ESG Market Alert UK – May 2026

FCA proposal to regulate ESG ratings providers

Who will this affect?

The FCA has recently closed its consultation on a new proposal to regulate ESG ratings providers. This will be naturally relevant to ESG ratings providers, who will fall into the scope of the FCA's proposed regulatory perimeter (this includes ESG rating providers outside the UK which provide ESG ratings to a person in the UK for remuneration). It will also be highly relevant to investors who rely on ESG ratings (such as asset managers and financial institutions) as well as rated UK companies.

How could this affect you?

The FCA’s regulation of ESG ratings providers aims to improve the quality, transparency and consistency of ESG ratings in the UK market. The FCA’s research indicates that users of ESG ratings identify concerns around transparency on ratings’ objectives, methodologies and data sources, weaknesses in ESG providers’ systems and controls, conflicts of interest and inadequate governance arrangements.

The FCA intends to bring ESG rating providers within the UK regulatory perimeter which would combine the FCA’s existing baseline requirements (such as governance standards, systems and controls, and supervisory oversight) alongside targeted, ratings specific conduct rules. Certain firms which are already regulated in the UK will be excluded from the regime where they provide ESG ratings in the course of carrying on another regulated activity. The bespoke requirements are designed to address key market risks identified by the FCA as mentioned above. The proposals are informed by international standards and industry practice, including IOSCO recommendations and the International Capital Market Association Code of Conduct for ESG Ratings and Data Providers. Our summary of the FCA’s proposals can be found here: UK proposals for the regulation of ESG ratings.

Adopting regulation to resolve structural issues with ESG ratings providers and improve ESG rating reliability will support the use of ESG ratings across financial markets, improving trust to potentially reduce risk of greenwashing and misallocation of capital, cementing the growing prominence of ESG considerations in financial markets.

In April, the FCA launched a voluntary pilot scheme for ESG rating providers. A Policy Statement outlining the final rules is expected to be published in Q4 2026 and subject to finalisation, the regime is expected to come into force in June 2028.

The FCA's proposal aims to build transparency and trust in the UK's ESG ratings market. Investors and companies who rely on ESG ratings should keep a close eye on the FCA's proposal to understand how the new measures will affect the use of ESG ratings and how it compares with the EU's ESG Rating Regulation, which is already in force. Given the growing use of ESG ratings and the plethora of available products, companies which understand how to navigate ESG ratings will be well-positioned to capitalise on the growing ESG ratings market.

European Banking Authority’s (EBA) major proposal to simplify supervisory reporting requirements for banks

Who will this affect?

The EBA has proposed a set of comprehensive simplification and efficiency measures to make supervisory reporting simpler, smarter and more proportionate. As well as simplification, the proposal includes ESG integration amendments which are regulatory driven. These changes will primarily affect EU regulated banks but will undoubtedly have broader implications across the financial system, including:

• Smaller and non-complex institutions (otherwise referred to as SNCIs), which stand to benefit most from these changes through lighter disclosure requirements.
• Large institutions (broadly, those with over €30 billion in assets) will see their reporting requirements streamlined but will remain subject to a more substantive ESG reporting framework than their non-listed or SNCI counterparts.
• Investors may benefit from more consistent and comparable ESG disclosures, which may, in turn, support better-informed long-term capital allocation decisions.
• Corporate borrowers may experience indirect but meaningful benefits as financial institutions, particularly SNCIs, face fewer and more targeted ESG data collection obligations, downstream pressure on corporates to supply granular sustainability data to their lenders may ease.

How could this affect you?

The EBA has stressed that its proposed changes should not be construed as a “deregulation exercise” but are instead aimed at simplifying and streamlining ESG supervisory reporting requirements for banks by removing duplicative and unnecessarily complex reporting obligations, as well as enhancing proportionality measures to reduce compliance costs – in particular for SNCIs.

