Sustainable-Finance Regulation — a Look Ahead for 2025
Key findings
- In 2025, the EU CSRD will standardize sustainability disclosures, promising greater transparency but introducing challenges for financial institutions as sector standards will come with a time lag.
- Financial institutions will need to navigate CSRD, SFDR and ESG fund-naming rules, aligning with stringent fossil-fuel exclusions, to avoid noncompliance and reputational risk.
- Globally, ISSB-based climate disclosures will foster data availability outside the EU but mushrooming green taxonomies will mostly retain regional flavors, challenging globally consistent sustainable-investment strategies.
In the EU, the standardization of sustainability data will reach a milestone in 2025 with companies in scope of the Corporate Sustainability Reporting Directive (CSRD) reporting, for the first time, on over 1,000 environmental, social and governance indicators (where material). Disclosures are subject to limited assurance and the scope will, in a few years, expand to over 50,000 companies, including approximately 10,000 non-EU firms.[1] Sector-specific standards are being developed with a first draft for financial firms expected in the spring of 2025. While such developments need to be lauded for the transparency they will bring, they also bring about challenges to avoid compliance and reputational risk.
Navigating SFDR and new ESG fund-naming rules
Financial institutions in the EU must navigate both CSRD obligations and requirements from the Sustainable Finance Disclosure Regulation (SFDR), which applies both at an entity and product level. There is much talk in Brussels about introducing labels to complement Article 8 and 9 product requirements in an upcoming review scheduled for 2025, but such requirements are unlikely to apply before 2028.[2] More immediately, guidelines on funds' names using ESG- or sustainability-related terms, released earlier this year by the European Securities and Market Authority (ESMA), are likely to have more of an impact on the market in the shorter term with, e.g., stringent exclusion criteria for fossil-based investments — for new funds these kicked in on Nov. 21, 2024, while they will apply for existing funds from May 21, 2025.
With the new EU Commission taking office in early 2025, the pace of new legislation on green finance may slow down as attention moves to competitiveness and enhancing usability of the current framework. Despite this expected slowdown, few expect the existing green finance rules to be repealed, as the process of undoing in-force legislation is both lengthy and uncommon. Fighting greenwashing is expected to be central to supervisors and could trigger additional scrutiny on products making sustainability claims.
In the U.K., the Sustainability Disclosures Requirements (SDR) also seek to address greenwashing concerns but, so far, there has been limited success in terms of market uptake of the label framework. Next year, disclosure requirements will kick-in for firms with more than GBP 50 billion of AUM.
Global divergence: Taxonomies, standards and cross-border challenges
Globally, climate-related disclosures developed by the International Sustainability Standards Board (ISSB) have seen strong uptake. Over 25 jurisdictions, accounting for over 40% of global market capitalization, are in the process of making them a legal requirement. The standards help establish a global baseline in sustainability reporting that connects financial accounting with sustainability matters. The ISSB's upcoming areas of focus include biodiversity and human capital. This year, interoperability guidelines between these standards and the EU's CSRD were released. While these guidelines are helpful, companies with global operations may find it increasingly challenging to navigate as standards diverge and become more prescriptive.
There is also a divergence in views on defining what is sustainable, e.g., there are over 50 classifications or taxonomies on sustainable activities globally. The EU was a first mover in 2020 defining what can be called "deep green" activities across six environmental objectives. Some of the newer ones also address transition for high-impact sectors (e.g. Singapore's "amber" category) and incorporate sustainable social practices in addition to environmental objectives.
Adapting to 2025
As sustainable-finance regulations evolve, 2025 will mark a pivotal year for transparency and compliance, with the EU's CSRD and global disclosure standards leading the charge. Financial institutions will need to prepare for increasingly complex frameworks, balancing sector-specific obligations with global interoperability. Significant challenges remain, however, including the risk of inconsistent global standards and diverging sustainable-fund labels across key markets. Adapting to these shifts while integrating robust sustainability strategies will be critical for mitigating compliance risks and seizing emerging opportunities in the sustainability landscape.
1 “Commission Staff Working Document Executive Summary of the Impact Assessment - Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting,” (SWD/2021/151 final) European Commission, April 21, 2021.2 See, for instance, “Questionnaire to the Commissioner-Designate Maria Luís Albuquerque – Financial Services,” European Parliament.
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