The changing face of ESG and what it means for financial institutions and insurers

Anthea Bowater and Lei Yi Wong examine the practical implications of the changing scope of ESG, including how firms’ AI and ESG strategies may increasingly interact.

Over the past few years, global environmental, social and governance (ESG) objectives have continued to fragment, and ESG-related regulation in many centres is now being streamlined to lessen the burden of disclosure and marketing obligations on firms and to encourage economic growth. This article considers the changing face of ESG for financial institutions and insurers, including the key changes, the most likely pressure points for firms in the near future, and the way that matters will continue to evolve.

Key changes for financial services

Financial regulators in both the UK and Europe are in the process of amending recently-introduced ESG regulation, often with the objective of streamlining disclosure and marketing obligations to reduce complexity and cost for firms, as well as (even if this is not always expressly stated) for the purpose of ensuring that their relevant centre remains economically attractive for firms and investors alike.

For example, in the UK, the Financial Conduct Authority’s (FCA’s) proposed streamlining of disclosure requirements for investment products demonstrates a concern that rules are clear and proportionate, and that undue burdens are reduced where possible. The FCA is now proposing that Task Force on Climate-related Financial Disclosures (TCFD) product reporting requirements be removed and replaced with fewer, more targeted, and more outcomes-based rules. In particular, with respect to retail clients, the FCA proposes a new requirement for firms to periodically consider and disclose whether climate risks could be ‘materially relevant’ to the financial performance or the return of the product. With respect to institutional clients, the key message is that regulation will support (and require) the flow of information through the investment chain, so a firm will have a regulatory basis for requesting the climate information it needs, but not more than once a year.

Further, in a separate consultation, published on 7 September 2026, the UK government is proposing a modernisation of the corporate reporting regime, including a streamlining of the strategic report, which has been a key feature of sustainability reporting in the UK, in which the company reviews the risks it has faced during the financial year and expects to face going forwards, covering sustainability and other matters. Most existing reporting requirements (including those requiring specific reporting of environmental, social and human rights matters) would be removed and replaced with a ‘baseline’ set of narrative disclosures covering a company’s business model, performance, resources and relationships, strategy, and principal risk exposures. Companies would still report on ESG matters where financially material to their performance or operations.

In Europe, disclosure requirements for sustainable financial products are also being reviewed and streamlined. For example, earlier this year, the Council of the EU agreed to an updated sustainability transparency framework for financial products sold in the EU. Three new categories of financial products have been introduced: (i) sustainable, (ii) transition, and (iii) ESG basics, to replace existing concepts in the framework that have been perceived as confusing and which may lead to greenwashing.

Firms themselves are also reconsidering their ESG-related commitments, including net zero goals, as well as their memberships of net zero alliances. Indeed, last year, the Net Zero Banking Alliance shut down. The Net Zero Asset Managers initiative, which paused operations at the beginning of 2025, re-launched early this year with an updated Commitment Statement. The new Commitment Statement has removed references to achieving targets by 2050, and has added a caveat that commitments will be undertaken ‘where consistent with our fiduciary duties and, where applicable, client mandates, fund investment objectives and other legal obligations’.

Litigation trends

Changes in litigation patterns in the last year have been more nuanced. The overall number of claims being brought has slowed, although the desire to bring new cases on the part of claimants and other NGOs clearly remains. ESG-related cases generally continue to be brought in all major centres (including, for example, new claims against Shell in respect of its investments in new oil and gas projects, and how its contribution to climate change has impacted typhoon behaviour in the Philippines). Very few new claims have been brought specifically against financial institutions. Complaints under the OECD Rules are continuing to be brought against financial institutions though; for example, a new OECD complaint has been filed against Barclays in the UK, over its financial connection to a power station, illustrating continued claimant appetite.