Key changes resulting from the proposal include:

• An overall estimated 50% reduction in the required number of ESG-related data points, based on the EBA’s own estimates.
• Limiting supervisory reporting requirements for SNCIs to a single template aggregating annual data aimed at capturing exposures to both transition and physical climate-related risks, including an additional reporting column on off-balance sheet risk.
• Removing taxonomy-related disclosures (e.g. indicating how a company's or institution's activities align with the EU Taxonomy Regulation) from the supervisory reporting requirements. While certain taxonomy-related information may still be required as part of public disclosures under Pillar 3, this change would eliminate duplicative reporting in what is often one of the most technically demanding areas of ESG disclosure for financial institutions.
• Adoption of two new reporting templates for large institutions, and other listed institutions and large subsidiaries:
• D04.00 – a new obligor-level template, replacing the existing Template 4 covering environmental exposures towards the top 20 polluting companies. The intention here is to move towards a broader, more dynamic assessment metric, aimed at providing supervisors with a more holistic view of risk exposure across portfolios, rather than focusing on a narrow, name-based disclosure. As more granular, obligor-level information will need to be provided under this new reporting template, it will form part of supervisory reporting only, and not Pillar 3 reporting.
• D11.00 – a new annual template capturing exposures to environmental risks beyond climate, including biodiversity loss, ecosystem degradation, pollution, and overexploitation of natural resources.

The EBA’s proposal is still at the consultation stage, which is set to close on 10 July 2026 but, if implemented, would mark one of the EBA’s largest reform packages in over a decade. The EBA's proposed reforms reflect a wider recalibration of EU sustainability reporting. Through the Omnibus agenda and related CRR3 reforms, the EU is streamlining and simplifying reporting towards a more proportionate framework focused on decision-useful data. While important differences remain between the EU and UK sustainability reporting frameworks (notably, the FCA is still consulting on proposals to make compliance with the UK Sustainability Reporting Standards mandatory for listed companies, which we covered in last month’s alert – see ESG Market Alert UK – April 2026), a philosophical convergence is emerging, with both regimes placing greater emphasis on quality over breadth of disclosure, with a view to providing a more efficient and comparable basis for assessing sustainability-related risks and opportunities.

Heightened scrutiny over water and energy use in data centres

Who will this affect?

Data centres have found themselves in the middle of an intensifying ESG debate. This will primarily affect tech companies and companies seeking to utilise AI, as well as businesses related to AI downstream infrastructure.

How could this affect you?

Whilst data centres are key to support the computational requirements of generative AI, cloud computing and digital services, these facilities have a significant impact on nature and the environment. The most acute pressure points include energy consumption and water use – data centres require vast and continuous supplies of both – planned construction of data centres across the UK means that their impact is set to grow significantly. Scrutiny from investors, environmental activists and governmental authorities is elevating the risk for tech companies and data centre-related businesses who require additional computing power to fuel their growth.

These concerns are not merely theoretical. According to the National Energy System Operator, electricity consumption from UK data centres alone is expected to quadruple by 2030. The implications of rapid data centre growth are already generating pressure on big tech companies in the U.S., where major investors such as Trillium Asset Management are raising questions on tech companies’ ability to meet their existing climate goals and seeking more data on water usage and conservation efforts as these companies seek to expand their computing power.

In the UK, the environmental risks associated with data centre development is attracting both parliamentary and judicial attention. In late February 2026, the House of Commons Environmental Audit Committee launched a formal inquiry into the environmental impact of data centres, examining how much energy and water they are likely to consume and how this could affect the Government's net zero goals. The inquiry also considered how growing AI use might accelerate the need for data centres, whether planning authorities are adequately accounting for their environmental impact, and what lessons the UK could learn from other countries. Separately, the limits of the current planning framework have been brought into sharp relief by a significant concession in the courts. The Government conceded a judicial review challenge to its decision to grant planning permission for a hyperscale data centre at Iver, Buckinghamshire on the basis that the application had not included an Environmental Impact Assessment (EIA) and instead relied on mitigation measures to justify that conclusion, which the Government subsequently acknowledged was a "serious logical error" in the EIA screening process. This heightened scrutiny takes place against the backdrop of significant planning reform for data centres in the UK, which added data centres to the list of Nationally Significant Infrastructure Projects in January 2026 and allows data centre developers to request that their project be determined by the Secretary of State, as opposed to local planning authorities. For UK companies and investors, these recent developments underscore the fact that despite government policy being clearly in favour of data centre development, sustainability considerations are still a critical factor when assessing data centre-related opportunities and robust due diligence is needed to identify and manage such risks.

