ESG in 2025: Navigating challenges and embracing opportunities

Despite the lack of financial incentive from the government, 2025 is set to be a pivotal year for ESG. Here, we consider some of what’s to come and the opportunities there are for business.

With experts having just announced that 2024 shattered records as the hottest year ever, crossing the critical 1.5°C global warming threshold for the first time, now seems a particularly relevant time to be discussing what we anticipate happening across the landscape of Environmental, Social, and Governance (ESG) in 2025.

2024 was marked by some significant global developments, but in the UK, we have been receiving mixed signals. At COP29 in Baku, Prime Minister Keir Starmer emphasised his ambition that the UK be a global leader in climate action. That we lead the world in the clean energy transition and confirming our commitment to reducing greenhouse gas emissions by at least 81% by 2035. Yet, many business leaders feel these bold statements were not supported with incentives for business to make the changes needed in the Autumn Budget. In fact, in some cases the announcements seemed to result in a negative impact on the environment.

Take fuel duty, instead of using this as an opportunity to raise the funding the government said it needed and reduce the tax increases imposed elsewhere, it was frozen. According to one study conducted by CarbonBrief in 2023, the fuel duty freeze since 2010 has resulted in UK carbon emissions being as much as 7% higher than they would have been had the rate continued to increase in real terms from 2010. According to the Office for Budget Responsibility (OBR), the cumulative total of these freezes is now some £100bn. This sends a mixed message and is one example of how it does not incentivise carbon reduction.

Legislative changes

2024 was a landmark year for ESG legislation, with several announcements reshaping the regulatory landscape. Historically there have been too many differing standards with different ideas of what ‘good’ looks like for ESG regulation, however there was certainly more direction last year.

The International Auditing and Assurance Standards Board (IAASB) introduced the International Standard on Sustainability Assurance (ISSA 5000), setting a global benchmark for sustainability assurance engagements. Concurrently, the IFRS Foundation’s Sustainability Disclosure Standards (IFRS S1 and S2) came into effect, establishing a new global baseline for sustainability-related financial disclosures. The European Union’s Corporate Sustainability Reporting Directive (CSRD) also took centre stage, mandating comprehensive ESG disclosures for nearly 50,000 companies. The development of these regulations signifies that there is a clear aim to enhance transparency, comparability, and accountability in ESG reporting, driving businesses towards more sustainable practices.

In 2025, the impact of these regulations is expected to be profound for UK business. The previous Government began the development of UK Sustainability Reporting Standards (UK SRS), and it is anticipated that the current Government will consult on exposure drafts of UK SRS in the first quarter. While this will be targeted at larger companies, any new legislation is likely to mean that larger companies will need to begin to gather ESG data from their supply chain, leading to a direct impact on the SME market. This move is likely to foster greater investor confidence and drive the adoption of best practices in sustainability reporting, positioning the UK as a leader in corporate sustainability. As these regulations take hold, businesses that proactively adapt will be better positioned to thrive in an increasingly ESG-focused world.

Companies will need to invest in robust data collection and reporting systems to comply with the new standards, potentially leading to increased operational costs but also offering opportunities for innovation and competitive advantage.

Stakeholder expectations

The demand for strong ESG practices is intensifying across various stakeholder groups, including investors, individual and corporate customers, and employees. Investors are increasingly prioritising ESG criteria in their decision-making processes, recognising that sustainable practices can mitigate risks and enhance long-term returns. Individual customers are more conscious of the environmental and social impacts of their purchases, driving companies to adopt more ethical and sustainable practices. Corporate customers too are seeking partners with strong ESG credentials to align with their own sustainability goals or legislation requirements. Employees are advocating for workplaces that reflect their values, pushing for greater transparency, diversity, and environmental responsibility. This collective pressure is pushing business to integrate ESG considerations into their core strategies, ensuring they remain competitive and resilient in a rapidly evolving market.

The urgency of these demands is elevated by the increasing frequency and severity of natural disasters linked to the climate crisis, as well as social failures by businesses. The past decade has seen a sharp rise in climate-related events, just look at the recent fires in Los Angeles, the terrible floods that swept across Valencia and, closer to home, the unseasonable weather pattern changes in the UK. All of which have led to a significant economic impact. These disasters highlight the critical need for businesses to address their environmental impact and build resilience against climate risks.

Additionally, social failures have led to serious scandals being publicised and impacting a business’s reputation. Take poor manufacturing practices in foreign countries for large fashion retailers that supply the UK market. Consumer demand has led to these retailers having to stop prioritising profit while turning a blind eye to ‘sweatshops’ and allegations of abuse and instead work with their suppliers to improve practices or stop working with them altogether.

Such events underscore the importance of robust ESG practices in safeguarding not only the environment but also the well-being of communities and workers. As stakeholders continue to demand greater accountability and action, businesses must rise to the challenge, embracing ESG as a fundamental component of their operations and strategy in 2025.

Taking advantage of opportunities

Embracing ESG is no longer just a trend. It is a strategic imperative for forward thinking businesses. Companies that integrate ESG into their core operations can significantly enhance their reputation, attracting both consumers and investors who prioritise sustainability and ethical practices. This commitment not only opens new avenues for capital, as ESG focussed companies are increasingly favoured by investors and lenders, but also ensures regulatory compliance, helping businesses stay ahead of potential regulatory changes. There are substantial cost savings to be had too. Companies that improve energy efficiency, waste reduction, and better resource management can ultimately boost operational efficiency and profitability.

Beyond the immediate financial benefits, a strong ESG focus can also drive long-term growth and innovation. By addressing environmental and social challenges, companies can tap into new markets and revenue streams, creating a culture of innovation. Additionally, a robust ESG strategy can enhance risk management, making businesses more resilient to ESG related risks. This approach not only mitigates potential threats but also positions a business as leaders in their industries. In essence, embracing ESG is not just about doing good, it’s about doing well by doing good.

As we navigate the evolving ESG landscape in 2025, businesses must recognise that the integration of robust ESG practices is not merely a compliance exercise but a strategic imperative. The convergence of stringent regulations, heightened stakeholder expectations, and the pressing need to address climate and social challenges presents both significant risks and significant opportunities. Companies that proactively embrace these changes, invest in sustainable innovations, and align their operations with ESG principles will not only mitigate risks but also unlock new avenues for growth, resilience, and competitive advantage. The journey towards a sustainable future is complex, but those who lead with purpose and commitment will set the benchmark for success in the years to come.

If you have any questions around ESG, please don’t hesitate to get in touch with me.