to plan feasible integration timelines and to disclose transparently the share of portfolios included and excluded, along with justifications for any exclusions.

In our view: The expanded PCAF Standard represents a meaningful evolution in how the financial sector accounts for carbon emissions linked to its activities. By broadening methodological coverage and introducing forward‑looking guidance, PCAF helps bridge gaps between current reporting practices and emerging sustainability reporting frameworks such as IFRS S2, ESRS E1 and other global standards that increasingly emphasise financed emissions.

The optional guidance on financed avoided emissions and forward‑looking metrics is particularly important, as it provides a structured way to account for future impacts while maintaining clarity between historical and projected emissions - a recurring challenge in climate‑related financial disclosures. That said, adopting such metrics requires disciplined governance and transparent documentation to avoid misinterpretation or over‑optimistic narratives about transition performance.

For insurers and other financial service providers, the addition of insurance‑associated emissions methodologies is a valuable advancement that aligns measurement capability with sector‑specific risk profiles and underwriting practices.

8. California corporate climate reporting (multi-sector)

What: On 9 December 2025, the California Air Resources Board (CARB) released draft regulations implementing SB 253 (Climate Corporate Data Accountability Act) and SB 261 (Climate‑Related Financial Risk Act), setting out California's new corporate climate disclosure regime. The draft rules define covered entities, revenue thresholds, and the scope of reportable emissions.

Key details:

• SB 253 applies to companies with over $1 billion in annual revenue doing business in California, requiring public reporting of Scope 1 and Scope 2 GHG emissions from 2026, with Scope 3 emissions phased in later. The first reporting deadline is 10 August 2026.

• SB 261 requires climate-related financial risk reporting for companies with over $500 million in revenue; however, enforcement is currently stayed by a court injunction.

• Draft regulations include definitions of covered entities and revenue, administrative procedures, and fee structures. Assurance and detailed content requirements will be addressed in subsequent rulemaking.

What's next: A public comment period runs through 9 February 2026, with a public hearing scheduled for 26 February 2026.

9. New UK regulation of ESG rating providers (multi-sector)

What: The UK Government finalised the legal instrument which will newly regulate the provision of ESG ratings in the UK (the ESG Ratings Order), and the FCA published its proposed rules and guidance for regulating ESG rating providers.

Key details: The ESG Ratings Order creates a new UK regulated activity of providing ESG ratings. Firms falling within scope of the new regulated activity will need to be FCA authorised to carry on this activity by 29 June 2028. This is relevant both to firms which provide ESG ratings as a standalone business, and also firms which provide ESG ratings as part of other products or services, including asset managers.
However, there is an extensive range of exemptions and scoping provisions, which reduce the headline application:

• The ESG Ratings Order applies only to firms which both produce and make available ESG ratings. It does not apply to firms which merely distribute ratings that have been produced by a third party.
• There is a helpful exemption available for providing ESG ratings as part of a FCA regulated service. There is a similar exemption available for non-UK firms which market certain funds into the UK.

The FCA's consultation covers the proposed regulatory framework for ESG ratings providers.  There are no new rules for users of ESG ratings or for those firms who provide ESG ratings but are able to rely on the available exemptions.  However, the FCA has indicated that it may introduce new rules for such firms in the future.

Our view: The regulation of ESG ratings providers in the UK has been a long time coming (the original consultation was in Spring 2023) and the EU has already adopted an equivalent regulation (coming into force in July 2026 - read more here).  ESG ratings providers providing ESG ratings in the UK will need to examine the scope of the Order and the FCA's rules to ensure compliance by 2028.  Asset managers and investment firms who provide ESG ratings as an incidental part of their business will need to carefully examine the exemptions to ensure they are out of scope of the new regime.  While there is much commonality with the EU ESG Ratings Regulation, there are differences that will need to be navigated with care.  Read our client note here.