ESG Knowledge Update | February 2026

Highlights this month include the UK's consultation on sustainability reporting, the EU's expansion of its Carbon Border Adjustment Mechanism, a one-year delay to the EU Deforestation Regulation with new simplification measures and new UK NHS procurement regulations targeting modern slavery in supply chains. We also examine updated guidance on the UK Green Claims Code.

Sustainability and climate reporting

UK FCA consultation on sustainability reporting for listed companies

The UK Financial Conduct Authority (FCA) is consulting on replacing the current rules for listed companies' sustainability disclosures with a requirement for in-scope listed companies to report against the UK Sustainability Reporting Standards (UK SRS).

The current rules are aligned with the Task Force on Climate-related Financial Disclosures, which was disbanded in 2023 following the transition to standards published by the International Sustainability Standards Board (ISSB). The UK government is currently in the process of developing the UK SRS to tailor the ISSB Standards for the UK. The FCA is consulting now, based on the draft UK SRS, to ensure it has sufficient time to consult and engage UK issuers and market participants on its implementation approach.

The FCA is proposing that companies in scope move to mandatory reporting against UK SRS S2, which covers climate disclosures and is an area where reporting is already high across companies. However, it is not proposing to require mandatory reporting of Scope 3 emissions data, which it proposes can continue to be reported on a ‘comply or explain’ basis.

The FCA recognises that wider sustainability (non-climate) reporting (against UK SRS S1) will be new to many listed companies and may present challenges. It is therefore proposing that this non-climate reporting can be on a ‘comply or explain’ basis against UK SRS S1.  

Companies in scope will also need to disclose whether and where they have published a transition plan, or the reason why not, and whether they have obtained third-party assurance on their sustainability disclosures. Mandating that companies have a transition plan is a matter for government rather than the FCA and so is not part of the proposals.

There will be flexibility to minimise duplication for international companies that have their primary listing in another jurisdiction.

The government aims to publish finalised versions of UK SRS S1 and UK SRS S2 for voluntary use in early 2026. The FCA's consultation is open until 20 March and the FCA aims to finalise its rules and publish its policy statement in autumn 2026, subject to the final UK SRS. 

Supply chain transparency

EU Carbon Border Adjustment Mechanism

From 1 January, businesses have had to comply with additional requirements under the EU Carbon Border Adjustment Mechanism (CBAM) legislation. These include requirements to submit CBAM declarations, importers registering with the national authority and an obligation on businesses to pay for the CO2 emissions generated in the production of carbon-intensive goods outside the EU.

In response to feedback received from industry, the European Commission has set out proposals to extend the scope of CBAM: starting 1 January 2028, the mechanism would expand to cover 180 steel and aluminium-intensive downstream products, such as machinery and appliances, preventing carbon leakage through product substitution.

The proposals introduce anti-circumvention measures, including enhanced reporting requirements, incorporation of pre-consumer scrap in emissions calculations and authority to address misdeclarations by requiring additional evidence or defaulting to country values when actual data proves unreliable.

A temporary decarbonisation fund will support EU producers facing carbon-leakage risks in third-country markets, reimbursing a portion of EU Emissions Trading Scheme carbon costs for companies demonstrating decarbonisation efforts, with financing derived from 25% of CBAM certificate revenues from 2026-2027 (contributed by member states) and 75% from EU own resources.

The UK's CBAM is due to commence on 1 January 2027, following the government's consultation and response last year on its proposed legislation.

UK and EU take action on 'forever chemicals'

The Department for Environment, Food and Rural Affairs has published the UK's first plan to combat PFAS  (per- and poly-fluoroalkyl substances) or "forever chemicals": the persistent substances used in manufacturing and low-carbon technologies that pose long-term environmental and health risks.

The plan sets out a range of measures for governments, businesses and regulators including:

• Consulting on statutory PFAS limits in England's drinking water later this year, giving regulators clearer enforcement powers
• Assessing contamination in estuaries and coastal waters for the first time, with increased testing and monitoring including for contaminated land, soils and food packaging
• Developing PFAS-free alternatives for products such as period pads and water-repellent clothing
• Creating new guidance for industrial sites on handling, monitoring and disposing of PFAS
• Completing work to consider restrictions on the use of PFAS in firefighting foams
• Considering potential restrictions or regulatory measures on PFAS use in specific consumer product groups
• Launching a new public website to raise awareness and increase transparency on government action

While England and Wales currently have safe drinking water with no PFAS above permitted levels, the plan aims to strengthen monitoring, enforcement and public awareness. The government will work with regulators and industry using science-based approaches to minimise risks from these chemicals that persist for hundreds of years.

Meanwhile, in the EU, the European Chemicals Agency (ECHA) has proposed a ban on more than 10,000 PFAS substances for all consumer goods. The ECHA proposal is currently under review by the Committee for Risk Assessment and the Committee for Socio-Economic Analysis, who are due to issue their opinions to the European Commission by the end of 2026.

EU Deforestation Regulation application delayed and further simplification measures introduced

The regulation simplifying and delaying the enforcement of the EU Deforestation Regulation (EUDR) has been published in the Official Journal and entered into force on 26 December 2025. Medium and large enterprises will have until 30 December 2026 to comply, with micro and small operators being given an additional six months until 30 June 2027.

Along with the delay, a number of simplification measures will also be introduced, with the aim of reducing compliance burden for companies while preserving the regulation’s environmental goals.

Micro and small primary operators will only be required to provide a one-off simplified declaration (rather than per transaction), while downstream operators and traders will no longer need to file additional due diligence statements.

