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Sustainable finance

Don't stop now

In Europe, the sustainability transition continues to reshape the economy and the financial system, creating new opportunities and altering the cost of doing business for financial services firms. Regulation is an important driver of these changes and a critical consideration for firms as they plan how to meet the commitments they have made to transition their own businesses to net zero and support the transition of the real economy. Climate will continue to dominate discussions, but nature will become a greater priority for policymakers following the finalisation of the TNFD framework. This is especially true for banks supervised by the ECB, which has already explained its expectations to firms. In 2024, firms will need to invest significant resources to tackle the implementation of new sustainability regulation requirements.

The outlook for sustainable finance regulation in 2024


Uncertainty about the pace of change and direction of travel of sustainability regulation will increase, but that should not delay action by firms. During 2024, we expect regulatory change driven by sustainability to hit an inflection point. The case for sustainability and the momentum behind the transition are established and will not be reversed, but other priorities are competing for policymakers’ attention. In particular, upcoming parliamentary elections and the turning economic cycle have led policymakers and others to examine perceived short-term trade-offs between the sustainability transition and economic growth, and to ask whether the costs of the transition are distributed equitably within society and between countries.

The case for sustainability and the momentum behind the transition are established and will not be reversed, but other priorities are competing for policymakers’ attention.

If the political orthodoxy on the urgency of transition does shift, we see the greatest impact as being on the next phase of regulatory activity rather than on more immediate deadlines. That said, these developments undoubtedly increase uncertainty in the nearer term. On the one hand, concern about entering the political fray may lead supervisors and standard setters to act in a more muted manner, saying less, delaying decisions, or being less proactive on supervisory interventions. On the other hand, a ramp-up in supervisory activity could occur quickly as the economic cycle turns again or concern about the real effects of climate change increases. Firms may therefore debate whether to adapt to any delay in timelines or continue to invest at the same pace. The decision ultimately comes down to a firm’s risk appetite, including reputational, franchise and litigation risks. Through this lens, many firms will conclude they cannot afford to delay.

The priority for firms in 2024 is to address corporate sustainability reporting requirements. For most firms work remains to be done to meet new reporting requirements in full, most immediately for those firms that need to report under CSRD in 2025. For later reporters under CSRD and for those firms that will report under SDS in the UK, however, implementation still needs to begin in 2024 given the complexity of the work required. Finance teams will usually lead these projects but should not run them alone: if positioned correctly, reporting projects can be used to drive a wider set of changes across the organisation – in operations and business strategy – and demonstrate how risks and opportunities are being managed across the three lines of defence. A disclosures strategy, encompassing a firm’s obligations across all disclosure requirements and commitments, will further support the overall effectiveness of the implementation of reporting requirements by helping to identify synergies and dependencies.

Firms have more to do to meet expectations on transition planning, climate-related financial risk management and managing greenwashing, in particular, to put ambition into practice. Climate transition plans, for example, need to reflect how the Board is in practice steering a firm towards its sustainability commitments and transforming the business. Some firms have already disclosed transition plans, but the introduction of requirements to do so in the EU (being formalised under CSRD, CSDDD and CRR3) will enhance scrutiny. In the UK, the TPT framework will update expectations for disclosures compared to the TCFD framework that preceded it.

Most firms will find they need to step up their efforts. As they do, they should also take account of how the sophistication of their plans will need to develop as regulations evolve. For example, firms will need to consider how their transition plans might adversely affect, and depend on, society and the natural environment, particularly as TNFD recommendations are taken forward. Consideration of supply chains, the credibility of transition plans, and of adaptation and transition finance are also coming to the fore. And for banks in particular, we expect the qualityof transition plans will also begin to be tested by supervisors.

We do not expect significant revisions to the banking and insurance capital frameworks in 2024 to accommodate climate-related financial risk, although more substantial revisions may still come. Nonetheless, supervisory expectations for banks and insurers have moved on from focusing on firms putting in place the right building blocks of an approach to looking increasingly at whether climate capabilities are embedded within organisations. For example, have firms integrated climate into pricing and risk management? That said, although supervisory expectations will evolve, we expect divergence between supervisors in terms of how changes in focus are implemented. The ECB recently said it will use “all measures in [its] toolkit”1 to ensure compliance during 2024, whereas the PRA seems to accept firms having multi-year plans to meet their goals. Firms should also not overlook the extent to which climate- and environmental risks are captured within the existing prudential framework. The ECB, for example, has increasingly considered these factors in determining capital add-ons for the banks it supervises.

