Sustainability, supply chain and ESG: climate change challenges to consider for 2026

At the same time, increased due diligence on environmental and human rights impacts in the supply chain are making these issues critical for larger companies to prioritise and strategise going into the next 12 months and beyond.

In the wake of November 2025’s COP 30 summit, pressure on businesses is set to increase to address climate risk, with significant regulatory changes due down the road.

As such, it has become increasingly important for companies to be aware of the challenges they may face in their climate change obligations this year.

Global political challenges

While there has been a degree of geopolitical pushback in relation to climate regulation policies, this is neither globally uniform nor as substantial as some media coverage may indicate. Instead, the political environment has become more fractured around the issue, with greater divergence between countries in their implementation of climate policy – most notably by the current US administration.

However, there is no significant evidence of a uniform roll back of climate regulation and policy. In fact, a recent global climate policy monitor survey hosted by Oxford University found an overall increase in regulation and policy, while legal developments across the globe demonstrate increasing regulation in many jurisdictions, and states are generally coming under increasing judicial scrutiny to implement climate policy.

At the COP30 climate summit in Brazil in November 2025, the achievements were more muted than some hoped for without any agreement on fossil fuel phase out, although some notable progress was made - including to scale up finance for climate adaptation. There was a consensus that the Paris Agreement’s goal to hold global temperatures to 1.5ºC above pre-industrial levels would be overshot in the short to medium term, but this remains the primary goal which all governments and businesses should work towards at pace.

In the UK, political challenges remain in meeting climate and sustainability goals. While the roadmap to net zero by 2050 remains legally binding, recent court rulings have exposed gaps in delivery plans, forcing revisions. 

Political divisions, legal scrutiny and economic constraints have further complicated progress even as public opinion still broadly supports climate action. The Reform party has rejected net zero and is positioning itself as the populist voice against sustainability policy. They have stated they’d reverse some climate and sustainability laws.

Meanwhile across the EU, 2026 begins with changes to the Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive coming into effect. Further significant changes are expected to the sustainability landscape following the publication of the forthcoming Environmental Omnibus package.

The growing risk of climate litigation

Climate and sustainability litigation saw several landmark developments in 2025, and businesses should be prepared for litigation risk to grow through 2026.

As the Grantham Research Institute on Climate Change and the Environment reported last summer, the preceding 12 months saw a widening of both jurisdictions where climate-related claims are made and the business sectors pursued, with diversification beyond the fossil fuel industry and other traditional targets. Going forward, the litigation landscape may involve growing activity against businesses who are alleged to be ‘enabling’ climate change.

Courts handed down several significant decisions in 2025. Amongst these, a German court in May 2025 recognised that under German law, in principle, a company could be held liable in respect of climate-related harms in another country, and as a result be required to contribute to preventative measures in proportion to its share of emissions.

That claim – brought by a Peruvian farmer against a multinational energy company – failed because no sufficiently concrete risk of flood damage to the farmer’s property had been shown. As a result, the court did not need to consider whether a causal link can be established between a particular company’s emissions and a particular event such as a flood. However, the decision has been viewed by many as positive for climate activists, given the court’s statements of principle.

Other, similar litigation elsewhere has come at a time when considerable investment and advances are being made in attribution science, which looks to link human-generated greenhouse gas emissions with extreme weather events and other environmental harms.

The credibility of such scientific analysis was recognised by the International Court of Justice in its landmark advisory opinion on states’ legal obligations in respect of climate change - handed down in July 2025 and cited since in a number of climate lawsuits globally - where the court concluded that the scientific evidence before it “establishes that significant harm to the climate system and other parts of the environment has been caused as a result of anthropogenic GHG emissions.”

UK-headquartered businesses should also be aware of the risk of facing litigation in the UK in relation to activities of their overseas subsidiaries and suppliers, in light of the attractiveness to claimants of the English courts and a notable trend of those courts being willing to hear such claims, as illustrated in ongoing litigation against Dyson, Brazil Iron and the high-profile mass claim against BHP arising out of the collapse of the Fundão dam.

