Policy Digest: August 2026

Key Trends & Highlights

• EU: stronger climate risk integration, softer carbon market trajectory. The ECB is moving to price climate and transition risk directly into the financial system, including adjusting collateral values to reflect corporate exposure to climate vulnerabilities. At the same time, the EU’s proposed ETS reforms would slow the pace of emissions reductions and extend flexibility for industry through 2038. This creates a clear policy tension: the EU is strengthening measures to prevent climate risk from crystallizing on financial-sector balance sheets, while simultaneously giving emissions-intensive companies more time to decarbonize—potentially putting long-term climate ambition and industrial competitiveness at odds.
• ISSB adoption accelerates across Asia-Pacific. Jurisdictions continue to move towards ISSB-aligned reporting, with a climate-first approach emerging as a common pathway. Singapore is developing an ISSB-aligned framework, Korea is proposing to expand mandatory KSSB 1 and KSSB 2 reporting to more than 3,000 listed companies by 2028, and Bangladesh has adopted localized IFRS S1 and S2 standards with coverage extending beyond financial institutions.
• Push for more comparable and decision-useful emissions data. The ISSB is advancing updates to its Digital Sustainability Taxonomy and GHG disclosure requirements, including enhanced digital tagging for Scope 3 Category 15 (financed emissions) and greater flexibility to disaggregate emissions beyond GICS classifications. At the same time, California is taking a more pragmatic approach, proposing to limit mandatory Scope 3 reporting to five categories in response to data and cost challenges.
• Taxonomies expand beyond “green” finance. Canada is preparing a Sustainable Investment Taxonomy covering both green and transition investments, initially focusing on electricity, transportation and buildings—reflecting the growing recognition that transition finance requires a broader classification framework.
• Supply chain-related regulatory requirements are also tightening. Australia is strengthening its Modern Slavery Act, with criminal penalties on the table for companies with forced labor-related violations across their supply chains.

Regulation is moving in two directions simultaneously—greater integration, standardization and enforcement of sustainability data, particularly through ISSB-aligned frameworks, alongside a growing emphasis on proportionality, transition finance and regulatory flexibility as jurisdictions grapple with the cost and competitiveness implications of the transition.

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International

ISSB proposes updates to the IFRS Sustainability Disclosure Taxonomy

The proposed update to the digital sustainability taxonomy reflects ‘Amendments to Greenhouse Gas Emissions Disclosures’, which made targeted amendments to the IFRS S2 Climate-related Disclosures in December 2025. Proposed disclosure requirements in ‘Amendments to Greenhouse Gas Emissions Disclosures’ include a text element, an axis member and table for:

• The disclosure and measurement of Scope 3 category 15 GHG emissions;

• A flexible classification system beyond the Global Industry Classification Standard (GICS) to disaggregate financed emissions.

These enhancements to the Sustainability Disclosure Taxonomy tackle implementation challenges faced by preparers, while maintaining the decision-usefulness of reported sustainability information for investors. Information prepared in accordance with the ISSB is digitally tagged, enabling investors and other end users to compare and extract information from reports more efficiently. The IFRS Foundation has requested feedback on the proposed updates by 28 September 2026. Read more

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Europe

EBA ESG Risk Dashboard shows stabilized exposure to climate risks

The European Banking Authority (EBA) published its ESG Risk Dashboard on 6 August 2025. The EBA Dashboard shows a stabilized share of exposures to non-financial counterparties in carbon-intensive sectors at 62% across banks in the Eurozone. The continued exposure may point to opportunities for transition-focused portfolios for banks directing capital towards decarbonizing hard-to-abate sectors and technologies, rather than funding pure-play green assets. The EBA dashboard also reveals a broadly stable distribution of mortgage exposures across energy efficiency categories, while the share of highly energy efficient mortgage exposures (≤100 kWh/m²) showed slight improvement. Indicators such as the proportion of exposures without energy performance (EP) information and the share of estimated EP scores declined marginally, reflecting banks’ enhanced climate data collection capabilities and the increased availability and quality of climate-related data used to assess mortgage portfolios. Physical risk varies across jurisdictions, with average exposure shares ranging from 10-55% – the wide-ranging exposure can be attributed to varying geographic, economic and sectoral characteristics, along with jurisdiction-specific risk classification and assessment methodologies. Overall, the results reflect continued stability in physical risk and transition risk indicators across the EU banks in the second half of 2025. Improving environmental data quality and availability in the EBA’s ESG Risk Dashboard means reduced reliance on proxy data and estimates (falling by around 10 percentage points since December 2023). This also signals progress in regulatory readiness as institutions prepare EBA ESG Pillar 3 reports and prepare to meet supervisory expectations under the EBA Guidelines. The EBA has continued to emphasize the imperative for financial institutions to deepen climate risk management across the banking sector, equating ESG and climate-related regulatory and disclosure requirements to traditional financial risks such as credit risk, market risk, and operational risk. Read more

