ESG Market Alert UK – Outlook for 2026

For a global view, read our article on ESG compliance – Current state, global trends, and outlook 2026.

Outlook for 2026

Regulatory focus on ESG matters in 2026

We expect that, continuing the trend from 2025, companies will face increasing pressure in 2026 to enhance transparency in ESG reporting, including the introduction of more granular, sector-specific requirements. Regulators are expected to maintain a strong focus on ESG matters.

In its 2025 review of climate disclosures, the FCA signalled that its priorities going forward would be simplification and streamlining disclosure requirements, and global alignment to incorporate ISSB standards and promote international consistency to maintain the UK's leadership in sustainable finance. Looking ahead, firms should prepare for rising expectations around quality and clarity of disclosures.

Separately, on 30 January 2026 the FCA published a consultation on replacing its existing Task Force on Climate-related Financial Disclosures aligned rules for listed companies with mandatory reporting under the new UK Sustainability Reporting Standards (UK SRS). The UK SRS are broadly aligned with IFRS S1 and IFRS S2 to promote international consistency and efficiency. The final UK SRS are expected to be published by the Department of Business and Trade in early 2026. To facilitate timely engagement with market participants, the FCA has based the consultation on the draft UK SRS, with the FCA's final rules to reflect the final version of the UK SRS. The FCA closes its consultation on 20 March 2026 and intends to issue its final policy statement in autumn 2026. The new requirements are proposed to take effect from 1 January 2027. For further details, please see our HL article UK sustainability reporting: Financial Conduct Authority (FCA) publishes proposals for new ISSB-aligned rules to replace TCFD-aligned rules for listed companies.

AI in ESG: Technology transforming how ESG frameworks operate

Artificial intelligence (AI) will continue to be a core topic of conversation in the ESG space this year, as focus is placed on how to utilise the AI landscape to enhance and streamline ESG commitments and optimise operational efficiency while at the same time maintaining an ethical and responsible approach, as increasingly governed by regulators.

The EU Artificial Intelligence Act (the AI Act), the first global comprehensive regulatory framework on AI, will continue in its transitional phase this year, coming into full force from 2 August 2027. The AI Act seeks to introduce a harmonised regulatory framework that classifies AI systems according to their potential harm. The AI Act goes so far as to ban the use of AI systems where associated risks are classed as unacceptable and will also introduce a number of new transparency requirements for companies in respect of their AI usage. With its broad extraterritorial effect, the AI Act will capture certain UK businesses whose systems are exposed to the EU market.

At the end of 2025, the UK government also updated its Data and AI Ethics Framework, expanding the key principles to also include privacy, societal impact, sustainability and safety. As cooperations seek to amass and analyse masses of data, with the intention of meeting ESG requirements, whether that be to comply with the streamlined Energy and Carbon Reporting (SECR) reporting requirements, supply chain transparency or other disclosures, ensure cross-border compliance or automate processes – the concerns of the regulators should be kept firmly in mind by leadership.

To explore how AI is colliding with and accelerating the biggest issues in ESG, listen to our two-part podcast series on AI, ESG, and Ethics: Building Responsible Systems for a Transforming World.

Governance and supply chain accountability

Looking ahead in 2026, supply chain and governance oversight is expected to continue to become more important for businesses and regulators alike.

In the UK, the Independent Anti-Slavery Commissioner published a report on 16 December 2025 calling for reform, most notably the introduction of a new offence of failing to prevent serious human rights harms, as well as proposals for mandatory human rights due diligence. If adopted, this would represent a significant shift, imposing a material compliance burden on UK corporates. The report also includes model legislative drafting and while there is currently no indication that the UK Government will legislate in the near term, pressure from NGOs, some MPs and the wider community for reform is expected to continue to build in 2026.

The Competition and Markets Authority has issued new guidance clarifying how consumer law applies to environmental claims across the supply chain. This guidance supplements the Green Claims Code and explains who may be liable, including brands, retailers, manufacturers and suppliers, when claims are made, repeated or left unexplained. This signals that misleading “greenwashing” behaviour remains a high enforcement priority.

Taken together, these developments indicate that supply chain oversight is expanding from operational risk management to reputational and enforcement risk, and businesses may seek to engage more actively with their global supply chains.

Retrospective on 2025

Climate Transition Plans: From commitment to action

2025 was a defining year for climate transition planning, as the UK regulator advanced ambitious measures while navigating complex political and economic pressures. The publication and refinement of climate transition plans became a central focus, with growing emphasis on integrating nature and biodiversity risks into ESG frameworks.

The Climate Change Committee published its recommendations for the UK's seventh carbon budget (covering 2038-2042), setting out clear sectoral priorities for decarbonisation, including electrification, the scaling of low carbon fuels and carbon capture and storage, nature-based solutions and demand reduction. Further details can be found in our April 2025 ESG alert. In addition, the UK Transition Finance Council (a partnership between the UK Government and the City of London Corporation) released draft guidelines to support capital allocation for entities transitioning to net-zero. The guidelines emphasise target-setting, transparency and accountability, and are designed to align with broader initiatives, such as the UK's Transition Plan Taskforce, the International Sustainability Standards Board (ISSB) disclosure standards and the Net Zero Investment Framework. The final guidelines are expected in Spring 2026.

