Sustainability

2024 lookback: climate and biodiversity action policy weathering the storm

In our regular Sustainable Finance Policy and Regulation round-up we explore the latest developments shaping the market.

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Year of COPs: COP 29 and COP 16 Recap

Key dates and announcements

Announcements and publications

24 Jan 2025 . 20 min read

This is our wrap up for 2024 covering key developments over November and December 2024.

Global

Global voluntary standards for public sector climate-related financial disclosures.
Taskforce on Climate-related Financial Disclosures (TCFD) annual review by the IFRS foundation.
International Finance Reporting Standards (IFRS) sustainability-related risks and opportunities guide.
International Organisation of Securities Commissions (IOSCO) report on transition plans.
Interoperability between the European Financial Reporting and Advisory Group (EFRAG) and Carbon Disclosure Project (CDP) guidance.
IAASB’s ISSA 5000 – new framework for sustainability assurance.
Update on ESG risk disclosures under Basel III.
PCAF consultation on new methodologies for the global GHG accounting and reporting standard.
FMSB Financial Markets Standards Board’s (FMSB) statement of good practice for Sustainability-Linked Products (SLPs).

UK

Sustainability Disclose Requirements (SDR) and investment labels: pre-contractual disclosure examples.
UK green finance package.
Research on the EU green taxonomy framework.
UK clean power 2030 action plan.
Principles for voluntary carbon and nature market integrity.
The UK government report on scope 3 reporting.

EU

European Securities and Markets Authority (ESMA) clarification on exclusion rules for green bonds in ESG funds.
Voluntary disclosures for green bonds and sustainability-linked bonds marketed in the EU.
Official portal enabling external reviewers to register under the EU Green Bond Regulation.
Product labelling requirements under Sustainability Finance Disclosure Regulation (SFDR).
New transition benchmarks.
Consolidation of EU reporting regulations.
EFRAG preliminary draft guidance on transition plan reporting.
EU taxonomy FAQ.
ESAs Fit-for-55 climate risk scenario analysis.
Regulation to introduce a certification for carbon removals and carbon farming.
Simplifying the Do No Significant Harm (DNSH) framework under EU taxonomy.

Recent policy developments and financial market implications

2024 COPs: COP29 and COP16 recap

The 2024 United Nations Climate Change Conference (COP29) in Baku, Azerbaijan, and the United Nations Biodiversity Conference (COP16) in Cali, Colombia, yielded several significant outcomes.

Progress was made in the “G” of ESG, namely through establishing international governance around 1) carbon market mechanisms and 2) enhancing indigenous participation in biodiversity decisions. Challenges remain, which this year’s COPs will be looking to further address, especially in securing adequate financial commitments for countries most affected by climate change and biodiversity loss.

COP29

COP29 delivered key agreements across several climate policy areas.

Carbon markets progress (*Article 6): Agreements on market safeguards and integrity for carbon trading set the stage for a UN-regulated global carbon market, enabling more transparency and activity in carbon credits going forward. Read our article ‘UK leads advances in carbon markets at COP29 amid key announcements’ here.

*Article 6 of the Paris Agreement allows countries to voluntarily cooperate with each other to achieve emission reduction targets set out in their National Determined Contributions (NDCs). One of the tools stipulated under Article 6 includes carbon markets where countries can trade carbon credits to help each other meet their climate targets
New Collective Quantified Goal (NCQG) on climate finance: Developed nations pledged USD 300bn annually by 2035, with an aim to mobilise USD 1.3tn annually through public and private sources. Despite falling short of these demands by developing countries, the framework emphasises private sector engagement to bridge the gap.
Loss and damage fund: Agreements were finalised to operationalise the loss and damage fund, with distribution expected by 2025 to support vulnerable countries affected hardest by climate impacts.
Updated NDCs: The UK, UAE, Brazil, and Mexico – together responsible for ~4% of global emissions (source: Worldometer) – submitted new NDCs, with the UK aligning to stringent domestic targets (emissions reduction target of 81% by 2035) and Mexico becoming the last G20 nation to adopt a net zero goal. More countries and regions, including the EU, are expected to update their NDCs by 2025.

COP16

COP 16 saw incremental progress in biodiversity conservation financing and governance but highlighted significant gaps in ambition and resources.