Government responses to energy price shock from conflict in the Middle East

Who will this affect?

Recent events in the Middle East have had profound implications for all businesses and consumers, not just for the oil and gas industry. While any potential government interventions to the energy price shock will have a direct impact on energy prices, everyone should be looking closely at the fiscal impact of such measures on government finances and the overall economic outlook, with central banks carefully mulling the impact of higher energy prices on inflation and interest rates. Companies in the energy industry will also need to consider the geo-political ramifications of the crisis, which has created a renewed focus on energy security.

How could this affect you?

The complex nature of the global energy supply chain means that each country is experiencing varying degrees of impact on energy prices based on their geography, energy mix and primary suppliers, provoking different responses from each government. We set out the responses of the UK government and EU Commission to the energy crisis below.

UK government response

Ofgem's price cap is forecast to rise significantly this summer, increasing household energy bills. The government has indicated that it is developing contingency plans but has stated it is too early to commit to major energy relief measures. Universal support has been ruled out in favour of targeted assistance based on household income. Potential measures under consideration include retaining the fuel duty cut currently scheduled to be phased out. In parallel, the government has announced plans to accelerate the clean energy transition, including speeding up the warm homes plan to encourage take-up of solar panels and electric vehicles, expanding the use of solar on public land, and delinking gas and electricity prices to cut consumers' bills.

European Commission measures

The Commission is preparing proposals to cut electricity taxes across the EU and tax fossil fuels more heavily. The planned reforms to EU tax rules are intended to support the electrification of heating and transport, reduce exposure to volatile global energy markets and accelerate the shift towards domestically generated power. The proposals are also expected to include higher taxes or windfall levies on fossil fuel profits, alongside measures to expand renewable energy, strengthen electricity grids and introduce electrification targets. Taken together, these initiatives reflect efforts to rebalance the EU’s energy ecosystem while embedding longer term energy security and decarbonisation objectives.

Impact

The UK government and EU Commission appear to be taking slightly different approaches to mitigating the short-term price shocks from the crisis, with the UK taking a more cautious, targeted approach to energy support. However, the common theme is that the conflict has created a renewed focus on energy security, stimulating long-term structural reforms to their respective energy markets. Transactions involving energy-intensive targets may require enhanced due diligence on exposure to wholesale energy price volatility, additional government levies and future regulatory changes, including potential reforms to electricity pricing mechanisms. Conversely, assets and businesses aligned with the accelerated decarbonisation agenda, particularly renewable energy generation, grid infrastructure, EV charging networks and energy efficiency solutions, may benefit from supportive government policies, lower relative operating costs and stronger investment tailwinds. Against the backdrop of a strong wave of energy transition focused M&A activity across the UK and Europe (which we reported on last month, see ESG Market Alert UK – April 2026), developments arising from events unfolding in the Middle East have created a more nuanced deal environment. The economic and geopolitical instability stemming from the crisis may create opportunities for actors who are able to navigate and capitalise on the rapidly evolving energy landscape.

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Authored by Nicola Evans, Emily Julier, Scott Prior, Hanwei Low, Callum Bobath, Camilla Cerruti, Simeng Fan, Lilyana Georgieva, Katelyn Groenewald, Shenaya Lalljee, Devina Patel, and Samuel Tahir.