ESG Circular - Issue 1 - October 2025

The European Commission began its traditional September 'rentrée' with the President's State of the Union speech, with notably few references to sustainability reporting and the EU Green Deal. We expect this "light touch" trend to continue, as new Omnibus simplification packages covering chemicals and the environment are developed over the coming months.

On CSRD, in July the European Financial Reporting Advisory Group ("EFRAG") took the first steps towards a less onerous CSRD, as outlined in the first Omnibus package. published revised and simplified drafts of the European Sustainability Reporting Standards ("ESRS").

In the UK, we are heading for adoption of ISSB sustainability standards as the first UK Sustainability Reporting Standards ("UK SRS") as well as proposals on climate transition plans (see below), although timing remains uncertain. UK SRS are expected to be voluntary initially, but we would advise in-house counsel unfamiliar with sustainability reporting to begin to orient themselves with the underlying ISSB standards. A UK Government roadmap with the timetable for implementation is expected.

Companies may face greater scrutiny and pressure from their investors to improve the credibility and reporting of their net zero transition plans, with planned new requirements on climate-related transition plans for UK financial institutions, as well as FTSE 100 companies.

As part of the UK Government's proposed sustainability reporting framework, it has committed to mandating UK-regulated financial institutions (including banks, asset managers, pension funds and insurers) and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement. Over the summer, the Government launched a consultation seeking views on how best to implement this commitment, how the  new transition plan requirements should integrate with the existing climate-related reporting requirements, such as TCFD, and also how they will sit alongside the implementation of UK SRS (see previous article).

Some investors, including many UK pension schemes, have already adopted voluntary net zero targets. In practice, this involves selecting and monitoring asset managers equipped to implement these strategies, holding company management and boards to account through active stewardship, use of tools and analysis (such as from the Science Based Targets initiative (SBTi), and the Transition Pathway Initiative), and collaboration with industry bodies (such as the Institutional Investors Group on Climate Change).

Crucially, this approach also depends upon the quality and reliability of the information provided by corporate reporting from investee entities and is a foretaste of the increased scrutiny companies may face when investors become subject to mandatory transition plan requirements.

As ESG ratings gain prominence, both the EU and UK have stepped up efforts to regulate the firms providing them. Why? Issues like conflicts of interest, unreliable assessments and opaque methodologies have cast doubt on the independence and validity of ratings, echoing concerns that once surrounded credit ratings post-2008.

For issuers and corporates, greater oversight could boost investor confidence and drive positive pricing impacts, and the UK's focus on ESG rating providers is another limb of its campaign to establish a credible, reliable sustainability reporting framework. However, tighter rules may also drive up costs and reduce ratings coverage.

The EU is ahead of the curve, with its new regime launching in July 2026. ESG rating providers will need authorisation and will face new restrictions on undertaking other activities (e.g. assurance or consulting services). They will also need to disclose information about their methodologies, data sources and ownership, while meeting tougher standards on independence and conflict management.

Meanwhile, the UK is progressing at a slower pace, aiming for finalised legislation by the end of 2025. The FCA will consult on the detailed regime thereafter, but expect a similar focus on transparency, reliability and managing conflicts. However, the two regimes are unlikely to be perfectly aligned, meaning rating providers operating in both markets will have to navigate divergent rules.

This area is definitely one to watch.

Social value in real estate is not a novel concept, incorporating long-utilised planning and public procurement standards. It has tended to be overshadowed by pressing environmental concerns driving the sustainability agenda in the real estate sector, but there are various factors compelling investors to prioritise social value, including protection of their reputation, the desire to demonstrate their ESG strategy across their business, and the concurrent need to back this up within investment, governance and asset management strategies. The most encountered social value objectives are those that tackle inequalities in employment, promote equal work-based opportunities and wellbeing/good health, and/or those that aim to deliver something back to the local community. 

In a recent podcast, real estate partner Sarah Walker and guests Sam Carson from CBRE and Alice Teboul from Columbia Threadneedle define social value as the intentional creation of measurable benefits to society through real estate activity.  This could include everything from local job creation and community cohesion to enhancing the environment around a development. 

‘The ESG Myth Busting Podcast’ is a bitesize series by AREF that aims to address prevalent misconceptions and myths surrounding ESG in real estate, offering clear, evidence-based insights from industry experts. Listen to the series.