Institutional investors are also increasingly interested in using securities litigation under sections 90 and 90A of the Financial Services and Markets Act 2000 as a tool to protect their investments and drive changes in corporate behaviour. With one securities claim concerning alleged misstatements about ESG-related matters in published corporate material already before the English High Court, against fashion company Boohoo, further similar claims may follow, for example alleging greenwashing.

Sustainability strategy and compliance

Although some companies are re-assessing their sustainability commitments in light of geopolitics and policy change in some jurisdictions, there is evidence that most corporates continue to respond to climate and sustainability-related risks and opportunities.

Action in industry-wide alliances has shifted to companies incorporating risks and opportunities directly into their strategic approach, demonstrating effective risk management and value creation for their stakeholders and customers.

Companies are transitioning from a compliance-driven approach to sustainability towards a business resilience and value creation approach. This necessarily propagates sustainability throughout the whole business and across functions, including legal.

Sustainability regulations relating to disclosures and due diligence are becoming, in general, more ambitious, covering topics beyond climate including deforestation, critical minerals and forced labour. In particular, the anticipated requirement for large businesses in the UK to publish climate transition plans will force many companies to develop robust plans and show how they are making progress against them over time.

Supply chain resilience and visibility

Large companies are increasingly required by legislation – and expected by stakeholders – to conduct due diligence on their supply chain and broader value chain in relation to greenhouse gas emissions, environmental impacts, and human rights impacts.

Suppliers are increasingly required contractually by those companies to share sustainability data – but for many, a lack of proper oversight of contractual and regulatory obligations will likely increase in line with ramping up of regulations and updated terms and conditions among purchasing firms.

Suppliers contracting on purchaser terms with many different counterparties may find contract management solutions essential to track documentation.

Too often, legal and compliance teams do not have proper vision over counterparty requirements and current practices. Effective governance and reporting lines can close gaps and reinforce resilient supply chain risk management.

ESG ratings

In the EU and UK, legislative developments providing for regulatory oversight of ESG ratings will help to promote transparency around methodologies, data sources and assumptions, benefitting investors and capital markets as well as rated companies.

Across EU states, the ESG Ratings Regulation takes effect from 2 July 2026. While this regulation mainly dictates practice standards and transparency requirements for ESG ratings providers, it should also be of interest to companies using ESG ratings.

ESG ratings can have a significant impact on investment decisions, including in terms of individual security selection by asset managers, and inclusion in broad market ESG indices. Cumulatively, these decisions can influence demand for a company’s securities which directly impacts cost of equity and debt and share price performance.

The new EU ESG Ratings Regulation supports rated companies and other entities to engage directly with ESG ratings providers where they believe ratings may be based on factually incorrect information.

Meanwhile in the UK, new rules will give the Financial Conduct Authority oversight of how ESG ratings are awarded meaning any ratings provider, even beyond the UK, which serves clients in the UK will come under FCA scrutiny.

What this all means for you

Navigating the reputational and policy challenges the shifting political and cultural views on climate change present will be a challenge for firms in 2026, with mitigating any risk of exposure to policy change a priority.

This means maintaining a comprehensive understanding of how climate change and environmental standards rules impact and will impact businesses and organisations – both from an administrative and a physical perspective. Being able to separate the “signal from the noise” will be critical to ensure long term success.

Boards will be looking out for climate-related legal risks - including litigation - to stay informed of relevant developments and any operational changes which should be considered to reduce the risks. This is particularly relevant for multinationals and those in or exposed to emissions-intensive industries, though no business sector should regard itself as immune.

Suppliers need to ensure they understand their sustainability obligations and how to implement an effective operating model to comply with contractual and regulatory obligations, while purchasers will need to be across the significant shifts in regulation across 2026 which could increase exposure to risk within the supply chain.

For those with, or seeking, an ESG rating, engaging with providers to ensure the rating is factually accurate is vital, particularly as ESG ratings become increasingly relied on in contracts or negotiations – something set to increase as ratings providers become increasingly regulated.

Fundamentally, separating the key long term impact of climate and sustainability and related current and prospective law and regulation from the short-term noise of political divergence is key.