While 2024 was a year of implementation, 2025 is set to be “a defining year for sustainable finance”, according to commentators, with the success of incoming regulations and regulatory change depending on whether they drive meaningful action – or remain a box-ticking exercise.
In the UK, the Financial Conduct Authority’s Sustainability Disclosure Requirements (SDR) are still bedding in after a slow start regarding uptake for its sustainable fund labels. At the same time, in Europe, the European Commission’s system of sustainability regulations is set for an overhaul, with a planned ‘omnibus’ to amend and align the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive and the EU Taxonomy, while changes to the Sustainable Finance Disclosure Regulation (SFDR) are under consultation.
Given the expected upheaval, PA Future asked industry bodies and regulatory experts about what to expect for the year ahead.
CSRD comes into force
The EU’s CSRD regulations will come into force in the EU on 1 January 2025. The regulations will mean a broader set of large companies, as well as listed SMEs, will now be required to report on sustainability, which will have a major impact on EU and UK businesses.
However, while some have welcomed the initiative, others have criticised it as “a pointless middleman lining his pockets and profiteering from sustainability targets”, and “little more than a ‘tick box’ exercise”. That’s according to Florian Wupperfeld, CEO of UK-based urban innovation company, LCD Ventures.
“Conceptionally, citizens, employees, suppliers and workers should benefit. But since this scheme is so untransparent, it will only line the pockets of shareholders of big corporates including consultancy firms who will jump on an opportunity to sell glossy brochures with emotional pictures at hundreds of thousands of euros. It will certainly not benefit creative, sports or educational infrastructure for the local community. People talk about greenwashing – we are now about to enter a period of ‘social smoothing.’”
Explaining ‘social smoothing’, Wupperfeld said: “As a new scheme, lots of parameters are not sufficiently defined, and impact and rating are not aligned. Add to this a general lack of transparency prevailing in the social and environmental ratings markets and you get a lot of large companies viewing this as another ‘rubber stamp’ tax without a proper plan or philosophy behind it. This is very likely to create a lack of accountability, which is unlikely to deliver any real and lasting social sustainability.
“What is needed is a system encouraging companies to switch to a more sustainable economy. Instead of presenting an issue that they need to solve, the EU could present incentives in exchange for companies contributing capital to meet societal ESG needs.”
Likewise, Morningstar Sustainalytics predicted “an imbalance in information” for the double materiality assessments required under CSRD, with climate risk disclosures taking precedence over other environmental and social topics due to the phased rollout and the learning curve.
Moreover, probably only a minority of companies – the most advanced – will be able to explain the effects of their material risks and impacts on their business model, strategy and decision-making. Pragmatism will prevail as companies have expressed concerns over the cost of the reporting exercise and the potential trade-off between the time spent on reporting and the time invested in actual sustainability initiatives.
Given the complexity of such disclosures, a leaked letter from several German Ministries to EU Commissioners regarding CSRD shows a desire to reduce the number of CSRD reporting requirements, and even to postpone the CSRD application deadline by two years.
“A significant reduction in the content of CSRD reporting requirements is needed in order to avoid unnecessary burden for businesses,” the letter said, with such requirements reduced “at the top of the value chain and by stating clearly that companies should not send out information requests to SMEs in their value chain covering periods before 2027.
“In order to significantly reduce bureaucracy while enabling corporate responsibility, it should be envisaged to postpone the CSRD application deadline by two years for those companies subject to first reporting as of financial year 2025 or later and to increase the sustainability reporting thresholds concerning net turnover, balance sheet total and employees,” the letter concludes.
This provides a lot of additional uncertainty to businesses and is very disappointing, said Andreas Rasche – professor and associate dean at Copenhagen Business School – in sharing the documents. “It shows there is a real chance that the planned omnibus may turn out to be politically ‘captured’ to push through more substantive changes to Green Deal regulations.”
Over time, however, Sustainalytics expects that the first reports and the adoption of sector-specific standards, set for 2026, will improve the comparability of ESG information, ultimately benefiting investors and enhancing decision-making.
SFDR likely to see considerable upheaval
FE fundinfo regulatory manager, Helen Slater, predicted sustainable investment will remain high on the agenda in 2025 for asset managers with SDR bedding in and adjustments to SFDR coming.
“As SDR in the UK is now rolling out, the future of SFDR is likely to see considerable upheaval in 2025. Commissioner-designate Albuquerque has already made statements to the effect that SFDR is not fit for use by EU investors given how confusing the rules are and how they are being misused by the industry at large. Will the EU throw out SFDR altogether and start again?”
