Environmental, social and governance | UK Regulatory Outlook January 2026

EUDR application delayed until the end of 2026 with further simplification measures introduced

The European Parliament and the Council of the EU approved the delay to the enforcement of the EU Deforestation Regulation (EUDR) at a vote which took place on 17 December 2025. The regulation was published in the Official Journal and has entered into force. This means 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);
• downstream operators and traders will no longer need to file additional due diligence statements;
• micro and small operators may provide postal addresses instead of detailed geographical coordinates; and
• books, newspapers and printed pictures have been excluded from scope.

Also introduced by this regulation is an obligation for the European Commission to conduct a simplification review of the regulation and present a report by 30 April. This report will evaluate the impact and administrative burden of the EUDR, particularly for smaller operators and will, where appropriate, be accompanied by a legislative proposal. Businesses should therefore be alert to potential further changes to deforestation requirements being proposed in 2026.

Update on changes agreed to CSRD and CSDDD

The European Parliament has approved a provisional agreement on simplified sustainability reporting and due diligence rules for businesses. The text now needs to be approved by the Council and will enter into force 20 days after its publication in the Official Journal, which is anticipated to be in March 2026.

CSRD

The criteria for a company to be required to report under the Corporate Sustainability Reporting Directive (CSRD) has been significantly increased meaning many more companies will be out of scope. The previous required a company to meet two of the following: 250 employees, €50 million turnover and €25 million balance sheet. The requirement is now 1000 employees and €450 million of net worldwide turnover. Non-EU ultimate parents (other than financial holding companies, as below) of groups with €450 million net EU turnover or more (no employee threshold) will need to report via an obligation which sits with their EU subsidiary, where that subsidiary has a net turnover of €200 million.

The reporting requirements will be significantly simplified and sector-specific reporting will become voluntary. Importantly, companies required to prepare sustainability reporting will not be permitted to shift that responsibility to their smaller business partners. To facilitate compliance, the Commission will establish a digital portal with access to templates and guidelines on EU and national reporting requirements.

As reported in our November edition, the requirement for "second wave" and "third wave" companies to report will begin for financial years starting 1 January 2027 onwards with publication in 2028. With member states being given discretion as to whether to exempt "wave one" companies from reporting for 2025 to 2026.

CSDDD

If the proposed text is agreed, fewer companies will need to carry out due diligence under the Corporate Sustainability Due Diligence Directive (CSDDD), which will only apply from 26 July 2029 for businesses within its new scope. Under the revised rules, this will only be required from large EU corporations with more than 5,000 employees and a net annual turnover of over €1.5 billion, with the same turnover threshold for non-EU companies. They will have to carry out scoping exercises to identify risks in their chain of activities and should only request information from business partners with fewer than 5,000 employees when the information for in-depth assessment cannot be obtained another way.

Transition plans ensuring a company's business model is compatible with the shift to a sustainable economy will no longer be required. Businesses will be liable at the national level for failures to apply the rules correctly and could face fines of up to 3% of their net worldwide turnover, a decrease from existing penalties which are a minimum of 5% of the group worldwide turnover.

Businesses need to ensure that when the final text is agreed and comes into force, they are aware of which of these CSRD and CSDDD requirements apply to them and when the requirements come into force.

CBAM

EU CBAM

From 1 January, businesses have to comply with additional requirements under the EU CBAM legislation which came into force in September 2023. This includes the requirements to submit CBAM declarations; CBAM importers are required to register with the national CBAM authority and businesses will be obligated to pay for the CO2 emissions generated in the production of CBAM goods outside the EU.

In response to feedback received from industry, starting 1 January 2028, CBAM's scope will be expanded to close circumvention loopholes and strengthen its effectiveness. CBAM will 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 (ETS) 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.

UK CBAM

Following the government's consultation on the proposed UK Carbon Border Adjustment Mechanism (CBAM) legislation, it has now published its response with the government confirming that it intends to legislate for the introduction of a UK CBAM from 1 January 2027.

CBAM will apply a levy to greenhouse gas (GHG) emissions embedded in certain highly traded, carbon-intensive imported products, affecting the cement, fertilisers, iron and steel, aluminium and hydrogen sectors, so that they face a carbon cost equivalent to what would have applied had they been produced in the UK. It is a levy designed to mitigate the risk of carbon leakage and to support decarbonisation.

