The debate around net zero is shifting. What was once presented as an unquestionable moral imperative is now being openly challenged by a variety of different groups, not least the general public. The reality of the economic costs of net zero are coming home to roost. Some of the biggest culprits of this push are the UK’s regulators who are pressing ahead with an increasingly expansive climate agenda in 2026.
In a recent speech, the Governor of the Bank of England warned that the global economy faces “headwinds” from both climate-related economic shocks and “the consequences of the policies chosen to tackle these shocks,” explicitly acknowledging that net zero policies can weigh on growth. Yet Andrew Bailey is not a distant observer of this process. As Governor, he oversees the Financial Policy Committee and the Prudential Regulation Committee and the Bank of England itself oversees the Prudential Regulation Authority.
These bodies are at the centre of the UK’s climate-driven regulatory agenda. While Andrew Bailey recognises the economic risks associated with net zero, the institutions he leads continue to advance policies that embed climate objectives deeper into financial regulation, often at the expense of growth and competitiveness.
At the same time, public and investor enthusiasm for ESG is clearly waning. Data from the Association of Investment Companies’ ESG Attitudes Tracker shows a sharp deterioration in sentiment among financial advisers and wealth managers. Only 10 per cent of intermediaries now believe ESG strategies improve investment performance, while 51 per cent expect them to worsen returns. ESG’s net favourability score has collapsed to minus 41 per cent, down from plus 31 per cent in 2021. Client interest has followed the same trajectory. Just 11 per cent of clients now raise ESG unprompted in meetings, down from 20 per cent two years ago and expectations of rising demand have almost halved in the past year. Years of underperformance and growing cost pressures have taken their toll.
In short, the public is moving on. Net zero and ESG are no longer automatic priorities for investors, clients or businesses. Yet regulators are not following the same trajectory. On the contrary, 2026 will see a further embedding of climate policy into the UK’s financial regulatory framework.
It is important to acknowledge that this is not entirely a matter of regulatory choice. Both the Financial Conduct Authority and the Prudential Regulation Authority are legally required to support the Government’s environmental objectives under the Climate Change Act 2008, which enshrines the net zero target, and the Environment Act 2021, which sets statutory nature targets. Climate considerations have therefore been hardwired into financial regulation. In practice, however, this has drawn regulators into an increasingly activist stance on ESG, effectively positioning them as instruments of environmental policy rather than neutral supervisors.
Criticism of this approach is growing. The House of Lords Financial Services Regulation Committee has warned of a “significant degree of mission creep”, arguing that regulators have expanded their activities into areas of business management that sit outside their core responsibilities. The Committee has cautioned that this expansion risks increasing bureaucracy, raising costs and distracting regulators from their primary objectives of financial stability and consumer protection.
Against this backdrop, 2026 will bring a number of new climate-related regulatory measures that will materially affect financial services firms. Firstly, ESG ratings providers will be brought under direct FCA supervision following secondary legislation laid by HM Treasury in October 2025. These firms will need FCA authorisation and will be subject to core rules such as the Senior Managers and Certification Regime and the anti-greenwashing rule. The aim is to make ESG ratings clearer and more consistent, addressing concerns about opaque methods and poor-quality data. While this may improve basic standards, it also embeds ESG scores more firmly into investment decisions at a time when trust in them is already falling.
At the same time, the FCA, alongside the Department for Business and Trade, is expected to consult in early 2026 on new UK Sustainability Reporting Standards and mandatory transition plan disclosures for listed companies. The consultation will be based on draft standards, with final rules referencing the completed versions once they are published. Fixed time-limited exemptions will be removed, with timing instead set through Companies Act regulations or FCA rules. For businesses, this means more reporting and compliance obligations, even as investor interest in ESG disclosures continues to decline.
The Prudential Regulation Authority will also move ahead with tougher expectations on how firms manage climate risk. In December 2025 it published Policy Statement 25/25 and Supervisory Statement 5/25, replacing earlier guidance with immediate effect. These changes reinforce the idea that climate risk must be treated like any other financial risk and built into existing governance and risk management frameworks. Boards and senior management will be expected to take clear responsibility, and firms will need to show that climate considerations affect everyday decisions, not just long-term strategy papers.
The PRA has also raised the bar on climate scenario analysis and data use. Firms will be expected to produce clearer, better-documented scenarios and to show how these feed into business planning. They must also demonstrate an understanding of the limits of climate and ESG data, using sensible proxies where data is missing. In practice, scenario analysis is becoming a supervisory expectation rather than a purely exploratory exercise, despite the uncertainty involved.
Finally, both the FCA and PRA will tighten expectations around governance in 2026. Boards and senior managers will be expected to take visible ownership of climate risks, have enough expertise to challenge assumptions. This marks a further extension of regulatory influence into boardrooms and core business decisions, reinforcing the central role climate policy now plays in UK financial regulation.
The underlying issue is one of accountability. Regulators are largely insulated from the commercial consequences of the policies they impose and are not directly accountable to either businesses or the public. As a result, even as economic risks become clearer and public support for ESG fades, there is little to restrain the continued expansion of the climate agenda within regulation. Absent a change in mandate or meaningful political intervention, regulators are likely to keep pushing ESG requirements deeper into the financial system, regardless of the growing gap between regulatory ambition, market demand and economic reality.