Micro and small operators may also provide postal addresses instead of detailed geographical coordinates. Books, newspapers and printed pictures have been excluded from scope.

The regulation also introduces an obligation for the European Commission to conduct a simplification review of the regulation and present a report by 30 April evaluating the impact and administrative burden, particularly for smaller operators, of the EUDR. It will, where appropriate, be accompanied by a legislative proposal. Businesses can potentially expect further changes to deforestation requirements being proposed in 2026.

New UK NHS procurement regulations target modern slavery in supply chains

The National Health Service (Procurement, Slavery and Human Trafficking) Regulations 2025 were made on 17 November 2025 and are designed to help eradicate goods or services tainted by slavery and human trafficking in the NHS in England. Coming into force on 17 May 2026, the new regulations will apply to public bodies procuring goods or services for the purposes of the NHS in England, including central purchasing organisations and local authorities.

The regulations follow the government's consultation response earlier in 2025. A review delivered in December 2023 showed that across 60% of spend on medical consumables, 21% of suppliers were identified as high risk for modern slavery and 16% were medium risk, highlighting the need for standardised risk management across the NHS.

From 17 May 2026, in-scope public bodies will have to complete a modern-slavery risk assessment before advertising a contract or framework opportunity where a competitive procedure is being used, or prior to contract award if competition is not used. They must then take reasonable and proportionate steps to address and, where practicable, eliminate any identified risks when designing the procurement procedure (such as by setting conditions of participation and award criteria), setting the terms of the contract and managing the contract. 

The regulations will apply to all procurement activities undertaken by a public body, regardless of value, including those procurements covered under the Procurement Act 2023, those awarded under the Health Care Services (Provider Selection Regime) Regulations 2023 and any other procurement activity not covered by either of those regimes.

NHS England has updated draft statutory guidance, although the final version has not yet been announced, to which public bodies in scope for the regulations will need to have regard. The guidance sets out proposed reasonable steps public bodies should apply according to the level of modern slavery risk that has been assessed, including:

• For medium- and high-risk procurements, undertaking pre-market engagement to understand how supply chains respond to modern slavery risk.
• Conditions of participation to ensure suppliers in scope of the Modern Slavery Act 2015 have a compliant modern slavery statement.
• Requiring completion of the Modern Slavery Assessment Tool (MSAT) within three months of contract award for medium-risk procurements or as a condition of participation for high-risk procurements.
• Requiring key performance indicators (KPIs) on modern slavery in contracts. The KPIs could include the sharing of MSAT recommendations, handling confirmed cases within an agreed timeframe and requiring staff to complete modern slavery training.
• Taking a positive, proactive and collaborative approach with suppliers during contract management to foster transparency and encourage them to raise issues as they emerge.

Suppliers to the NHS will need to consider what steps to take now to ensure they meet the additional requirements that will be implemented in procurements from May onwards.

Green claims

Guidance on the UK Green Claims Code

The UK Competition and Markets Authority (CMA) has published guidance to supplement the Green Claims Code that was introduced in 2021 to help businesses understand and comply with their obligations under consumer protection law when making environmental claims.

The CMA guidance maps how consumer law applies across the supply chain from raw material to consumer, showing where environmental claims may be added or retained and defines what constitutes "making" an environmental claim, including statements, presentation and omissions.

It also confirms that retailers stocking products with false environmental claims can be liable alongside manufacturers. The guidance requires all supply chain businesses to ensure environmental claims (direct, indirect or passed on) are accurate and not misleading

As well as setting out the CMA's approach to determining which businesses to investigate, practical examples and separate checklists are included for retailers, brands and suppliers/manufacturers

Sustainable finance

UK FCA proposes new rules for ESG ratings transparency

The UK's Financial Conduct Authority (FCA) has published proposals on ESG ratings to ensure they are transparent, reliable and comparable. The move is estimated to deliver approximately £500 million in net benefits over the next decade.

ESG ratings inform investment decisions, risk management and regulatory reporting, with global spending on ESG data projected to reach $2.2 billion in 2025. The proposals published at the start of December 2025 follow the government's decision to bring ESG ratings within the FCA's remit, supported by 95% of consultation respondents.

The proposals include increased transparency to allow easier comparisons for users and rated entities and improved governance, systems and controls to ensure clear decision-making and strong oversight. They specify the need for the identification and management of conflicts of interest and for clear expectations for stakeholder engagement and complaints handling.

The FCA's research shows around half of ESG ratings users are concerned about how ratings are built (55%) and their transparency (48%). The proposed rules are designed to be proportionate to business size and risk, drawing on the existing voluntary industry code of conduct and International Organisation of Securities Commissions recommendations.

The consultation closes on 31 March 2026. Final rules are expected in the fourth quarter of 2026, with the new regime taking effect from June 2028.

European Commission consults on ESG rating activities delegated regulations

The European Commission has published two draft delegated regulations for consultation, supplementing Regulation (EU) 2024/3005 on the transparency and integrity of ESG rating activities.

The first draft regulation concerns ESMA supervisory fees charged to ESG rating providers (article 42(2) mandate). It sets out rules on fee types, coverage, amounts, rationale and payment methods.

The second draft regulation published simultaneously addresses procedural rules for fines and periodic penalty payments imposed by ESMA on ESG rating providers (article 39(9) mandate). It includes provisions on rights of defence, temporal provisions, collection procedures, and detailed rules on limitation periods for imposing and enforcing fines and periodic penalty payments.

The draft delegated regulations will come into force 20 days after publication in the Official Journal of the European Union. The deadline for comments is 13 February, with adoption expected during the first quarter 2026.

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