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ECB introduces climate risk factor into collateral framework

On July 8, 2026, the European Central Bank (ECB) has announced that it will begin incorporating climate risk considerations into its collateral framework by applying a climate factor to the valuation of marketable assets pledged as collateral. The measure is designed to better reflect the financial risks associated with climate change on the Eurosystem's balance sheet and complements the ECB's broader strategy to integrate climate-related risks into monetary policy operations. Following the rollout of its climate risk collateral framework, the ECB announced that it will extend its application to corporate loans, adjusting the value of assets pledged by banks as collateral based on their exposure to climate and transition risks. The climate factor is calibrated periodically to reflect uncertainty arising from climate-related vulnerabilities. It is partly determined by an ‘uncertainty score’ assigned to each corporate bond used as collateral. This score captures both sector-level stressors, reflecting the projected impact of transition shocks on financial asset values across sectors, and a firm- and asset-level vulnerability component, which considers factors such as GHG emissions, decarbonization targets and the quality of climate-related disclosures. By incorporating these sectoral and firm-level factors into the valuation of collateral, the framework could result in significant haircuts for assets associated with hard-to-abate sectors, including utilities and transportation. Read more

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EU Emissions Trading System offers greater flexibility risking EU decarbonization drive

The European Commission has proposed revising the EU Emissions Trading System (ETS), including a lower Linear Reduction Factor (LRF) of 3.7% for 2031–2035 and 1.7% for 2036–2040, alongside allowing up to 2% high-quality international credits. While this could provide short-term relief for industry, the additional “breathing space” risks being short-sighted, potentially leaving European companies playing catch-up as China and other economies accelerate clean technology investment. It could also conflict with the EU’s ambition to cut net GHG emissions by 90% by 2040. The proposal would maintain free allocation beyond 2030, while requiring Member States to direct at least 50% of ETS revenues towards clean energy, industrial decarbonization and innovation. Strengthened Innovation and Modernization Funds would support low-carbon technologies, electrification, industrial decarbonization and CCS/CCU, while fossil-fuel investments remain excluded. The proposed extension of the ETS to aviation is welcome, including broader coverage from 2029 and the inclusion of business aviation. Twenty million allowances would also support European sustainable aviation fuels and other aviation decarbonization measures. Read more

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North America

Canada launches Sustainable Investment Taxonomy

In April 2026, Canada established the new Taxonomy and Transition Planning Council (TTPC), tasked with developing Canada’s Sustainable Investment Taxonomy for green and transition investments. The taxonomy was first announced as part of the federal Budget, following which the investor-led Business Future Pathways initiative worked with the Canadian Climate Institute (CCI) to develop science-based taxonomy criteria for six priority sectors: electricity, transportation, buildings, agriculture and forestry, manufacturing, and extractives. In July 2026, the TTPC released a draft methodology report intended to provide issuers, lenders and investors with a common framework to identify and assess climate-related investments, supporting transition planning, sustainable finance products and the allocation of capital towards eligible projects. Reflecting the realities of Canada’s resource-based economy, the draft framework includes ‘green’ and ‘transition’ investment categories, as well as ‘abatement measures’ for substantial near-term emissions reductions in carbon-intensive activities and investments. It also incorporates the principles of ‘do no significant harm’ and ‘minimum social safeguards’, aligning with approaches adopted by other global taxonomies. The TTPC is also expected to develop detailed criteria for three high-priority sectors—electricity, transportation and buildings—by the end of 2026. Read more

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California limits Scope 3 reporting to 5 categories