Although supervisory expectations will evolve, we expect divergence between supervisors in terms of how changes in focus are implemented.

Many firms are still unclear what greenwashing means for their products and firm level commitments. Boards should be concerned about the latent greenwashing risk that may be building up on their balance sheets, and to understand how the risk is being managed across the first and second lines of defence. This latter point has been flagged by the FCA on several occasions. Following the FCA’s final SDR rules (published in November 2023), naming and marketing of funds will be a point of focus. The targeted consultation on the SFDR launched last year by the European Commission considered similar issues, and the ESAs will publish in May final recommendations to the European Commission on possible changes to the EU regulatory framework for greenwashing.

In the UK, in 2024 the FCA will begin to supervise under its new anti-greenwashing rule, which will spur work across all asset classes. Whilst the rule underscores the importance of firms tackling greenwashing, it is not clear that it will mark a step change in supervisory scrutiny. Looking across the FCA’s interventions on greenwashing over the past year, it – and possibly regulators more generally – are still finding the right balance between taking action and supporting new product development. At the same time, firms need to be alert to the reputational and litigation risks that could arise from greenwashing. Litigation risk in particular is already on the radar of insurers, and the ECB has highlighted reputational and litigation risks arising in particular from transition objectives and net zero commitments, as an area of focus for supervisors this year.2

Many firms are looking to support companies as the transition in the economy accelerates and this was a key theme at COP28 in November 2023. We expect policymakers in 2024 to increase attention on how the regulatory framework supports transition finance. For example, the Fit-for-55 climate risk scenario analysis in the EU will assess the capacity of the financial system to support the transition to a lower carbon economy under conditions of stress. A number of factors currently make it difficult for firms to finance transition projects or companies that have a plan to transition towards a ‘green’ business model. In the regulatory domain, a key challenge is the inconsistency of terms used to define green finance. We expect progress to be slow to address this though, given the lack of consensus on how terms should be defined. In the meantime, firms will need to decide on an internal definition of transition finance that they can use consistently and justify externally.

Policy makers and standard setters sought to reset perceptions around carbon markets at COP28 to reinvigorate the market. Consultations published at end-2023 by the CFTC and IOSCO marked a new phase of regulatory activity. We expect activity to promote the development of carbon markets to be increasingly prominent through the course of this year.

Firms should look to understand better – and be able to explain to supervisors – the extent to which more sustainable investments are less risky, and how that risk profile is reflected in lower probabilities of default and higher recoveries

We do not expect policymakers to make concessions on the prudential treatment of green assets to incentivise the transition. Instead, firms should look to understand better – and be able to explain to supervisors – the extent to which more sustainable investments are less risky, and how that risk profile is reflected in lower probabilities of default and higher recoveries. Other steps, such as introducing internal carbon pricing or greater recognition of reputational risk, could also help distinguish the incremental value of green assets.

Availability and quality of data remain the elephant in the room that runs across all of the topics discussed. Across all of these developments, firms need to consider how they will mitigate the challenges and risks from key data gaps. Firms’ product and business development decisions may need to be constrained by the uncertainty about data. This challenge is not new. In 2024 the issues though become more critical to address given the progress of regulatory requirements. And as companies publish more information on climate transition plans, firms need to demonstrate that they are making effective use of those data. New rules and guidelines on ESG ratings and data in the UK and EU will also shape developments in this area.

A call to action


Firms need a plan that connects all the moving parts on sustainability across regulation and business strategy. Within this plan, firms can factor in what leading practice looks like, the most effective way to manage and sequence the changes required and what further changes to requirements are expected. A plan will also enable them to identify, for example, what optionality exists; and where they need to make progress despite uncertainty because of other dependencies or opportunities in their strategy. Ultimately, firms need a willingness to make real change and tackle tough decisions. Boards should, through their actions, set the expectation for their organisation that sustainability is integrated into all aspects of their decision making. In doing so, they should take steps to test and challenge the validity and effectiveness of the information they are being given.

As firms navigate these topics, they need to factor into their planning the acute shortage of technical skills. Following the UK CMA’s clarification of competition law rules, firms can also consider where there are opportunities to collaborate in the market to find solutions to the most complex challenges.

In detail


Read more about corporate sustainability disclosures, transition planning, climate & environmental-related financial risk, greenwashing and key themes for the real economy.

  1. Speech by Frank Elderson, Member of the Executive Board of the ECB, June 2023, available at
  2. ECB, SSM supervisory priorities for 2024-2026, December 2023, available at

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