ESG (Environmental, social, and governance) is an abbreviation for an investment principle that gives priority to environmental issues, social issues and corporate governance. Investments that take ESG considerations into account are sometimes called responsible investments or, in more proactive cases, impact investments.
Mandatory ESG reporting, new artificial intelligence tools for ESG data management and a growing risk of litigation are among the topical themes this year.
In 2024 the development of the ESG and sustainability environment was dynamic. That dynamism is expected to intensify in 2025, given the implementation of ESG-related rules and possible amendments to them, as well as significant geopolitical events around the world. Companies, investors and asset holders will need to remain flexible and well informed in order to respond adequately to these trends, while at the same time navigating the energy transition, closer scrutiny of value chains and the “greenlash” (from “green” and “backlash”; a political term used to describe resistance to the environmental activist movement and green policies). Integrating ESG and sustainability into corporate strategies and operations will demand ever greater sophistication and careful consideration, particularly from senior executives, who are responsible for overseeing these matters.
1. Developments in the USA
Many people want to know how the administration of the next US president, Donald Trump, might affect ESG and sustainability. Whatever the speculation, these topics will in essence continue to develop and will be critically important to business resilience in 2025.
Given the Republican-led Congress, congressional attempts to scrutinise climate organisations or associations closely are expected to continue. As early as 2022, attorneys general of conservative states contacted particular asset managers, questioning their participation in various “net zero” and climate action initiatives and alliances and alleging breaches of antitrust and/or fiduciary duties, as well as of consumer protection laws. Litigation related to these matters, brought by Texas and 10 other states, will continue into 2025. In addition, the demand letters submitted at the end of 2024, which US representatives sent to various asset managers in connection with their participation in climate change initiatives, will carry over into 2025. The boards of the entities concerned, which have received or might reasonably receive such letters or be subjected to such close scrutiny, should be briefed regularly on these developments in 2025 as well. They should continue to enquire how management is handling the risks while still moving forward and remaining faithful to the company's publicly stated business strategy.
In 2023 some US states advanced so-called “fair access” laws, which prohibit companies from acting on social, ideological or political interests when doing business with certain customers. In 2025 similar federal legislation is expected to be reintroduced, or rules may be proposed by the Office of the Comptroller of the Currency (Office of the Comptroller of the Currency). Discussions are also expected on whether any such new federal law or regulation could pre-empt state laws, the repeal of which could reduce the compliance burden on financial institutions or other affected entities. In addition to the Fair Access laws, the administration of the next president, Donald Trump, may remove some of the legal uncertainty in the ESG and sustainability field created by the pressure and pull of the differing laws and policy directions adopted during the Biden administration. Republican control of the US executive and legislative branches, together with the recent aligned changes in the judiciary, could potentially reduce uncertainty and tension, at least at federal level.
However, as in the EU and other international jurisdictions, many progressively minded states are expected to move in the “opposite direction”. California, for example, is actively insisting that climate change disclosure obligations be retained, and several other states want to follow its example. New York recently passed a climate superfund law under which the state will be able to impose new penalties on companies deemed responsible for causing adverse effects related to climate change. Moreover, depending on their sector and location, some companies will have to continue managing the physical risks that extreme weather poses to their assets or operations, as well as complying with climate and sustainability legislation and requirements in force outside the USA.
In addition, given that many US entities also operate in a global context, they will need to navigate US federal and state trends while bearing in mind the potential reputational or operational risks associated with diverging from global ESG trends. This applies in particular where the USA seeks to counter the external effects of ESG and sustainability rules (especially those of the European Union) through trade negotiations, legislation or other mechanisms.
2. Developments in the European Union
The results of the EU parliamentary elections, the changing dynamics in the Member States and the new European Commission meant that 2024 brought an unsteady trajectory for several of the EU's leading legislative initiatives related to ESG. At the start of 2024, for example, there was considerable uncertainty about how the Corporate Sustainability Due Diligence Directive (Corporate Sustainability Due Diligence Directive, CSDDD) might be implemented. Although the CSDDD was ultimately approved and written into law, the protracted negotiations set the tone for further resistance to ESG and sustainability-related rules, culminating in the entry into force of the EU Deforestation Regulation (EUDR) being postponed by a year.