The California Air Resources Board (CARB) has proposed reducing Scope 3 reporting requirements under SB 253 following feedback on the cost and data challenges associated with measuring, accounting for and verifying Category 15 financed emissions by 2027. Under the proposed rule, companies would be required to disclose only five Scope 3 categories: purchased goods and services; fuel- and energy-related activities; waste generated in operations; business travel; and employee commuting. Companies would be encouraged to voluntarily report additional Scope 3 categories where relevant information is available. CARB has invited additional stakeholder feedback on the proposals and will schedule sessions to further discuss the scope of the regulation. Read more

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Asia-Pacific

Singapore releases draft Sustainability Disclosure Standards

Singapore’s Accounting and Corporate Regulatory Authority (ACRA) has announced the release of draft Singapore Sustainability Disclosure Standards. The new draft standards include Singapore Financial Reporting Standards (SFRS) S1 and SFRS S2. The SFRS S2 (which covers climate-related disclosures) will be mandatory, while SFRS S1 (which covers broader sustainability disclosures beyond climate) will be voluntary. The public consultation on the draft standards runs through October 25, 2026. Read more

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Korea expands scope of ISSB-aligned disclosure standards to cover more companies

South Korea’s Financial Services Commission (FSC) has released its final roadmap for mandatory sustainability reporting under KSSB 1 and KSSB 2. KOSPI-listed companies with total consolidated assets of KRW 10 trillion or more will be subject to the requirements from FY 2027, with the first disclosures due in 2028. This initial phase is expected to cover approximately 291 companies, including affiliates. The scope will expand to companies with consolidated assets of KRW 5 trillion or more from FY 2028, bringing approximately 3,171 companies into scope. Following a review of implementation in 2028–2029, the FSC will consider further extending the requirements to companies with assets of KRW 2 trillion or more from 2030, which would expand coverage further, although the number of additional companies has not yet been specified. Read more

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Australia introduces stronger penalties under Modern Slavery Act

The Australian government has announced enforcement measures, including criminal penalties for companies with annual consolidated revenue exceeding $100 million whose operations are linked to forced labour across their supply chains. Companies with auditable systems, controls, governance and risk management frameworks can demonstrate that they have taken reasonable steps to identify, prevent and address modern slavery risks. The government has also introduced civil penalties and associated enforcement powers to address non-compliance with existing obligations. Read more

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Philippines SEC adopts local version of IFRS S1 & S2

The Philippines Securities and Exchange Commission (SEC) issued a circular confirming the adoption of the ISSB-aligned Philippine Financial Reporting Standards (PFRS) S1 – General Requirements for Disclosure of Sustainability-related Financial Information and PFRS S2 – Climate-related Disclosures. The new disclosure regime will follow a tiered implementation approach, beginning in 2026 for reporting in 2027, and will initially apply to Publicly Listed Companies (PLCs) and Large Non-listed Companies (LNCs) with revenues exceeding PHP 15 billion as of December 2027. Companies covered in the first wave will also be required to obtain limited assurance over Scope 1 and Scope 2 GHG emissions from 2028. The Philippines has introduced jurisdiction-specific transition reliefs, including a climate-first approach during the first year of implementation, under which PFRS S2-aligned disclosures will be required while PFRS S1 disclosures will become mandatory from the second year. Scope 3 emissions disclosures will also remain voluntary during the first two years of implementation, through 2029. Read more

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Bangladesh FRC adopts IFRS S1 & S2, brings listed companies in scope

Bangladesh’s Financial Reporting Council (FRC) has finalized the adoption of the internationally aligned IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. The climate- and sustainability-related disclosure requirements initially applied only to scheduled banks and finance companies; however, they have now been extended to listed companies, which are also in scope. Read more

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Other News & Resources

• FCA consults on Climate Adaptation and Resilience. Read more‍
• ESRS State of Play Implementation Report available now. Read more‍
• EU Commission publishes Draft Regulation on EU-wide sustainability rating scheme and electronic label for data centres. Read more ‍
• OECD publishes Mapping Tool for Global Due Diligence Regulations. Read more‍
• ESMA publishes initial List of authorized ESG Ratings Providers. Read more
• ISSB publishes translations of Exposure Draft of SASB and IFRS S2 Industry Guidance. Read more ‍
• SBTi opens consultation on FLAG standard v2. Read more

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