The Global Biodiversity Framework Fund, now supported by an additional USD 163m from eight governments, including the UK, reached just under USD 400m – less than 2% of the USD 20bn commitment by developed nations due by 2025.
A new subsidiary body was established to elevate indigenous peoples’ voices in future biodiversity conservation decisions.
The Cali Fund for Digital Sequence Information (DSI) introduced voluntary contributions from companies using genetic data, ensuring some financial support for biodiversity protection from industries such as pharmaceuticals (who use this data extensively).
Domestically, the UK announced a 30x30 plan to protect 30% of its land and sea by 2030, with a pilot planned for late 2024 and a strategy launch in 2025.
The European Union pledged EUR 12 million through the Biodiversity Finance Initiative (BIOFIN), focusing on biodiversity credit markets, indigenous community involvement, and financing marine protected areas.

Implications for financial institutions

COP29 continued to highlight the essential role of private sector engagement in achieving climate goals.

Progress in carbon markets governance, both across the mandatory and voluntary markets, creates opportunities for financial institutions. Heightened transparency and alignment on standards should make intermediation, investment, and advisory activity more straightforward and less subject to greenwashing concerns.

The rising importance of adaptation finance, as signalled by the loss and damage fund establishment, highlight areas where the insurance sector and banks can lead, especially in assessing and mitigating physical climate risks. Our recent investor survey flagged that 52% of accounts were keen to allocate more capital to climate change adaptation.

With regards to COP16, while public financing is still lacking for biodiversity investments, there appears to be private sector appetite to help fill the gap. Our recent investor survey found that 84% interested in investing more in biodiversity. Equally, insufficient public financing and focus could elevate the risks of biodiversity loss. In this regard, as nature-related risks become more material and as the regulatory pressure increases, integrating nature and biodiversity considerations into due diligence processes and risk assessments will be essential.

Implications for corporates

The development of carbon markets could provide new revenue opportunities for corporates investing in decarbonisation projects – through linkage to carbon credit generation.

Equally companies active in areas more prone to physical risks will become more focused on programmes and financing required to make these local activities more resilient. In certain cases they may benefit from blended finance structures or concessional funding for adaptation projects, supported by multilateral institutions. Such investments however may have a “double effect” in also supporting decarbonisation – e.g. energy-efficient insulation systems.

As more countries review their NDCs, pressure on companies will continue to rise. Transition strategies will increasingly influence access to and terms of capital, with sustainability-linked instruments that have natural transition application such as Sustainability Linked Bonds (SLBs) and Sustainability LinkedIn Loans (SLLs) potentially regaining momentum.

Equally, as more governments follow the UK in developing biodiversity strategies, this will increasingly be an area for firms to consider in their business plans – reinforced in the EU by regulation such as the Corporate Sustainability Reporting Directive (CSRD).

Key 2025 updates and announcements

Several publications and updates were announced by the EU and UK bodies for 2025.

EU:

Re-elected European Commission president Ursula von der Leyen has promised to table a new clean industrial deal, within the first 100 days of her Commission taking office on 1 December 2024. This would form a strategy to strengthen the EU’s industrial competitiveness and help it decarbonise.
On 26 February the Commission is set to propose an “omnibus” legislation to simplify ESG reporting requirements across CSRD/ESRS, EU Corporate Sustainability Due Diligence Directive.
A broad review of SFDR is scheduled for 2025.
EFRAG is due to publish transition plan implementation guidance under European Sustainability Reporting Standards (ESRS) during Q2.
European Commission is set to adopt voluntary disclosure templates under the EU Green Bond Standard for any environmental use of proceeds and SLBs marketed in the EU. The Commission is also due to issue application guidance on the EU Green Bond Standard.

UK:

UK Government is due to publish its new industrial strategy and growth-driving sector plans in spring 2025. The growth-driving sectors include advanced manufacturing; clean energy industries; creative industries; defence; digital and technologies; financial services; life sciences; and professional and business services.
UK to adopt the International Sustainability Standards Board’s (ISSB) S1 and S2 standards in 2025. The first reports published under this regulation are expected to be for periods on or after 1 January 2026.
The UK Government plans to launch a consultation in Q2 on transition plan disclosure requirements for UK companies.
FCA is expected to launch a consultation on introducing the Sustainability Reporting Standards (SRS) and transition plan expectations (with reference to the Transition Plan Taskforce’s framework) for listed companies.
UK Government is expected to reveal its planned course of action on the development of the UK green taxonomy.