The focus of attention for 2025 was set by the comments of European Commission President Ursula von der Leyen on the potential for an “omnibus” initiative to simplify the EU taxonomy, the Corporate Sustainability Reporting Directive (Corporate Sustainability Reporting Directive, CSRD) and the CSDDD. Von der Leyen's suggestions that the aim of any such omnibus initiative is simplification rather than substantive change indicate that Europe is seeking to strike a balance between maintaining high ESG and sustainability standards and safeguarding economic competitiveness.
However, the experience gained from the negotiations on the CSDDD and the EUDR, as well as the transposition of the CSRD in some Member States, suggests that there is considerable uncertainty as to whether the changes in 2025 will be more substantial. It is possible that the changes could to some extent reflect a trend towards weakening ESG and sustainability regulatory requirements. This move towards simplification is driven in part by concerns about the economic impact of strict rules on companies, particularly small and medium-sized enterprises. It reflects Mario Draghi's report on the future of European competitiveness, as well as persistent criticism from some non-EU countries about the cross-border effects of the legislation. Companies should therefore follow the European Commission's work in its first 100 days closely and stay informed about possible regulatory changes and their long-term consequences.
3. Mandatory ESG reporting
2025 will be a turning point in mandatory ESG and sustainability reporting, when EU reports are submitted under the EU CSRD for the first time.
The first reports, prepared mainly by large European financial institutions or entities whose securities are listed in the EU, are expected to be produced in the first six to eight months of 2025. This moment marks a shift from voluntary ESG and sustainability reporting, which has traditionally been largely qualitative, to mandatory, data-driven ESG and sustainability reporting subject to limited third-party assurance. The publication of such reports will be tracked closely, given that in 2026 a larger number of companies will have to prepare their first reports. Those companies will be paying attention to the approach taken to the required double materiality analysis, to reporting on the achievement of climate change targets (particularly those for 2050), to value chain reporting, to the stance of limited assurance providers and to the extent of enforcement (if any) by the relevant Member State authorities.
In addition, companies are expected to turn their attention to various other reporting obligations, such as those under California's AB 1305, as well as to the further introduction of reporting requirements in connection with the adoption of the standards of the International Sustainability Standards Board (International Sustainability Standards Board, ISSB). Meeting these reporting requirements will call for reliable data collection, reporting processes and appropriate governance and oversight.
4. Value chains
Attention to value chains located closer to home through “near-shoring” and “reshoring” is expected to intensify, driven by geopolitical tension, ongoing supply chain disruption and regulatory requirements such as the CSDDD, the EUDR, the EU Batteries Directive, the Uyghur (an ethnic minority in China) Forced Labor Prevention Act, modern slavery reporting requirements and similar matters. This area is also likely to be affected by broader antitrust and trade developments, particularly in relation to China.
Companies must continue to review their supply chains in order to improve resilience, reduce risk and ensure compliance with changing standards. This requires a comprehensive understanding of value chain dynamics, including the environmental and social impact of supply and production. It is needed particularly because regulatory trends increasingly impose a requirement to trace value chains back to their point of origin. For many, the time and resources needed to uncover such value chains are unfeasible and/or unrealistic. As an alternative, companies may consider the potential costs and strategic opportunities associated with restructuring their value chains.
Critical minerals in particular are highly significant for the global economy, renewable energy and military needs. China is the leading supplier of certain critical mineral resources, and the supply chains for these commodities will come under increasing scrutiny within their customers' supply chains (potentially in both the USA and the European Union). Demand for the most critical minerals is expected to rise in the context of legal requirements or corporate commitments to reduce carbon emissions. Attention is nonetheless being paid to the responsible sourcing of these materials from a human rights perspective. The International Energy Agency, for example, has warned that failing to take ESG issues into account could limit the supply of minerals critical to the energy transition. Companies may therefore seek to support their value chain partners through training and additional resources, and countries (particularly in Latin America and sub-Saharan Africa) may consider developing systems to promote the responsible production and processing of such minerals in anticipation of growing future demand. These initiatives could have implications for the energy transition, trade agreements and geopolitical tension.
