2025 ESG + Sustainability Predictions

In 2024, challenges to environmental, social, and governance (ESG) and sustainability initiatives in the United States proliferated internationally. This proved true, even as Europe promoted additional ESG and climate/social mandates. This volatility will trigger uncertainty and risk for both companies and investors in 2025.

The debate is plagued by confusion over nomenclature. “Impact” (as in “impact investing”) focuses on the goods and services produced by a company and their impact on stakeholders, with some impact investors (but not all) agreeing to a lower return in exchange for increased positive impact.

“ESG,” by contrast, refers to environmental, social, and governance factors not reflected on the balance sheet but nonetheless material to operations and stockholder value. Opponents of ESG often conflate ESG with impact, claiming that it is, by definition, concessionary. We do not believe that any efforts to promote data privacy or cybersecurity or evaluate risk (all part of ESG) would drive lower returns—in fact, just the opposite.

In some quarters, ESG initiatives will advance, particularly in Europe and in the United States at the state level, with California leading the charge. Elsewhere, however, state legislatures, state attorneys general (AGs), and federal agencies will oppose ESG, arguing that a climate or DEI agenda creates cartels, reduces tax revenue, and necessarily translates into lower returns. And although we have already seen indication of corporate retreat in the face of anti-ESG attacks, some corporations and investors are expected to maintain or even strengthen their ESG commitments, citing consumer demand for sustainability and social responsibility.

In the series of trends and outlooks to follow, we provide our predictions for 2025. Our global ESG + Sustainability Steering Committee, which includes more than 35 partners from across the firm, contributed to the writing of this alert.

Disclosure Standards, Guidance, and Regulations

• Federal Level: Companies will need to focus on executive orders and federal actions intended to reduce focus on ESG and climate, even as they respond to states expected to follow California and the EU in requiring increased ESG disclosure and compliance obligations.
• EU Compliance: Companies are behind in complying with the Corporate Sustainability Reporting Directive (CSRD), with complex subsidiary rules and upcoming deadlines in 2026. Expect increased efforts to meet these requirements, even as they will likely be weakened.
  
  In fact, further legislative action is expected, including an omnibus directive to streamline Taxonomy Regulation, CSRD/ESRS reporting, and CSDDD. Negotiations on the Green Claims Directive will continue, and new categorization systems for retail funds will be developed.

• Institutional Investors: Institutional investors are deprioritizing ESG, focusing instead on basic compliance. Companies may reduce their ESG efforts unless these efforts offer a competitive advantage and/or translate directly into the risk/return analysis.

Compliance

• We expect that many public companies will proceed with risk assessments and policy updates initiated in 2024. The focus will remain on addressing ESG-related risks despite changes in federal enforcement.
• Some state AGs and environmental groups will likely become more active in enforcing state‑level climate regulations. Other state AGs will continue to bring actions against companies that adopt ESG initiatives in apparent violation of state law.

Environmental & Climate

• Expect a shift from climate change mitigation and net zero plans to climate risk and adaptation. Companies will repackage their climate strategies to align with external stakeholder expectations.
• Many of California’s clean air regulations (adopted by several states) that depend on EPA Clean Air Act preemption waivers face uncertainty. President Trump’s EPA is expected to revoke waivers for regulations promoting electrification of cars and trucks, as it did during Trump’s first term, which will spur lawsuits that could hold up the rules for years.

DEI Litigation & State AGs

• As the new administration seeks to eliminate DEI programs and protections for certain classes of protected individuals, companies will need to navigate these changes carefully. Federal enforcement agencies under the new administration will be more prone to pursuing reverse-discrimination claims, including claims for allegedly unlawful DEI programs and failure to accommodate religious beliefs. Companies will also need to monitor changes and laws at the state level.
• Private litigation related to DEI is expected to increase, with both anti-DEI and pro-DEI activists filing lawsuits.
• State AGs’ focus on DEI issues is only expected to increase with the continued multi-state attention on the issue. Companies will need to assess risk based on their home states as well as the places in which they do business.

Securities Litigation

• The plaintiffs’ bar is gearing up to fill gaps caused by any reduction in federal securities enforcement, though the anticipated pullback in rulemaking may deprive plaintiffs of a favorite strategy—pointing to supposed noncompliance with federal law.
• Given continued attention on ESG, companies can expect an increase in securities class actions related to ESG issues both in support of and against related corporate policies and conduct.
• Companies continue to prepare for private plaintiffs to scrutinize information disclosed to the public related to ESG.

Congressional Investigations

• The House Judiciary Committee likely will continue investigating ESG initiatives, particularly focusing on Climate Action 100+ and the Glasgow Financial Alliance for Net Zero (GFANZ) members. Companies must be prepared for document preservation and potential public disclosures.
• The Senate, now controlled by Republicans, likely will also increase scrutiny of ESG initiatives, potentially leading to multi-front investigations.

Antitrust

• Republican state AGs and congressional Republicans likely will lead antitrust investigations into ESG initiatives. Federal agencies like the FTC and DOJ may also enter the mix, increasing scrutiny on alleged DEI- and ESG-related collusion.

Investment Management

• With a likely Republican majority in the SEC, expect a slowdown in new ESG regulations. Institutional investors will integrate ESG considerations into their overall investment processes, rather than focusing on standalone ESG funds.

Investment Funds

• Fundraising strategies for ESG-focused funds are expected to keep evolving. Asset managers are likely to prioritize broader risk management strategies in their marketing materials and side letters, while taking a more measured approach to highlighting ESG considerations and moving away from presenting ESG objectives as separate or standalone goals.

Responsible Tech

• Focus will shift from ethical and responsible tech to risk management for AI and technology more generally. Foreign and state-level regulations on AI and data protection will increase, creating a complex compliance landscape for companies.

Privacy + Data Security

• Consumer awareness and demand for privacy will continue to rise, with increased scrutiny from state AGs and regulatory bodies.

Mergers + Acquisitions & Private Equity

• This year will see continued backlash against specific ESG initiatives by buyers and sellers; however, significant EU legislation will impact companies, customers, suppliers, and private equity portfolio companies, creating new opportunities for an M&A market that is expected to be very active.
• Cybersecurity, privacy, climate risks, and compliance with expanding regulations will remain key areas of diligence and assessment—and will be blended into business/operational diligence questionnaires.

Emerging Company + Venture Capital

• Venture capital investors will reframe their focus on climate tech and infrastructure to align with an America-first perspective and will reframe technological advances as efficiency‑focused rather than environmentally focused. Impact investors will double down on their efforts, deploying capital and raising funds despite regulatory challenges, to fill perceived gaps created by the unwinding of regulatory and tax incentives.

Sustainable Finance

• Sustainable finance will continue to expand, supported by a more favorable interest rate environment and global interest in the structure.
• Expect an evolution of the ESG metrics and KPIs as set forth in loan agreements to (1) combat greenwashing and (2) manage the optics of any KPIs.

Impact

• Impact investing will continue to represent a large segment of the deployed capital, given the flow of federal funding that was allocated before the administration change and the lack of further government funding.
• However, investors will also sharpen their terminology (with increased focus on risk and returns as they relate to impact) and continue to prepare for regulatory and litigation challenges.
• Fundraising by managers will remain difficult in the sector, but investment activities will ramp up, particularly in climate-related sectors.

Our team remains well positioned to support clients as they strategize and develop holistic programs focused on key areas such as Climate, DEI Strategy + Defense, Responsible Technology, and Business + Human Rights. We help clients build comprehensive strategies that not only address immediate ESG and sustainability goals but also position them for long-term leadership and effective performance in these critical areas.