Other recent announcements and publications

Global:

Global voluntary standards for public sector climate-related financial disclosures

The International Public Sector Accounting Standards Board (IPSASB) published its draft of the world’s first voluntary disclosure standards for public sector climate-related disclosures [1] – covering aspects including climate transition plans, greenhouse gas emissions including Scope 3, and carbon credits for offsetting.

IPSASB SRS ED 1 requires companies to disclose information under two categories:

Own operations: requirements about climate-related risks and opportunities that affect the entity’s ability to continue to provide its day-to-day activities and deliver on its public interest mandate.
Public policy programmes: requirements about the climate-related public policy programmes related to international agreements and/or national commitments.

Proposed disclosure requirements are adapted from the TCFD and IFRS S2 and are based on four pillars – governance, strategy, risk management, and metrics and targets.

TCFD annual review by the IFRS Foundation

The International Financing Reporting Standards (IFRS) Foundation published its first Taskforce on TCFD annual review [2]. The report highlights progress of companies against the TCFD’s 11 recommended climate-related disclosures.

Key findings of the report include:

The requirements in IFRS S2 integrate and are consistent with the TCFD recommendations. Companies using ISSB Standards provide information covered by the TCFD recommendations.
Most asset managers and owners want or expect portfolio companies to make the transition from disclosures prepared using TCFD recommendations to ISSB standards.

IFRS sustainability-related risks and opportunities guide

IFRS Foundation published a comprehensive guide [3] to assist companies with identifying and disclosing material information about sustainability-related risks and opportunities that could affect capital flows.

This educational material is divided into three chapters:

Chapter 1: Defining material information in ISSB standards
Explores the key components of ‘material information’ and its application in ISSB standards, focusing on making materiality judgements.

Chapter 2: Sustainability-related risks and opportunities
Explains sustainability-related risks and opportunities, their potential impact on an entity’s prospects, and their application in ISSB standards using examples and key considerations.

Chapter 3: Identifying and disclosing material information
Builds on the previous chapters to outline the process for identifying and disclosing material information about sustainability-related risks and opportunities, referencing ISSB standards guidance.

IOSCO report on transition plans

IOSCO published its Report on Transition Plans [4] setting out how transition plan disclosures can support the objectives of investor protection and market integrity. The report highlights several key challenges relating to transition plan disclosures such as:

Lack of common definition of transition plans and information gaps in existing disclosures.
Lack of global transition plan-specific disclosure guidance, including for financial institutions.
Uncertainty for entities around the disclosure of forward-looking information, e.g. concerns about liability risks.

And four main focus areas:

Ensuring consistency and comparability of transition plan disclosures.
Promoting their assurance.
Enhancing legal and regulatory clarity and oversight.
Building capacity.

Interoperability between EFRAG and CDP guidance

The EFRAG and CDP announced interoperability between CDP’s questionnaire and the ESRS climate standard (ESRS E1) [5]. Both announced plans to publish mapping guidance between the ESRS and CDP questionnaire in early 2025.

IAASB’s ISSA 5000 – new framework for sustainability assurance

The International Auditing and Assurance Standards Board (IAASB) introduced the International Standards on Sustainability Assurance ISSA 5000 [6].

The global standard aims to support both limited and reasonable assurance engagements and align with traditional and double materiality concepts. ISSA 5000 aligns with EU’s CSRD and supports various sustainability frameworks including ISSB IFRS and GRI.

Update on ESG risk disclosures under Basel III

In an update on the implementation of Basel III [7], the Basel committee stated that work is continuing on the Pillar 3 disclosure framework for climate-related financial risks and anticipates the finalisation of this work in the first half of 2025.