Litigation and reputational risk associated with any adverse environmental and social issues identified in the context of a company's value chain is likely to persist. Such risk may influence a company's decision about which markets to operate in (some companies, for example, are openly considering avoiding the EU market as a result of the CSDDD). For certain key raw materials, the shift could have a substantial impact, creating opportunities for other economic regions.
5. The growing importance of “traditional” environmental issues
“Traditional” environmental topics such as pollution control, chemicals management and waste management are becoming ever more significant as regulation tightens and consumer attention grows, and in line with ESG and sustainability disclosure trends. Regulatory and legislative bodies are paying increasing attention to this as public awareness and scientific evidence about the impact of these issues on human health and ecosystems grows.
Heightened awareness of per- and polyfluoroalkyl substances (PFAS), for example, is affecting transaction due diligence, given how widespread these substances are. Circular economy initiatives are focusing greater attention on the use of plastics (despite the suspension of negotiations on a possible agreement on plastics use) and on new and used packaging. Importantly, rules will be phased in requiring the use of more sustainable packaging across the bloc. Companies operating in Europe will have to adapt their production processes accordingly.
Companies are expected to address traditional environmental topics proactively, not only to ensure compliance with stricter environmental protection rules, but also to meet business partners' expectations and to manage risks during transactions. This may include investing in cleaner technologies and setting up research and development processes, improving waste management practices and introducing sustainable materials and processes.
6. A focus on “net zero” and transition plans
In striving to achieve ambitious climate goals, companies continue to focus more heavily on “net zero” commitments and energy transition plans. There is growing recognition of the complexity involved in measuring and reducing so-called Scope 3 emissions, which cover indirect emissions from a company's value chain. Companies are taking more pragmatic approaches to Scope 3 emissions, focusing on working with suppliers and customers to achieve meaningful reductions.
Mandatory reporting requirements are increasingly forcing companies to re-examine their net zero commitments and climate-related targets critically. With the CSRD and other new reporting frameworks, companies subject to these rules will be obliged to disclose a considerable volume of data about their measurement processes and their progress towards net zero targets. Such disclosures must be prepared bearing in mind heightened stakeholder attention to potential “greenwashing”. In this context, companies will most likely have to review their “net zero” commitments, including those made as part of industry associations, in order to ensure that the information disclosed reflects genuine progress and to maintain credibility and trust among investors, consumers and regulators.
Companies are increasingly expected to disclose detailed plans setting out how they intend to reach their “net zero” targets. The CSRD rules will require detailed information about companies' transition plans to be disclosed, and the same may well be required under the United Kingdom's new Sustainability Disclosure Requirements framework. In addition, companies operating globally will have to balance rules (such as the CSDDD) that encourage the adoption of transition plans and a focus on limiting global warming to 1.5 °C in line with the Paris Agreement against the changing priorities of the new US administration under President Trump. Although climate change remains a driving force for business, financial markets and regulation, the administration of the next US president, Donald Trump, is expected to withdraw from the Paris Agreement. The incoming US Securities and Exchange Commission is also expected to reassess the outgoing Commission and Securities and Exchange Commission (SEC) climate change and diversity agendas. Consequently, support for the domestic oil and gas industry is expected to increase under the new US administration.
In this context, companies will have to consider global frameworks while balancing the financial consequences of the transition to a low-carbon economy against potential opportunities for innovation and growth.
7. The role of artificial intelligence and its links to ESG
The role of artificial intelligence (AI) in ESG strategies continues to grow, offering new possibilities for data collection, analysis and reporting. AI technologies can be a powerful tool for improving the accuracy and efficiency of ESG data management, enabling companies to understand and address their environmental and social impact and performance better. In recent years the number and sophistication of ESG and sustainability-focused AI technologies and products have increased. This trend is expected to continue in 2025.
