Simon Witney
Senior Consultant
Heather Gagen
Head of Dispute Resolution | Co-Head of ESG & Impact
Sarah-Jane Denton
Director, Operational Risk & Environment
CSRD and CS3D – agreement reached
After almost a year of uncertainty over the scope and requirements under these two key pieces of sustainability legislation – the final text is expected to be published in early 2026 having been agreed by the institutions in December 2025.
Many managers can expect to be out of scope of CSRD in their own right given that the revised scope includes a 1000 employee threshold test in addition to a significantly increased turnover test (€450m), and a newly introduced exemption for financial holding companies. However, non-EU entities should check the thresholds carefully (as they can still be in scope even where none of their EU subsidiaries need to report) and larger portfolio companies might still be in scope. The reporting burden under CSRD is expected to be lighter, but uncertainty over the shape of the reporting standards will continue into 2026.
SFDR – significant reworking
Changes to the EU sustainability disclosure regime are expected to be the subject of intense debate during 2026. The European Commission has published proposals to significantly rework the EU Sustainable Finance Disclosure Regulation, including new product categories and removing some of the disclosure requirements. Under the proposals, the regime would also no longer apply to portfolio managers and financial advisers.
Alternative fund managers are likely to be materially affected by this upcoming change. 2026 is likely to see significant effort put into industry representations with particular focus on how new categories are defined, how pre-existing funds are treated and the application to professional-only funds.
Two developments to keep an eye on in the UK
Voluntary (for now) sustainability reporting
The UK Government is again delayed in its process of adopting the International Sustainability Standards Board’s sustainability reporting standards as the first UK Sustainability Reporting Standards (“UK SRS”), though this is still expected to happen in Q1.
Once adopted, reporting under the standards will initially be voluntary, but the FCA and the Department for Business and Trade are expected to consult in 2026 to determine the scope of mandatory reporting, with listed companies likely to be first in line. In the longer term, the FCA might look to apply UK SRS to asset managers, perhaps replacing other rulebooks such as TCFD.
Consultation on some (regulated) businesses being required to have plans for moving to net zero
The Government is committed to require asset managers (and others) to implement credible climate transition plans aligned with the Paris Agreement goal of limiting warming to 1.5 degrees C.
It consulted in 2025 on a broad range of options (including some that would not meet its manifesto commitment) and we expect to find out more about the way forward in 2026.
Transition planning, if required, is likely to be very impactful for any business which has not yet engaged with the transition to net zero. The asset management sector faces some unique challenges because their control over investment decision making is clearly limited by investor mandates, which may not (yet) align with net zero and so we expect that GPs will want to actively engage as this progresses.
Uncertainty over climate reporting in California
Firms preparing to report under California’s climate law will be carefully tracking developments. Despite last November’s injunction against SB 261 (which should have required production of a TCFD or equivalent report by 1 January), regulator CARB continues to prepare the implementation of SB 261 and, later, SB 253. On 26 February, a public hearing will take place on draft regulations which contain key definitions necessary for entities to assess whether they are in scope. Uncertainty will continue for a while – CARB has said that it will not enforce the reporting requirements immediately even if the injunction is lifted, and a full decision of the court is not expected before late Q2 or Q3 2026.
Your Checklist.
Our analysis.
Click below for our detailed briefings
Final text expected in 2026 with a lighter burden for some
A major reworking of this framework is on the cards – read our detailed analysis
A voluntary rulebook for now: with a 2026 consultation likely on mandatory application
UK (regulated) businesses move to net zero – a consultation
An asset manager’s capacity to act is limited by its investor mandates, so the industry faces challenges in any mandatory move to net zero