PCAF consultation on new methodologies for the Global GHG Accounting and Reporting Standard

PCAF has released [20] two documents for consultation (open until 28 February 2025):

Part A: Updates to financed emissions measurement:

New methods for public consultation:

Use of proceeds accounting

Securitised and structured products

Sub-sovereign debt

Guidance on avoided emissions and forward-looking metrics: Supporting financial institutions in reporting avoided and expected emissions reductions (EER) across asset classes.
Inventory fluctuations: Exploring approaches to address inventory impacts on financed emissions.
Undrawn loan commitments: Proposed calculation method aligning with IFRS S2 for emissions from undrawn loan commitments.

Part C: Expansion to insurance sector

Methods for project insurance and treaty reinsurance to enhance emissions measurement for the international insurance sector.

Financial Markets Standards Board (FMSB) statement of good practice for SLPs

The working group which delivered the statement was chaired by NatWest. The statement [27] is intended to codify good practices for the governance of SLPs and support the adoption of consistent governance approaches across asset classes and jurisdictions. Enhancing governance practices for SLPs can help to improve the quality and integrity of SLPs; mitigate social or greenwashing risks; increase market confidence and investor trust in such instruments; and support the development of a deeper, more robust sustainability-linked product market. The statement is intended to apply to service providers or users of SLPs in wholesale financial markets and to support, and be read in conjunction with, existing asset-class specific guidance (notably ICMA, LMA and ISDA principles). The statement is open for consultation until 21 February 2025.

UK:

SDR and investment labels: pre-contractual disclosure examples

The FCA published additional guidance on the SDR and investment labels regime [8], including examples of pre-contractual disclosures. These non-exhaustive examples, drawn from the FCA’s experience with label applications to date, aim to help firms align their sustainability labels with regulatory expectations and transparency standards. The SDR and investment labels regime officially took effect on 2 December 2024, though firms have been permitted to use the labels since 31 July 2024.

UK green finance package

Chancellor Rachel Reeves made a number of announcements in her Mansion House speech on 14 November 2024 including on Sustainable Finance [9]:

The financial services growth and competitiveness strategy to be published in March 2025. This will involve five priority growth opportunities: fintech, sustainable finance, asset management and wholesale services, insurance and reinsurance, and capital markets.
A consultation on a UK green taxonomy, seeking views on the value and design features of the potential UK Green Taxonomy.
The government’s response to the consultation on ESG ratings and draft legislation on the regulation of ESG ratings providers in the UK (the deadline for technical comments on the draft was 14 January 2025).

UK research on the EU green taxonomy framework

Department for Business and Trade published a research paper on the EU green taxonomy framework (conducted in 2023) [10]. The study aimed to identify key challenges and cost drivers in reporting, examine how disclosed information is utilised, and highlight significant market gaps that could be addressed through these disclosures. Insights were gathered through in-depth interviews with reporting corporates, financial institutions, consultancy firms, and data providers.

UK clean power 2030 action plan

The UK Government published a detailed plan [11] for achieving the target of clean power by 2030 – also aiming to lower energy bills, boost energy security, and create skilled jobs. The initiative includes reforms to energy infrastructure planning, prioritisation of critical projects, and faster grid connections, targeting £40bn annually in private investment to drive sustainability and economic security.

Principles for voluntary carbon and nature market integrity

The UK government has published principles to guide responsible participation in voluntary markets for carbon and nature credits [12]. These markets involve the voluntary production and purchase of credits, separate from legal compliance schemes like the UK Emissions Trading Scheme. The principles address concerns about the quality and integrity of certain credits and their use in environmental impact claims. They outline the government’s approach to high-integrity credits and how businesses and organisations can use them responsibly to achieve their climate and environmental goals. For more information, see the dedicated article by our Carbon Markets colleagues.

The UK government report on Scope 3 reporting

The UK government conducted a call for evidence on the costs, benefits, and practicalities of Scope 3 greenhouse gas (GHG) emissions reporting [13], focusing on aligning with ISSB standards and reviewing the Streamlined Energy and Carbon Reporting (SECR) framework. Responses from 184 stakeholders, including businesses and investors, highlighted challenges such as data availability and methodology inconsistencies but emphasised strong demand for Scope 3 reporting, with benefits outweighing costs. The findings will inform government decisions on endorsing ISSB standards and potential updates to the SECR framework to enhance transparency and accountability in emissions reporting.