As ESG and sustainability reporting becomes mandatory in 2025 and the years that follow, more and more entities, including smaller companies that occupy an important place in corporate supply chains, are likely to use AI tools to compile data accurately and reliably in a structured and efficient way.
The use of artificial intelligence from an ESG perspective is not, however, without problems that need to be taken into account. In addition to the considerable amount of energy required to run and develop AI systems, ethical and social considerations – such as potential algorithmic bias, privacy issues and ensuring that outputs are checked so that they are not misleading or contradictory – have to be borne in mind in connection with many AI technologies, including those developed to help achieve ESG goals.
New legal frameworks such as the European AI Act, which entered into force on 1 August 2024, introduce additional regulatory requirements for AI applications, including a ban on the use of AI in certain contexts. As regulatory requirements and stakeholder attention evolve in 2025, companies must ensure responsible AI governance, addressing these problem areas while harnessing the potential of AI to improve ESG performance – for example by developing clear AI usage policies and frameworks and by working with stakeholders to build trust and transparency.
8. The growing link between antitrust and trade policy and ESG policy
The interaction between antitrust, trade policy and ESG is becoming ever more pronounced as companies seek to align their international operations with sustainable practices while addressing the problems created by extraterritorial (foreign-made) rules. Meanwhile, regulators worldwide are paying closer attention to ensuring that ESG initiatives do not inadvertently give rise to anti-competitive conduct or distortions of the trading environment, thereby highlighting the potential tensions between ESG goals and trade policy. This dynamic calls for careful consideration of compliance and strategic alignment as companies seek to balance competing priorities.
Against the broader “greenlash” backdrop, the enforcement of antitrust law is increasingly becoming a tool for scrutinising ESG initiatives, particularly with regard to possible antitrust infringements arising from cooperation and agreements intended to advance climate, environmental and social goals. US legislators may step up this scrutiny after the inauguration of President-elect Donald Trump.
Following the appointment of Teresa Ribera as Commissioner for Competition and Executive Vice-President for a “Clean, Just and Competitive Transition”, ESG considerations may be taken into account to a greater extent in state aid and competition law enforcement in the European Union. Ribera has the strongest “green” mandate of any competition commissioner to date. She was Spain's minister for the ecological transition, played a significant part in the negotiations on the Paris Agreement and was the EU's chief negotiator at COP28. Ribera is expected to assess how sustainability objectives can be incorporated into or promoted through EU state aid and competition law in competition enforcement. The start of her term as commissioner coincides with the publication of Mario Draghi's report and the European Commission's focus on the bloc's economic and industrial competitiveness. Ribera has pointed to plans to advance the competitiveness agenda, including by creating a new state aid framework under the “Clean Industrial Deal” to accelerate the uptake of renewable energy, industrial decarbonisation and clean technology manufacturing.
Given this situation, companies should be aware of the possibility of regulatory scrutiny and enforcement action in relation to anti-competitive practices and trade restrictions in the ESG field. This may include working with policymakers and industry groups to advocate for fair and coherent rules that support sustainable business practices.
9. ESG and sustainability, “greenwashing” and DEI litigation
Litigation risk, and “greenwashing” risk in particular, continues to grow as companies are required to show greater transparency and accountability and face closer scrutiny to substantiate the ESG claims they make and avoid misleading stakeholders, including consumers. Despite the disputes around and about ESG, heightened interest in the issue of “greenwashing” – including both support for tackling it and closer scrutiny – is expected to continue from all sides of the political spectrum.
The climate commitments of large companies in the USA are increasingly being scrutinised from a consumer protection perspective, reflecting a broader trend of litigation targeting companies for potentially misleading customers about their sustainability efforts and forward-looking ambitions.
