Sustainable Finance Regulation Faces Its Defining Test in 2026

Looking back, 2025 will go down as the year where progress on sustainability-related regulations hit a bump in the road. Some of those bumps were expected: we knew that federal level climate and sustainability related regulations were at risk under the new US Presidency. What was more surprising was the EU’s decision to take a sledgehammer to its own sustainability regulations in pursuit of loosely defined “competitiveness.”¹ 

The Omnibus announced in February surpassed even the grimmest expectations in terms of marking an abrupt departure from the progress made since the European Green Deal was passed in 2020. Even worse, it unloaded a quantity of uncertainty and confusion on the market that will probably end up doing more harm than good to the EU’s international competitiveness.

In 2026, we can look forward to the eventual completion of the Omnibus discussions and examine what’s left of the EU sustainable finance framework. On the one hand, it will be a relief that the uncertainty will begin to subside. On the other hand, it may leave a market with significant holes in its regulatory framework. 

Severe question marks remain over whether any surviving version of CSDDD will actually lead to meaningful due diligence by EU companies on their supply chains. And the cuts to the scope of CSRD and Taxonomy (and the final ESRS) will undoubtedly lead to a data gap in the EU.

At best, this might make regulatory compliance more difficult than it should be for banks or investors. And at worst, it could lead to the build of unchecked sustainability-related risks in the market and a systemic inability to locate sustainability opportunities.

Looking Ahead: SFDR 2.0 Pillar 3 Reporting

On a related note, we can expect the final templates for EU Pillar 3 ESG reporting at the end of 2026. This will mean new reporting templates for larger institutions and for smaller institutions it represents their first requirement to report under Pillar 3. 

After much delay and deliberation, we expect to see the EU Commission’s final proposal for a revamped SFDR and the beginning of the trilogue negotiations with the EU Council and Parliament. Towards the end of 2026 we may have a glimpse of what the new SFDR 2.0 looks like.

Meanwhile, the proliferation of regulatory and industry-led labels like France’s SRI, Germany’s FNG, Austria’s UZ49 and Belgium’s Towards Sustainability will continue to be a theme.

Outside EU and U.S.A: Steady Progress Continues

Outside of the EU and US, the rest of the world seems to be progressing in a much more stable and predictable manner, especially in Asia-Pacific and the Middle East. For example, the UAE reaffirmed its commitment to achieving net-zero GHG emissions by 2050 through its oversight of the Climate Change Reduction Law,² and Saudi Arabia advanced its sustainability agenda by issuing Guidelines for green, social, and sustainability-linked debt instruments.³ 

The UK will continue to monitor the roll-out of its sustainable fund rules, the SDR. Beyond this, it will also complete its process having consulted in late 2025 on transition planning and ISSB-inspired sustainability reporting standards. 

Elsewhere, we see continued interest in ISSB reporting, with many countries beginning or continuing their process to onboard the reporting standards. In 2026, we will see first reporting from in scope entities in Brazil, Australia, Mexico, Singapore, Sri Lanka, and Hong Kong, with the likes of Japan and Qatar not far behind. 

While Federal level climate reporting remains a distant prospect, US states continue to push their own climate legislation and we will see the first reporting period under California’s climate regulation in 2026.

A Defining Year for Sustainable Finance

Ultimately, 2026 will be a testing year for sustainable finance regulation. While some jurisdictions seem intent on slamming their regulatory vehicles into reverse, many others have their foot firmly placed on the accelerator. Market fragmentation remains a key risk with market participants pointing to a lack of interoperability as a continuing drag on their businesses. 

A positive outcome in 2026 would be steady progress toward globally interoperable sustainability regulations for corporations and financial institutions, with stronger safeguards to protect retail consumers from greenwashing. The success of these regulations will depend on whether they drive meaningful action or remain a box-ticking exercise. 

Firms that prioritize data quality, transparency, and adaptability will be better positioned to navigate this evolving landscape and seize the opportunities it presents.