EU:

ESMA clarification on exclusion rules for green bonds in ESG funds

On 13 December 2024, ESMA published [21] three new Q&As with further details on the application of the recent guidelines on “funds’ names using ESG or sustainability-related terms” published in May 2024. Under the rules, ESG-named funds must apply entity level exclusions according to the Low Carbon Benchmark Regulation (“PAB exclusions”, e.g. based on exposures to coal, O&G, etc.). Read our article on this topic here.

The Q&A addressed the entity level exclusions for green and other use of proceeds bond issuers, the interpretation of “meaningfully investing in sustainable investments” requirement and the definition of controversial weapons.

Regarding green and other use of proceeds bonds, ESMA noted that investments in European green bonds issued under the European Green Bond Standard, do not need to be assessed under the exclusions rule set by the guidelines. For other use-of-proceeds bonds, fund managers may use a “look-through approach” to assess whether the activities financed are relevant for the exclusions.

We have summarised the application in the table below:

We see this as a positive and necessary clarification for both issuers and investors providing certainty and consistency around the treatment of use of proceeds bonds for the purpose of sustainable investment or investment-promoting sustainability characteristics.

The other two important clarifications provided by ESMA are noted below:

Funds using “sustainable” terms should commit to sustainable investments referred to in the SFDR. Funds investing less than 50% in sustainable investments are not “meaningfully investing in sustainable investments”.
For applying the exclusions related to companies involved in any activities related to controversial weapons (as the definition has been subject to interpretations and variability), ESMA pointed to the list of controversial weapons noted under SFDR’s principal adverse impact indicator 14, namely “anti-personnel mines, cluster munitions, chemical weapons and biological weapons”.

EC paper on voluntary disclosures for green bonds and sustainability-linked bonds marketed in the EU

The European Commission published draft voluntary templates [22] for post-issuance disclosures for all environmentally sustainable bonds and sustainability-linked bonds in the EU. This was part of the commission’s mandate under the EU Green Bond Standard (EU GBS). These voluntary disclosures, which would be applicable to bonds aligned with market standards, such as e.g. ICMA, aim to enhance transparency and standardisation in the European sustainable finance market. Drawing inspiration from the EU GBS, the templates seek to provide issuers with a structured approach to report on their alignment with the EU taxonomy, among other matters. Open for feedback until 28 January 2025, the proposed disclosures are expected to be adopted in the first quarter of 2025.

Official portal enabling external reviewers to register under the EU Green Bond Regulation

ESMA launched a portal [18] enabling external reviewers to register under the EU Green Bond Regulation and thus to provide review services for EU Green Bonds.

On 20 December 2024, ESMA published on its website [23] a list of firms that had notified ESMA and provided the necessary information to become an external reviewer. ESMA will update the list in mid-January 2025 and, subsequently, on a regular basis to include firms that meet the notification obligations. From 21 December 2024 until 21 June 2026, there will be a transitional period for firms to provide external review services for EU Green Bonds under the regulation.

As of 20 December 2024, 11 firms have notified ESMA of their intention to provide external reviews for European Green Bonds.

Briefing: Product labelling requirements under SFDR

The EU Platform on Sustainable Finance (PSF) published [25] its briefing on product categorisation under the SFDR, to help support the EC’s review of SFDR (Proposal expected in the first half of 2025).

The PSF recommends introducing the following product categories:

Sustainable: Products that are either taxonomy aligned or are sustainable investments that meet DNSH criteria.
Transition: Investments or portfolios that support the transition to net-zero, while avoiding carbon lock-ins. Such investments or portfolios must be in line with commission’s recommendations on financing the transition.
ESG collection: Products that do not fit into the above two categories but provide a credible degree of sustainability materiality. This category could comprise products that display any of the following features: positive or negative sustainability screening, a focus on improvement against a sustainability indicator, or a mixed approach to sustainability.

Report on new transition benchmarks

PSF also published [26] its Investing for Transition Benchmarks (ITBs) report – proposing two voluntary benchmark labels, with and without exclusions. These benchmarks aim to leverage the EU taxonomy to shape climate and environmental benchmarks and facilitate transition finance. Drawing inspiration from the success of EU Paris-aligned benchmarks (PAB) and climate transition benchmarks (CTBs), which have guided investments toward low-carbon and sustainable options since 2019, the proposed benchmarks focus on channelling funding to entities actively investing in their transition efforts.

