How is regulatory fragmentation affecting sustainable finance in 2026?
In 2026, the divergence of global sustainability standards has reached a critical inflection point. While capital markets remain global, reporting rules are becoming increasingly localized, with 90% of firms citing this divergence as a primary challenge. This fragmentation creates a “patchwork” of corporate reporting requirements (conflicting ISSB, ESRS, and local mandates), imposes an “intelligence tax” on financial institutions attempting to reconcile incompatible data, and creates compliance gaps between fund regimes like the EU’s SFDR 2.0 and the UK’s SDR.
Regulatory fragmentation in sustainable finance is not a new phenomenon, but in 2026, it is reaching a critical inflection point. While global markets remain inextricably linked, the “rules of the road” for extra-financial data are becoming increasingly localized.
For the financial sector, where capital flows have long transcended international borders, this divergence is both an administrative hurdle and a strategic challenge. Our recent survey highlights this tension: nearly 90% of respondents view regulatory divergence as a primary challenge in their decision-making process.
In this article, we’ll explore this finding in the context of corporate reporting on sustainability, regulations affecting financial institutions, and fund categorization.
The Corporate Reporting Landscape: A Patchwork of Standards
This year marks a significant milestone in the shift toward standardized disclosure, yet “standardized” remains a relative term. 2026 is the first year of reporting for ISSB-inspired rules across diverse jurisdictions, including:
- Australia
- Brazil
- Hong Kong
- Mexico
At the same time, we are seeing progress to bring ISSB standards into the regulatory framework in the UK. But not all ISSB standards are created equal. Which companies are considered “in-scope”, various relief measures, and whether IFRS S1 is a mandatory requirement all vary significantly across regions.
While ISSB is seen as additive to TCFD, the alignment is not perfect. So, while the introduction of TCFD-style reporting in California is a welcome development in the US, reports issued under the CARB rules may not be directly comparable to those in ISSB jurisdictions.
And that’s before we get to the EU and the ESRS. While EFRAG and ISSB have given assurances that the two standards are interoperable, many companies active in both the EU and an ISSB country remain puzzled as to how to efficiently execute their obligations under both standards.
As a result, confusion reigns at the company level. But what about financial institutions that invest in those companies or lend them money?
The Data Dilemma for Financial Institutions
The confusion at the corporate level creates a direct “intelligence tax” for the banks and investors who rely on that data. Assessing climate risk exposure now requires reconciling figures reported in different units, often without uniform digital tagging.
For investors positioning products as “sustainable,” the hurdle is even higher. Alignment to a sustainability taxonomy is one way to do this. However, despite collaborative efforts like the EU/China Common Ground Taxonomy and the ASEAN Taxonomy, the definition of what constitutes a “sustainable investment” remains fragmented across taxonomies.
Regulations that support the categorization of funds as being sustainable also have key divergences.
The Fund Categorization Gap: SFDR 2.0 and the SDR
While the EU’s SFDR 2.0 proposal moves much closer to the approach of the SDR in the UK, there are still key differences. For investors, these differences matter:
Documentation Discrepancies:
Credibility Risks:
Resource Diversion:
The Path Forward: Coordination Amidst Complexity
Fragmentation carries real costs, both in terms of capital and climate progress. While bodies like the ISSB, IOSCO, and the FSB are working to harmonize these frameworks, a “universal” standard is unlikely to emerge soon.
Success in this environment requires an intelligence layer that treats extra-financial data as a core component of risk management, rather than a compliance checkbox.
Stay ahead of global regulatory changes in 2026.
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