The North Sea Transition Taskforce report further underscored the importance of a coordinated, long-term strategy for the UK's energy transition in the North Sea. The report called for a clear regulatory framework, a stable and predictable tax regime, targeted government investment in key technologies such as offshore wind and carbon capture and the establishment of a ministerially led North Sea Transition Committee. These recommendations highlight the operationalisation of climate commitments in the energy sector.

Finally, the passage of the Great British Energy Bill paved the way for the establishment of Great British Energy (GBE), a publicly owned, operationally independent energy company tasked with investing in clean power projects across the UK. Backed by government funding, GBE is intended to accelerate the deployment of clean energy technologies in offshore wind, solar and hydropower, support community-focused investments and strengthen the UK's long-term energy security.

Social and supply chain accountability

In 2025, social and environmental accountability increasingly became a legal and regulatory focus for companies operating internationally, as regulators faced the challenge of aligning these priorities with political and economic realities.

Over the course of 2025, the EU revised a broad range of ESG legislation, including through the so-called Omnibus I simplification package, which focused on corporate sustainability reporting and due diligence.

The Omnibus I package includes important changes to the Corporate Sustainability Reporting Directive, which establishes sustainability reporting and disclosure obligations for entities or groups operating within the EU, and to the Corporate Sustainability Due Diligence Directive, which requires certain companies operating in the EU to incorporate human rights and environmental due diligence into their management systems. As part of the Omnibus I package, a number of key terms will be amended, including the thresholds for applicability, thereby materially reducing the number of entities subject to these requirements. For further details, please see our HL articles EU – Council and Parliament reach provisional agreement on omnibus simplification package for CSRD and CSDDD – what has changed? and EU – provisional agreement on omnibus simplification package for CSRD and CSDDD – a closer look at the draft available.

Meanwhile, under the EU Deforestation Regulation, the European Commission introduced a country risk classification system for deforestation and forest degradation that directly affects supply chains. The classification of a country's risk determines the extent of due diligence required from operators before placing on or exporting certain commodities from the EU market. As the UK was classified as “low risk,” companies sourcing products from UK operators and traders benefit from simplified due diligence obligations compared to those sourcing from higher-risk countries.

Regulatory momentum: SDR and greenwashing enforcement

The past year was characterised by significant regulatory activity, with the FCA and PRA sharpening their focus on ESG disclosures and market integrity, and greenwashing enforcement continuing and evolving into new sectors.

In its review of climate disclosure rules, the FCA acknowledged progress in integrating climate risk into governance and reporting. However, it also identified persistent challenges, including complex disclosures, and data gaps, and signalled plans to streamline disclosure requirements to improve efficiency across the Task Force for Climate-related Financial Disclosures (TCFD) and Sustainability Disclosure Requirements (SDR) frameworks. Similarly, the European Financial Reporting Advisory Group (EFRAG) initiated a cost-benefit analysis, and published revised drafts of the European Sustainability Reporting Standards (ESRSs) on 3 December 2025, which are materially simplified.

The EU introduced and implemented new directives to impose stricter regulations on all “green” claims, including the EmpCo Directive and proposed Green Claims Directive. These measures reflect a broader regulatory trend towards combating greenwashing and enhancing consumer protection. For further details, please see our article Ban of Green Washing in the EU.

2025 marked an expansion of greenwashing enforcement into new sectors, including into digital asset regulation. The FCA launched a consultation proposing to apply its ESG Sourcebook (including anti-greenwashing and sustainability labelling rules) to cryptoasset firms entering the UK's authorisation regime.

Investor engagement and shareholder activism

Shareholder advocacy and activism continued throughout the course of 2025, despite the new UK Listing Rules allowing companies more flexibility to defend against such campaigns. The UK remained an active landscape for domestic and international investors to push for greater accountability, diversity and high-quality governance, to enhance long-term shareholder value for companies.

As explored in our June 2025 ESG alert, many prominent European asset owners, including the £33bn People's Pension (UK), the €60bn Dutch industrial workers' fund PME, and the €250bn PGGM group, used 2025 to reassess or terminate mandates with asset managers whose ESG practices are viewed as insufficient. More broadly, shareholders increasingly targeted M&A strategy. As part of this, stake building continued as a theme, with certain fund managers amassing stakes in a number of high-profile LSE listed cooperations last year, utilising those holdings to push for strategic and governance changes.

For further details of global trends and insights in shareholder activism last year, please see our HL article Shareholder activism in 2025.

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The Hogan Lovells Climate, Sustainability and ESG team is here to help, including on all the issues raised in this snapshot. Hogan Lovells is one of the leading ESG firms in the world, delivering uniquely tailored cross-practice and geographic holistic advice as ESG counsel to clients globally. Our holistic and solutions-driven approach to managing ESG issues draws on the full scope of our global practice and sector capabilities (including our leading global corporate, environmental, governmental relations and regulatory, employment, and dispute resolution teams) to drive sustainable value and maximize positive impact for clients. Please contact us to discuss next steps or for our latest ESG-related materials, including our ESG Academy.

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Authored by Nicola Evans, Scott Prior, Zuzanna Krzyzos, Emily Louise, Sarah Tillmann, and Alexa Bickel.