Following the US Supreme Court's decision of April 2024 in Muldrow v. City of St. Louis, which upheld a workplace discrimination claim under Title VII of the Civil Rights Act, the number of workplace discrimination claims is also likely to grow. As courts apply the ruling that a Title VII claimant need only demonstrate “some harm” to a term or condition of employment, “reverse discrimination” cases are expected that target initiatives which have not previously been the focus of Title VII litigation, such as training or leadership programmes available only to certain groups.
Given the policy priorities of the incoming Trump administration, federal agencies such as the Department of Justice, the Department of Labor and the Department of Health and Human Services are likely to use enforcement bodies to investigate and act against various diversity initiatives. Private “reverse discrimination” cases are also expected to continue. Companies should remember that so-called traditional discrimination cases also remain a risk. Companies that depend on diversity of skills, background, age and so on (particularly those in the technology, healthcare and financial services sectors) are likely to review and update their practices and policies.
In the European Union and its Member States, high-profile “greenwashing” cases based on potentially misleading ESG claims have been brought against companies in a range of sectors, such as food production, airlines, car manufacturing and fashion, and coordination of these cases has been stepped up through the EU's Consumer Protection Cooperation network. Although such cases are usually brought on the basis of the Unfair Commercial Practices Directive (UCPD), the EU is strengthening its framework for protection against environmental commercial practices by adopting the Directive on Empowering Consumers for the Green Transition (which adds specific environment-related terms to the UCPD) and potentially adopting the Green Claims Directive (Green Claims) in 2025. Larger fines for breaches of consumer protection rules and for “greenwashing” advertising connected with companies' operations in the United Kingdom and the EU are expected to attract greater attention.
Companies must be ready to respond to potential legal challenges and regulatory investigations relating to ESG claims. Properly implemented verification processes and transparent communication are vital for reducing legal and reputational risks. This includes in-depth due diligence on the credibility of ESG initiatives, accurate and consistent reporting, and engagement with stakeholders to address concerns and build trust.
10. Biodiversity and natural capital
Nature is becoming a central ESG area as companies recognise the importance of conserving natural ecosystems and the part they play in long-term sustainability. This trend is driven both by regulatory requirements and by growing awareness of biodiversity's crucial role in supporting ecosystem services and mitigating climate change.
COP16 of the UN Convention on Biological Diversity, which was suspended in 2024 in Cali, Colombia, will resume in Rome in February 2025 to continue with the unresolved agenda items left over when the convention's work was suspended. The discussions will cover the proposed new resource mobilisation strategy, which aims to secure 200 billion US dollars a year from all sources for biodiversity initiatives by 2030 and to reduce harmful initiatives by at least 500 billion US dollars a year by 2030, as well as the potential creation of a global biodiversity finance instrument designed to mobilise and allocate funding effectively.
In the private sector, companies are integrating natural capital factors into their sustainability strategies, assessing their impact on natural habitats and drawing up plans to protect and restore biodiversity. This may involve working with conservation organisations, investing in nature-based solutions and engaging with local communities to promote sustainable land use practices. Companies will devote even greater attention to such practices in 2025. The growing spread of mandatory ESG reporting frameworks such as the Corporate Sustainability Reporting Directive (CSRD), as well as of voluntary reporting mechanisms such as the Taskforce on Nature-related Financial Disclosures (TNFD), suggests that companies will continue to publish even more publicly available information about their impact on nature and biodiversity.
Conclusions
At the start of 2025, the field relating to environmental and social issues and corporate governance – ESG – is characterised by both challenges and opportunities. Companies must remain vigilant and adaptable, taking an integrated and strategic approach to ESG and sustainability (including with regard to the terminology used) in order to ensure business flexibility overall. By staying informed and proactive, organisations can navigate the complexities of ESG and sustainability matters and secure long-term success for themselves in a constantly changing international environment.
These complex matters, which also entail a considerable administrative and bureaucratic burden, will of course be important here in Latvia too. Our companies must be ready to tackle potential problems in good time and to find the right solutions, by training staff and/or bringing in the relevant specialists.