In Europe, Milieudefensie v ING Bank continues. ING filed its Statement of Defence in February, and in September the Amsterdam District Court ruled that the case satisfies the admissibility requirements of the class action regime in the Netherlands (WAMCA), and may now continue to the merits phase. Mileudefensie’s case is (in very brief terms) that given all that ING Bank knows about the climate crisis and the position of influence it is in, it is obliged to take steps to ensure that its clients reduce their emissions and provide it with credible climate plans. The case is being closely watched by financial institutions globally.

In a more recent development, cases are now being brought by insurers against governments or public bodies in the form of subrogation claims to recover money paid out for climate-related claims. What adds complexity to this developing dynamic is that insurers may also be the subject of litigation in respect of this topic and may receive pressure from shareholders to bring these claims. For example, As You Sow, an activist group in the US, has brought an action against Chubb for the insurer’s decision to exclude a shareholder proposal, which concerns whether Chubb should assess the costs and benefits of subrogation claims against parties responsible for climate change.

Finally, the interaction of ESG with AI is a new and growing tension for financial services. Most clearly, the use of AI and the resulting emissions from data centres will add complexity to firms’ carbon accounting frameworks. There are also related climate litigation risks. Amazon, for example, is facing a claim in the US that alleges it published false and misleading statements about the sustainability of certain of its datacentres, and this type of claim could of course apply to financial institutions by analogy.

The use of AI and the resulting emissions from data centres will add complexity to firms' carbon accounting frameworks.

Pressure points in the near future

As regulatory reporting and marketing requirements are being streamlined and key messages are required to be distilled further than before, the focus on the substance of ESG matters becomes more acute. It therefore remains important for firms to carefully consider how objectives and risks are tracked, understood, and then presented, to avoid disclosures and marketing statements being perceived as misleading, and to ensure that they hold the data and rationale underpinning statements made.

We consider, in addition, that waning political enthusiasm for ESG-related measures and an apparent regulatory rollback is likely to provoke renewed claimant action. Indeed, some NGOs have explicitly prioritised what they perceive as the ‘diluting or abandoning’ of near-term emission reduction targets, and highlighted firms’ changes in approach as a particular area of focus. This sentiment is only likely to be exacerbated by new findings on the progression of climate change itself; a new report released by the UN Environment Programme – ‘Limiting Overshoot – Navigating exceedance of 1.5°C and pathways towards return’ – states that the goal to limit global temperature increase to 1.5°C is now out of reach. According to the report, returning to the target level through net negative GHG emissions is the best remaining option.

For insurers, the possibility of claims to recover climate-related losses is likely to become increasingly important, and they will likely wish to track the progress of these claims carefully. This is particularly likely given the pressure already seen in some markets and lines of business due to climate change events and extreme weather, which means that premiums are increasing and sometimes outpacing households’ capacity to pay.

Finally, the tensions arising from the interaction of ESG and AI may mean some difficult decisions for firms about which to prioritise. Both ESG and AI matters often fall into firms’ top current strategic priorities, but the question of how these strategies interrelate may not always be considered. It will be particularly important for firms to be alive to any interrelationships in the near future, including the way that AI strategies and use impact on sustainability objectives and statements, on the way that clients are using AI and feeding it into their own sustainability reporting (which in turn will impact the way that firms are reporting), and on the way that AI regulatory change and litigation risk also impacts on sustainability strategy.

Both ESG and AI matters often fall into firms' top current strategic priorities, but the question of how these strategies interrelate may not always be considered.

Looking forward

There is no question that the face of ESG is changing. Regulators are increasingly recognising that marketing and disclosure regimes need to be clear and proportionate, and this more mature approach means that it is critical that firms put careful thought into the substance of ESG-related strategies, commitments and the way that these are portrayed in marketing and disclosures.

There is likely to be heightened litigation risk in the near term post this period of change, and insurers may become more actively involved in climate-related litigation too, particularly given the impetus of the climate-related pressures already facing the industry. Finally, we recommend that firms consider emerging areas of interaction between ESG and other strategic priorities, particularly the use of AI, and that they monitor areas where those strategic priorities may conflict.

There is likely to be heightened litigation risk in the near term post this period of change.