ESG Market Alert – January 2025

OUTLOOK FOR 2025

A Second Trump Presidency: Possible ESG Developments under the new President

Donald Trump began his second term in office on 20 January 2025 and his presidency is set to bring about significant shifts in ESG policies in the United States. Trump has been vocal about his plans to deregulate the fossil fuel industry, repealing Biden-era plant regulations. He has also promised to carry out a series of "Day One" actions, halting offshore wind projects and rolling back environmental policies more broadly.

Nevertheless, we may see that certain sustainable alternatives are at less risk than others. For example, wind power is an area expected to lose any tax credits currently available under the Inflation Reduction Act (IRA). However, to reduce U.S. dependence on China, Trump has also suggested he may broaden initiatives relating to mining critical minerals deemed to be essential for clean technologies, such as lithium batteries. Further, Trump has been outspoken regarding his opposition to the IRA but it remains unclear whether we will see a complete roll-back of the IRA. It has even been suggested that the qualifying standards for certain IRA credits which have bipartisan support, such as the Clean Hydrogen Production Credit, will be lowered rather than removed. This would allow a wider range of manufacturers to qualify for such tax benefits.

At the state level, ESG regulation may intensify within certain U.S. states in 2025. California imposed mandatory greenhouse reporting in 2024 through the Climate Corporate Data Accountability Act and Climate Related Financial Risk Act, and it is predicted that other states may follow suit. 

Beyond the U.S., despite any U.S. deregulation, the more stringent reporting requirements imposed by the Corporate Sustainability Reporting Directive (CSRD), referred to below, will still apply to the European subsidiaries of a large number of U.S. businesses. This will therefore impact reporting practices within any companies with a significant presence in both the U.S. and Europe. 

For more information on our predictions of what ESG may look like under President Trump in 2025, read our analysis in our November/December 2024 alert. 

New developments are emerging fast, including swift action by the Trump administration to roll back allegedly illegal diversity, equity, and inclusion (DEI) policies (read our article here). To stay up-to-date with the latest developments, subscribe to our Trump Administration Executive Order (EO) Tracker.

The role of AI in ESG in 2025

We expect AI to remain a powerful tool to aide ESG regulatory compliance in 2025, helping firms to identify and mitigate risks. 

According to a recent report published by the Bank of England, 75% of firms are already using AI and 10% plan to do so over the next three years.¹ Large technology firms have unveiled AI innovations in 2024 designed to assist ESG compliance. For example, IBM has developed an environmental intelligence suite which combines weather and climate change data to improve insights on sustainable finance. As discussed in our analysis in September 2024, there are a number of ongoing areas where AI is being used to address sustainability challenges, such as the use of AI to optimise the energy grid and reduce energy waste. We expect such programmes to continue in 2025 across a broad range of sectors.

In 2025, firms will also need to embrace AI whilst addressing the sustainability challenges posed by AI itself, such as through the use of environmental assessments and tools to reduce inaccuracies. AI is energy intensive as it relies on large data centres, which consume considerable electricity. Furthermore, it has been shown that flawed AI systems could lead to incorrect conclusions and put firms at risk of greenwashing. 

Read our further discussion of these challenges and what firms will need to consider when addressing them in our article from December 2024.

Enhanced ESG Regulations in 2025

As in 2024, regulation will remain the principal area of ESG to which businesses will need to adapt.

As discussed above, this may take the form of state-level regulation in the U.S.. In the European Union, disclosure requirements are set to increase, including the expansion of the reporting scope of the CSRD to both large EU companies and SMEs. In the advertising and green claims space, the Green Claims Draft Directive (as further described below) is also expected to be agreed in 2025. This will form part of the EU’s clamp down on false and misleading claims in advertisements. 

Regulation is expected to increase in the United Kingdom too. For example, the FCA intends to extend the anti-greenwashing rule, so as to apply to all communications by authorised firms to their clients. By the first quarter of 2025, it is anticipated that the UK will adopt the International Sustainability Standards Board's IFRS S1 and S2 standards. These standards will require companies to disclose sustainability-related risks and opportunities. 

Our ESG Regulatory Alerts tool will help you keep abreast of regulatory developments and horizon scan for risks. Sign up for notifications to receive the latest ESG regulations impacting your business.

RETROSPECTIVE ON 2024

ESG regulations

New regulations on greenwashing, sustainability reporting and supply chain diligence were introduced, enforced, and debated worldwide in 2024. 