The consultation response confirms that indirect emissions associated with the production of CBAM goods will not be included in scope of CBAM until 2029 at the earliest, to reflect continued support for the energy intensive industries compensation scheme.

Key technical changes made to the legislation following consultation include:

• the free allowance adjustment in the CBAM rate calculation will be based on a sectoral average of emissions covered by free allowances over a baseline period, adjusted annually to reflect the phase out of free allowances under the UK ETS;
• carbon price relief has been extended to enable recognition of carbon prices incurred under CBAMs;
• exemptions will be included for emissions embodied in UK-produced precursor goods that are imported into the UK as part of a complex CBAM good and for emissions embodied in CBAM goods under temporary admission in the UK with a full relief from customs duties (customers who have mistakenly overpaid CBAM will have three years to claim repayment); and
• the group treatment provision has been removed.

The consultation response also indicates that the government is considering the role of refineries and will publish a call for evidence on the fuel sector, considering whether to include refined products in CBAM in future. HMRC will publish detailed guidance ahead of 2027 with draft secondary legislation and notices for technical consultation expected in early 2026.

European Commission proposes Environmental Omnibus to simplify environmental legislation

On 10 December 2025, the European Commission presented a package of measures to simplify environmental legislation in the areas of industrial emissions, circular economy, environmental assessments and geospatial data. The Commission expects the changes to save businesses approximately €1 billion per year while maintaining the EU's environmental and health protection objectives.

Key simplifications include:

• streamlined environmental assessments with single points of contact, digitalisation and faster procedures for granting permits, particularly for strategic sectors such as digital projects, critical raw materials and affordable housing;
• more flexibility for companies under the Industrial Emissions Directive, including removal of transformation plan requirements and exemptions for farmers from certain reporting obligations;
• repeal of the SCIP (Substances of Concern In articles as such or in complex objects (Products)) database on hazardous substances, to be replaced by more effective digital solutions such as the Digital Product Passport;
• suspension of the requirement for EU-based companies to appoint authorised representatives in every Member State for extended producer responsibility obligations; and
• alignment of geospatial data requirements under the INSPIRE Directive with horizontal legislation to facilitate access to high-value datasets.

The proposal, which reflects contributions from over 190,000 responses to a call for evidence launched in July 2025, will now be submitted to the European Parliament and Council for adoption. The Commission has committed to continuing simplification efforts, including upcoming guidance on the Packaging and Packaging Waste Regulation, revision of the Water Framework Directive in 2026, and the Circular Economy Act scheduled for 2026.

EU launches consultation on Climate Risk Management Framework

The European Commission has opened a public consultation running until 23 February to gather evidence for a new climate-risk management initiative. The consultation seeks input from a broad range of stakeholders, aiming to address significant knowledge gaps across the climate risk landscape and ensure stakeholder engagement in developing this framework.

The consultation aims to fill knowledge and evidence gaps in:

• Climate risk assessments and disclosure
• Regulatory frameworks and standards
• Governance and oversight
• Incentives and enforcement
• Financial frameworks
• Cross-border cooperation and consistency
• Sector policy commitments and contributions
• Stakeholder engagement and participation
• Emerging socio-economic trends
• Technological innovation

Businesses should consider participating in this consultation to help shape the regulatory framework and ensure their operational concerns are reflected in future climate risk requirements.

FCA proposes new rules for ESG ratings transparency

The Financial Conduct Authority (FCA) published proposals on 1 December 2025 to ensure environmental, social and governance (ESG) ratings 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 follow the government's decision to bring ESG ratings within the FCA's remit, supported by 95% of consultation respondents.

Key proposals:

• Increased transparency to allow easier comparisons for users and rated entities
• Improved governance, systems and controls to ensure clear decision-making and strong oversight
• Identification and management of conflicts of interest
• 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.

PFAS in the UK and EU in 2026

See Products section.

First set of requirements under the EU PPWR come into effect

See Products section.

Ecodesign for Sustainable Products Regulation – provisions on destruction of unsold consumer goods

See Products section.

EU forced labour regulations

See Modern slavery section.