As 2025 approaches, ESG (Environmental, Social, and Governance) is at an impasse. The recent trend towards global ESG reporting standardization has likely peaked to be replaced by jurisdictional heterogeneity amid an increasingly polarized geopolitical landscape. While Europe and other regions continue towards a highly aspirational net zero economy, reinforced through mandatory disclosure requirements and a regulatory agenda targeting operational and supply chain sustainability, the U.S. is redoubling on shareholder primacy, an about-face that gained momentum in 2023 and 2024 following politicized pushback on ESG investing from conservative lawmakers.
This is reshaping how businesses engage or disengage with ESG principles. With 2025 shaping up to be a year of extremes for ESG, there are five fronts for businesses to monitor:
1. Trump Administration and the U.S.
A Trump-appointed Securities and Exchange Commission (SEC) Chair will likely scrap the climate disclosure rule the Commission voted to adopt earlier this year (currently in stay). Additionally, changes to the Inflation Reduction Act (IRA) could see clean energy funding cut or redirected, impacting ESG investments in renewables, electric vehicles, and carbon capture.
At the state level, particularly in fossil fuel-dominated places such as Texas, legislatures are already furthering their stance against ESG initiatives and we can expect this to continue, potentially penalizing financial institutions emphasizing sustainable investment. Additionally, California and other pro-ESG states may face federal resistance, which could limit their climate initiatives and incentives that previously relied on IRA funding or other federal support mechanisms.
For financial services firms operating in multiple states, this could mean navigating a fragmented regulatory landscape. ESG-aligned firms may consider tailoring approaches to meet varying state policies, emphasizing compliance strategies for ESG-hostile states while aligning with stronger state-led climate actions, such as the California climate disclosure laws.
2. “ESG” and the battle over the next umbrella term
The politicization of the term “ESG” that started two years ago dragged the overall practice of sustainable business – and, perhaps more so, ESG-labeled investment vehicles – into the U.S. culture wars, garnering negative attention from conservative lawmakers. In reality, ESG has had vocal opponents from both the left, who have criticized it as corporate greenwashing, and the right, who argue ESG does not support fiduciary duty. When we consider the application of ESG good practices in the context of a specific firm – essentially, how well aligned their strategy and stakeholder communications connect to the business case – both sides present reasonable critiques.
The truth is closer to the increasingly radical middle. While European firms are largely staying with “sustainability” and U.S. firms adopt other terms like “impact” and “responsibility,” the work itself will continue. It is estimated that 50,000 European firms will need to comply with the CSRD and an additional 10,000 firms outside of Europe will also fall under the regime. If the “ESG” labels gets replaced over the next few years, something else will become the term du jour. This will do very little to quell the global polarization over the topic.
3. Follow the money and not the terminology
Despite institutional investors moving away from the use of the term “ESG,” there is continued appetite for investing in both the governance of environmental and social risks, or in thematic sustainability, such as energy transition adjacencies like direct air capture (DAC), grid hardening, and battery storage. In 2023, global energy investments reached approximately $2.8 trillion, with about $1.7 trillion of that (61%) going to clean energy. Nearly 90% of this increase in clean energy investment is coming from China, opening a potential geopolitical divide in more sustainable energy resilience.
As of the third quarter of 2024 nearly 75% of global sustainable funds were European. With European investors still dominating this market, shifting U.S. dynamics may do little to blunt global demand, even if U.S. sustainable fund growth slows as expected. A November 2024 Edelman Smithfield global investor pulse survey found that 54% of global investors believe the term “ESG” will no longer be used, yet a majority of the same global investors (58%) believe ESG factors will support the ability to generate Alpha over the next five years.
4. The culture wars rage on especially around DEI
In the wake of the U.S. Supreme Court decision to DEI initiatives have borne the brunt of the current backlash in the U.S. This often stems from a belief that DEI initiatives are overly focused on identity-based issues, which opponents feel detracts from other aspects of the core business. In late 2024 alone, public, social media-based campaigns against prominent public American firms have preceded some of these firms announcing changes to their DEI strategies.
While an internal reevaluation of DEI-related practices is reasonable – and even prudent to ensure continued alignment with overall business strategy – brands should take care to avoid a knee-jerk abandonment of policies in response to political pressure. One of the largest criticisms of companies that have changed their DEI-related initiatives following activist targeting has been the speed with which they have done so. The total dismantling of a DEI program in a matter of weeks that (very likely) took months – if not years – to stand up in the first place can signal that DEI was never truly a priority. Brands instead should demonstrate that they are taking a measured and thoughtful approach to addressing concerns by soliciting feedback from stakeholders, assessing the business rationale of their existing programs and weighing the costs – both financially and reputationally – of making any changes. “DEI” the term is likely to be dismantled perhaps even more quickly than ESG, with “inclusion and “belonging” waiting in the wings. A federal appeals court’s recent decision to block Nasdaq’s board diversity rules approved by the SEC in 2021 further complicates the landscape.
5. How should business respond to the bipolarity?
The early backlash against ESG was primarily focused on the investing side, where U.S. state-level attorneys general and other lawmakers have sought to regulate the use of ESG information in capital allocation. However, the success rate of passing state-level anti-ESG legislation is less than 20% since 2022. Financial services firms, especially asset management and insurance, will need to clearly communicate on how ESG adds value to financial returns.
On the corporate side, ESG-related good practices, such as DEI disclosures and programs, commitments to decarbonization, and overall ESG reporting, are likely to continue to present risks as the federal government under a conservative majority will be more aligned to the state-level backlash. Firms must stay disciplined on ESG by communicating on ESG topics that are material to their business model, using language of risk management and value creation, as opposed to language that focuses solely on societal needs.
This will be especially important for U.S.-based multinationals as the global perspective on ESG continues to diverge with the U.S. A considerable number of the S&P 500 will need to comply with the European Union’s Corporate Sustainability Reporting Directive (CSRD) by 2027 and the California climate disclosure laws will similarly affect a number of large public and private U.S. firms. This regulatory heterogeneity will place great pressure on businesses to balance the needs of different jurisdictions while also focusing on the most material tier 1 ESG topics that drive value to support the business case.
Finally, both the supply and demand for broader investment in climate solutions continues to accelerate. A recent Harvard Business School study found that 45% of nearly 900 publicly traded U.S. companies are investing in technologies to address climate change across multiple industries. The capital and rhetoric will continue to diverge, but stakeholders will continue to demand how even the most profitable firms are managing their externalities and how these affect future shareholder value.
--Lane Jost, Head of ESG Advisory, Edelman Smithfield (Lane.Jost@edelmansmithfield.com)