Clarity AI's Tom Willman on shifting rules, unclear signals, and what they mean in practice
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By: Tom Willman, Regulatory Lead, Clarity AI
SFDR 2.0 goes to Trilogue with no clear signs of simplification
The word “simplify” or “simplification” appeared more than 30 times in the EU Commission’s proposal for a revamped SFDR 2.0, mirroring language that has become endemic across EU regulatory initiatives since its Omnibus proposal in February 2025. So, here’s a question: how many times does the market need to see that word before the effects of simplification are actually felt?
As SFDR Trilogue negotiations get underway, the landscape feels more complex, if anything, than ever. Not only is the original SFDR still applying, but the market is also trying to predict what the final shape of the SFDR 2.0 will be. Key issues remain open, including entity-level disclosures, the role of PAI metrics, which exclusions to apply, and specifically which companies may qualify in Transition funds. The last one seems to be a particularly thorny issue, with the EU institutions still lacking a shared or clear view on how the market should filter companies before they are admitted to a Transition fund. And even once these issues are settled, financial market participants will have to update their products, their systems, and plug the inevitable data gaps created by the Omnibus. Simple, right?
So, if the walk is not yet matching the talk from policymakers, where is the simplification likely to come from? Our early conversations with the market suggest three main avenues for navigating the complexity. Firstly, some in the market are going it alone, building products and systems around rules that they know may ultimately change. Secondly, advisors and consultants are increasingly supporting asset managers through these types of transitions. And finally, the market continues to lean on data providers to translate frameworks into the data points and the reporting tools they need for their entities and in-scope products. This may have happened more by accident than design, but for now, more of the simplification is in fact coming from the market itself.
ESG Ratings: Regulation Takes Shape
One application in, another regime on the way
Regular readers will know this one has been on our desk for a while. After notifying ESMA of our intention to apply over the summer, Clarity and Glass Lewis have now submitted our joint authorization application under the EU ESG Ratings Regulation, with both entities consolidating regulatory responsibility for their ESG rating activities as part of the merger. The next milestone is ESMA’s first authorizations, expected in early 2027.
Meanwhile, the UK has caught up faster than many expected. The FCA published its final rules for regulating ESG ratings on November 3, with applications opening on June 24, 2027, and authorization required from June 29, 2028. The rules draw heavily on the EU regulation, and changes were made since the consultation to align the stakeholder engagement to be more like the EU. Points of difference do remain, and providers will discover how much of their work to implement the EU regulations can be leveraged in the UK in the coming months.
The signal: ESG ratings are moving from a largely unregulated market to a supervised one on both sides of the Channel. For investors, the question to ask now is whether their provider is on track for authorization.
ESAs Advise a Leaner EU Taxonomy
Less to report, with the core KPIs intact
ESMA, EBA and EIOPA sent the Commission their advice on simplifying Taxonomy reporting. ESMA’s advice focuses on OpEx, which takes the biggest cut. Companies would only have to report non-capitalized research and development spending, a fraction of what they disclose today. Groups get an easier ride too, with the weighted-average KPI dropped. Asset managers, on the other hand, get almost nothing new.
The signal: With OpEx scaled back, CapEx becomes the figure that matters for judging how green a company’s investment really is. This is not a big surprise given how little attention the OpEx metric had historically received.
California Climate Reporting: Lift-Off...Nearly
The first US emissions reports land days after the midterms
After years of lawsuits, delays and one pushed-back deadline, California is about to get its first batch of corporate emissions data. Reports covering Scope 1 and 2 are due November 10, with Scope 3 scheduled to begin in 2027. The bar for year one is low, with no assurance required. Its sister law, SB 261, is still stuck in the Ninth Circuit.
The reports land a week after the US midterms, and Washington has been moving the opposite way. The SEC has proposed rescinding its own climate rules, and the OCC has suggested California’s laws may be preempted by federal banking law for national banks. The midterm election results have seen a big swing in favour of the Democrats, which could alter the US’s course on sustainability related regulations.
The signal: For now, the only mandatory emissions data in the US comes from one state. The real test is Scope 3 in 2027, and whether California still stands alone by then.
Signals to watch
While the EU and UK seem to be aligning on their approach to ESG Rating regulation, they are taking very different paths on AI regulation. Last month saw the publication of Implementing Acts for the EU AI Act, a signal of the EU’s continued commitment to a prescriptive and detailed regulation.
Meanwhile in the UK, the FCA published “good practices”, showing a much lighter touch and their intention to apply existing rules and standards to AI. Investors in the EU risk death by a thousand pages under the weight of the EU’s AI Act, while those operating across the EU and UK may see differing expectations leading to a fragmented international approach.
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