The UK's Advertising Standards Authority cracked down on misleading environmental claims, banning the misleading use of “green” claims in advertisements by certain airlines. The UK government also launched a Green Taxonomy consultation in November 2024, one goal of which is to further mitigate greenwashing. Similarly, the EU introduced the Greenwashing Directive in March 2024 to improve product labelling and proposed the Green Claims Directive, requiring companies to back certain environmental claims with credible evidence and third-party verification. In the U.S., the Federal Trade Commission updated its "Green Guides", strengthening the agency's ability to address deceptive marketing. 

The European Commission also focused on developing and enforcing the CSRD in 2024. Additional guidance on the CSRD's scope was published, and infringement procedures were initiated against 17 Member States for missing implementation deadlines. There were also enforcement actions under the Renewable Energy Directive, which aims for renewable energy to comprise 42.5% of the EU's energy consumption by 2030. 

Finally, the EU's Corporate Sustainability Due Diligence Directive (CSDDD) came into force on 25 July 2024, requiring companies to address human rights and environmental issues within their supply chains. With implementation set to begin in 2027, affected companies will face penalties of up to 5% of net worldwide turnover for non-compliance.

Shareholder activism

2024 saw a rise in shareholder proposals focused on ESG topics, with an increase in proposals related to environmental matters, AI, and health & safety. 

Activist shareholders at Exxon filed a climate-related resolution demanding the company take action to reduce greenhouse gas emissions (please see our September 2024 alert). Although the resolution was ultimately withdrawn, the trend of using shareholder resolutions to apply pressure on companies gained momentum. In contrast, litigious activism saw a decline, likely due to the court defeat of environmental advocacy organization ClientEarth, which had filed a claim against the individual directors of Shell PLC for allegedly failing to protect the company against climate change-related risks.

Companies also faced increasing scrutiny from shareholders on director remuneration.

COP 29

COP 29, held from 11 November to 22 November 2024, was a major event in the global ESG calendar last year, with the aim of establishing a new collective quantified goal (NCQG) for climate finance taking centre stage. After intense negotiations, an NCQG of "at least" US$300 billion in climate finance by 2035 was unanimously agreed upon to support developing countries in addressing the consequences of climate change. However, the goal has attracted criticism based on the fact that only 12 countries are fully obliged to support it, and the Independent High-Level Expert Group on Climate Finance suggested that an NCQG exceeding US$1 trillion is necessary to tackle climate change sufficiently.

Despite this, the conference still gave cause for optimism. After multiple failures at previous COPs, new standards for a centralised carbon market were this time agreed. The Baku Adaptation Roadmap, which aims to foster the implementation of a framework for global climate resilience, was also launched.

However, the global political context, not least Donald Trump's intention to withdraw from the Paris Climate Agreement, added an element of uncertainty to the conference. Looking ahead to 2025, questions remain about some of the leading voices of influence, particularly the role of high-emitters such as China. 

UK election and Labour's October 2024 budget

2024 was a transformative year for ESG developments in the UK, with the Labour government's October 2024 budget aiming to play a central role in shaping the future of energy and sustainability.

The Energy Profits Levy, which places a 'windfall tax' on North Sea oil and gas profits to fund green energy projects, was raised from 35% to 38% and extended to March 2030. The 29% investment allowance for these companies, initially aimed at incentivising investment into domestic energy production during energy price rises, was also removed. While these changes were welcomed for the fiscal pressure they place on oil and gas companies, they also drew criticism for their potential negative impact on consumers at a time of rising energy prices.

Further, as promised, the government launched Great British Energy (GBE), a public entity designed to drive renewable energy. GBE aims to accelerate renewable energy production and create green jobs in the UK, while reducing reliance on imported oil and gas. Despite an £8.3 billion pledge, GBE has faced scepticism due to its initial funding being limited to £100 million over two years, with just £25 million allocated for its establishment.

ESG Counsel

The Hogan Lovells ESG team is here to help, including on all the issues raised in this snapshot. Hogan Lovells is one of the leading ESG firms in the world, delivering uniquely tailored cross-practice and geographic holistic advice as ESG Counsel to clients globally. Our solutions-driven approach to managing ESG issues draws on the full scope of our global practice and sector capabilities (including our leading global corporate, environmental, governmental relations and regulatory, employment, and dispute resolution teams) to drive sustainable value and maximize positive impact for clients. Please contact us to discuss next steps or for our latest ESG-related materials, including our ESG Academy.

Upcoming events

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Authored by John Connell, Nicola Evans, John Livesey, Alastair Young, Ben Littlewood, Scott Prior, Imogen Thwaites, Srishti Chhajer, Hannah Dingemans, Kieran Farrelly, Emily Louise, Beatrix Mosey, Aphrah Raja, and Makar Rozhkov.