The report provides methodologies to ensure comparability among taxonomy-based benchmarks while allowing flexibility for benchmark administrators. It aims to equip investors with tools to align their strategies with the taxonomy, enhance transparency regarding climate impact and sustainable CapEx, and prevent greenwashing.

The European Commission will consider the recommendations laid out in the report and will decide if any legislative action would be required.

Consolidation of EU reporting regulations

The European Commission President announced plans for a potential consolidation of EU ESG reporting frameworks in 2025 [14]. The proposal aims to merge mandates from EU CSRD, the Taxonomy Regulation, and CSDDD into a single “omnibus” regulation to reduce reporting burden on companies. Details of this legislation are set to be announced on 26 February 2025.

EFRAG preliminary draft guidance on transition plan reporting

EFRAG, the technical advisor to the European Commissioner, published [15] an early draft of implementation guidance for climate transition plans. The guidance will aim to provide support for organisations preparing to report in line with EU sustainability reporting requirements. The key topics include disclosing how climate targets are compatible with Paris 1.5°C scenario, reporting on investments and funding, including EU taxonomy-aligned CapEx and embedding climate transition plans with organisations’ overall strategy. EFRAG is expected to release an official draft for consultation during January-February 2025 and finalise the document in the spring of 2025.

EU taxonomy FAQ

The European Commission released a set of FAQs [16] to facilitate the usability of the EU taxonomy by providing technical clarifications on its application.

The FAQs include clarifications on the technical screening criteria (TSC) for the activities contributing to the taxonomy’s climate and environmental objectives, the DNSH criteria, and the related reporting obligations. There is also general guidance on third-party verification.

Voluntary reporting for SMEs

The EFRAG published [24] the voluntary sustainability reporting standard for non-listed micro, small and medium-sized companies that are not in the scope of the CSRD’s mandatory reporting.

ESAs Fit-for-55 climate risk scenario analysis

The Fit-for-55 climate risk scenario analysis was carried out [17] by the three European supervisory authorities or ESAs (EBA, EIOPA and ESMA) and the European Central Bank (ECB) to assess the resilience of the financial sector in line with the EU Fit-for-55 package, and to gain insights on the financial system’s capacity to support the transition to a lower carbon economy under conditions of stress. Key conclusions drawn from the analysis show that the banking sector could face aggregate losses over total credit and market exposures between 5.8% and 10.9%, with losses being largely driven by increased probability of default by borrowers. The Fit-for-55 exercise also illustrates how banks might adjust their lending practices due to the macroeconomic environment and transition risks. The findings also indicate that banks will be essential to financing the green transition.

Regulation to introduce a certification for carbon removals and carbon farming

The European Council approved [19] the establishing of the first EU-level certification framework for permanent carbon removals, carbon farming and carbon storage in products. This voluntary framework aims to facilitate and encourage high-quality carbon removal and soil emission reduction activities in the EU, as a complement to sustained emission reductions and covers:

Permanent carbon removals that capture and store atmospheric or biogenic carbon for several centuries (e.g. bioenergy with carbon capture and storage, direct air capture with storage).
Carbon storage activities that capture and store carbon in long-lasting products for at least 35 years (such as wood-based construction products).
Carbon farming activities that enhance carbon sequestration and storage in forests and soils or reducing greenhouse gas emissions from soils carried over a period of at least five years (e.g. reforestation, restoring peatlands or wetlands, improved fertiliser use).

Certification schemes will be in place for operators to prove compliance with the regulation. These will be subject to robust and transparent monitoring, verification, and reporting rules to promote trust in the system and ensure environmental integrity. Liability mechanisms will also be in place for operators to address any release of captured carbon back into the atmosphere.

Simplifying the DNSH framework under EU taxonomy

The Association for Financial Markets in Europe (AFME) and Oliver Wyman published a report ‘A Review of the DNSH Assessment in the EU Taxonomy: Progress, Gaps and Pathways Forward’ [28]. The report provides recommendations for policymakers to help ease the implementation of the DNSH component of the EU taxonomy as well as aggregates industry best practices to help users cope with implementation challenges. NatWest took a leading role in designing and steering the research project.