2025 ESG Outlook: Preparing for a Pivotal Year in Sustainability
The year ahead promises to be a transformative one for ESG and sustainability. As companies face regulatory shifts, evolving customer expectations, and persistent investor demands, the pressure to do more with less is becoming a defining feature of the ESG landscape. Whether you are well-versed in sustainability or just navigating the complexities of ESG, understanding the challenges and opportunities of 2025 is essential for staying ahead.
This post offers insights tailored primarily for ESG professionals at US, UK, and EU companies of a significant size to fall under the scope of the below-mentioned regulations, but aspects may be relevant for any company preparing to address the pressing demands of ESG in 2025.
Regulatory Compliance Challenges Amid Greater Uncertainty
Regulation is at the heart of the ESG conversation, and 2025 will be a hallmark year for compliance. The EU’s Corporate Sustainability Reporting Directive (CSRD) is officially in force, requiring extensive disclosures that go beyond financials, with the first reporting beginning in January 2025. Along with EU-based companies, non-EU parent companies, and their EU subsidiaries will also feel the ripple effects.
However, legal and regulatory landscapes are currently in flux. In the US, there is an expected push towards deregulation, while the EU is initiating efforts to simplify and streamline regulations. For example, the EU is looking to consolidate its key ESG Directives including the CSRD, the EU Taxonomy Regulation, and the Corporate Sustainability Due Diligence Directive (CSDDD), into a single framework by 2025 and reduce reporting requirements by at least 25 percent across the board. However, in jurisdictions including California and Australia, new mandates on emissions and climate risk disclosures are adding additional reporting requirements and layers of complexity. This leaves many companies navigating a moving target, with some finalizing reports and others just beginning their compliance journeys.
While companies aim to streamline their already-long annual ESG or integrated reports, regulatory demands are expected to result in even more comprehensive disclosures. Coupled with the rise of anti-greenwashing enforcement in Europe and the US, organizations will be challenged to create focused and engaging reporting while ensuring that claims are meticulously substantiated.
Increased Demand for ESG Data Tracking and Reporting
With compliance requirements escalating, ESG data management is no longer optional—it’s critical. The growth of ESG data platforms offers a lifeline for handling complex regulatory demands, but integrating these technologies with existing enterprise systems remains a significant challenge. Moreover, no platform can entirely replace human oversight, emphasizing the need for skilled ESG professionals to validate and interpret data.
The trend toward integrating non-financial ESG data into financial reporting has given rise to new roles like the ESG Controller, highlighting the need for audit-ready processes. As scrutiny grows, companies must adopt rigorous data collection and validation processes and systems to ensure data accuracy and reliability.
Supply Chains in Greater Focus
Supply chains are emerging as the next frontier of ESG accountability. Scope 3 emissions reporting and human rights due diligence are now top priorities, especially for companies operating in the EU under the Corporate Sustainability Due Diligence Directive. This requires organizations to assess risks and sustainability performance across their entire value chain, as detailed further in our August 2024 post.
Suppliers are also under the spotlight. Companies are setting sustainability criteria as prerequisites for maintaining and securing business relationships. Tools like EcoVadis assessments are becoming essential for evaluating supplier performance and maintaining a competitive edge.
A Mixed Picture for Investor Activism and Engagement
Investor focus on ESG is shifting. Several of the world’s largest asset managers including the “Big Three” (BlackRock, State Street Global Advisors, and Vanguard), have narrowed their engagement and voting focus to strictly financially material ESG issues that they view as being the most closely tied to long-term shareholder value creation. This shift is largely in response to the political backlash they have received in the US in recent years.
On the other hand, specialized ESG investors including asset managers and owners remain steadfast in pushing for action on topics such as climate change, biodiversity, human capital, and human rights. We expect that perceived corporate and governmental inaction on sustainability-related topics will enhance these investors’ engagement efforts on these and other ESG topics. ESG Outlook
A key emerging theme for investor engagement and voting is “Responsible Artificial Intelligence (AI)”, which refers to the ethical and transparent development, use, and oversight of AI. Investors including Legal & General Investment Management (LGIM) and Norges Bank Investment Management (NBIM) are increasingly flagging the potential risks tied to AI, including ethical considerations, regulatory compliance, and workforce impacts. As AI becomes increasingly embedded in corporate operations, ESG rating agencies and proxy advisors are incorporating Responsible AI considerations into their methodologies and guidelines, signaling a new area of focus for companies. ESG Outlook
Other notable themes moving up the investor agenda are nature-related risks and opportunities and various social impact topics including labor and human rights, living wages, and gender pay equality (see Figure 1 below).
Figure 1: Nature risks & opportunities, AI governance, and social impact-related topics are moving up the investor agenda
Source: Leaders Arena, Investor research [1]
Despite this continued interest, investors themselves face challenges with their ESG efforts, including reduced ESG specialist team headcounts and increased information burdens for fundamental analysts. This may lead to a heavier reliance on ESG ratings, which could influence corporate strategies moving forward.
Doing More with Less Will Require a Pragmatic Approach
The theme of 2025 is clear: companies must deliver more ESG value with constrained resources. Rising expectations from regulators, customers, and investors collide with tightening budgets and heightened scrutiny, particularly in politically polarized environments like the US.
To succeed, organizations will increasingly need to make tough choices about where to focus their efforts. We expect that key priorities will include energy efficiency, waste reduction, regulatory compliance, and robust ESG reporting (see Figure 2 below). ESG materiality assessments—whether financial-only or double materiality—will be crucial tools for identifying and addressing the most critical issues.
Figure 2: Companies may increasingly prioritize business-relevant, financial value-enhancing ESG initiatives given resource constraints
Source: Leaders Arena
On the other hand, some aspects of ESG are likely to be deprioritized. Voluntary commitments and reporting, survey requests, and certain DEI initiatives may be neglected as companies focus on measurable, high-impact outcomes.
How We Can Help
Leaders Arena has been at the forefront of ESG advisory since 2016. With over 75 years of combined experience, our team specializes in helping companies navigate the complexities of ESG strategy and implementation. Whether you’re looking to prioritize key issues, enhance your reporting processes, align with new regulatory requirements, or maximize your ESG ratings, we’re here to guide you every step of the way.
Visit us at Leaders Arena or contact us at support@leadersarena.global for a complimentary consultation.
Let’s tackle 2025 together.
Notes
[1] Investor views included in this analysis: Amundi, AXA Investment Management, Aviva, BlackRock, Fidelity International, Legal & General Investment Management (LGIM), Norges Bank Investment Management (NBIM), Robeco Asset Management, Schroders, & Wellington Investment Management