While the consultation on SFDR is still ongoing, the Platform on Sustainable Finance – an advisory body to the European Commission – has published a briefing note for the Commission outlining how a categorisation system for sustainable finance products could be set up and calibrated. The key considerations of the proposal include a strong interlinkage with investors` sustainability preferences, a seamless transition by streamlining existing elements of SFDR and the wider sustainable finance framework and the potential implications of introducing a new categorisation system on existing financial products.
The Platform recommends categorising products with the following sustainability strategies:
- Sustainable: Contributions through taxonomy‑aligned investments or sustainable investments with no significant harmful activities or assets based on a more concise definition consistent with the taxonomy
- Transition: Investments or portfolios supporting the transition to net zero and a sustainable economy, avoiding carbon lock‑ins, per the Commission’s recommendations on facilitating financing for the transition to a sustainable economy
- ESG collection: excluding significantly harmful investments / activities, investing in assets with better environmental and/or social criteria or applying various sustainability features
All other products should be identified as unclassified products, the Platform recommended.
Also read: What to expect in SFDR overhaul
Morningstar strategist, Kenneth Lamont, expects a raft of fund name and strategy changes resulting from the European Securities and Markets Authority’s (ESMA) decision to issue new guidance on naming for sustainable funds. However, while the guidance is intended to help bring clarity by defining when a fund can be labelled ESG, the move “is still likely to muddy the waters further”.
“Some existing funds will be unaffected while others will need tweaks to their investment strategies to allow them to retain an ESG tag. The real pain point is how to classify funds that clearly incorporate sustainable criteria but don’t meet ESMA’s sustainable thresholds.
“Unable to label this distinct and popular set of funds as ESG, expect asset manager’s marketing departments to work overtime to come up with some creative naming solutions for funds which fall between the two stools of ‘sustainable’ and ‘not sustainable’.”
UK perspective: Regulatory overload?
From a UK perspective, Slater added the industry may see regulatory overload as it finalises the repeal and replacement of EU laws and regulations for financial services.
“When it comes to compliance and reporting requirements concerning the same but different regulatory initiatives coming out of the UK and EU – for example, we’ve got SFDR versus SDR, two types of retail investment strategies – it will be interesting to see how the industry adapts to competing requirements. Will regulatory arbitrage stifle the popularity of the UK?”
Speaking of SDR, funds have been able to adopt a sustainability label under the regime since 31 July 2024, but the uptake was slow to begin with, with commentators expressing frustration over the challenges involved in the filing process.
Also read: Over 30 funds approved for SDR labels as December deadline passes
James Alexander, CEO of the UK Sustainable Investment and Finance Association, said he was pleased to see more funds announcing their successful attainment of SDR labels recently, and hopes this will continue throughout 2025.
“A few changes are anticipated including the extension of SDR to portfolio management, and a similar extension to overseas funds, with both consultations expected in 2025. We also anticipate an ongoing regulatory ‘ping pong effect’ between SFDR and SDR, with the former being reviewed by the European Commission by next summer and SDR bedding in further and hopefully helping influence the SFDR review. SDR in turn may look to draw on the next iteration of SFDR in time post-review.”
Wider ISSB adoption
Alexander also noted the Chancellor’s debut Mansion House speech, in which Rachel Reeves mentioned the government would consult on requiring large companies to disclose in line with ISSB through the UK Sustainability Reporting Standards (SRS).
“It is our firm hope that we see tangible progress on ISSB adoption in 2025 and we will be feeding insights from members into the consultation in due course,” he added.
Morningstar Sustainalytics also expects the UK to move beyond a TCFD-aligned framework to adopt ISSB standards, alongside several other jurisdictions. Australia “has effectively voted to mandate disclosures in 2025”, and many other significant jurisdictions are targeting 2026 as an effective date, including major APAC investment hubs, Hong Kong and Singapore.
In total, 30 jurisdictions, representing more than half of global GDP and GHG emissions, are making progress towards introducing ISSB standards in their legal or regulatory frameworks.
Transition planning evolution
Meanwhile, Patricia Pina, head of product research and innovation at Clarity AI, noted that 2025 must see a shift in focus toward extracting and processing data from transition plans to generate actionable, decision-relevant insights for investors.
“2024 was expected to be a pivotal year for transition plans, which are intended to guide the strategic reorientation of corporations and portfolios toward net-zero goals. However, these plans are still in their infancy. Most efforts so far have concentrated on defining what information should be disclosed, often resulting in an overwhelming and seemingly endless list of requirements. Yet, a critical question remains: how can we assess whether the information provided is credible and feasible?
“In 2025, the need for climate adaptation and resilience can no longer be ignored. The harsh reality is that the impacts of climate change are expected to intensify. Protecting investments, minimising losses and seizing opportunities in adaptation will be critical in the years ahead. Regardless of political discourse, the financial imperative to address climate risks and capitalise on the transition to a sustainable economy will drive meaningful action.”
