Written by Pavan Sukhdev

As the world grapples with the consequences of accelerating climate breakdown on the one hand and ascending far-right politics on the other, the year 2025 will test our resolve, vision and capacity to lead. We shall face critical inflection points in the worlds of ESG, sustainable investment and corporate sustainability, and the evolving regulations that govern them. 

Here are my thoughts for the journey ahead.

A year of reckoning

A decade since the Paris Agreement, 2025 certainly appears to be a year of reckoning. 

• The political landscape has changed: new leadership cards have been dealt. 
• Nature and climate imperatives loom larger: Mother Nature set the rules long ago and they still apply, with relentless consistency and at times great tragedy.
• Understanding of and preparedness for a ‘great transition’ is much improved: players now grasp the rules, risks, and opportunities much better than 2-5 years ago.
• A great transition always has winners and losers: transition losers have upped the ante and are vigorously fighting back, often using misinformation and false narratives, thus increasing transition risks, uncertainties and challenges.

Positioning a firm well in 2025, whether issuer or investor, needs charting a path through much turbulence and noise, ground realities always in sight, first principles always used, and the firm guided towards sustainable competitiveness. 

Transition losers (oil and gas, in particular) now hold political sway in the US, and they might soon do so in some EU nations. However, their multi-trillion-dollar-externality-based free lunch cannot bring them lasting success: it will fail both the vital tests of economic viability and societal patience. Meanwhile, governments aligned to transition losers will throw as many spanners in the works as they can. In the US, regulation is being promoted to explicitly exclude all ‘ESG’ considerations from the definition of fiduciary duty. In Europe, the French government appears to have surrendered to an expected ‘Trump’ ESG offensive even before it is launched, asking the EU Commission for delays & reductions in their forthcoming CSRD regulations. 

The EU Commission and Parliament have invested considerably in enhancing sustainability/ ESG regulation and have withstood many attempts to derail or delay CSRD implementation¹. As data providers and consultants get their act together, a key ground reality that is becoming very clear is that complaining about the “difficulty” or “complexity” of CSRD regulations is neither a credible standpoint nor a winning transition strategy. Furthermore, many serious investors are beginning to appreciate the risk transparency and data standardisation benefits of CSRD. A key ‘first principle’ is that corporate sustainability is about doing business which creates positive externalities, not negative, as the latter simply cannot be sustained² over any long horizon or large scale.

Corporate Externalities: a tale of two continents

There have always been only two schools of thought about corporate externalities. Milton Friedman’s iconic article (New York Times, Sept 1970) typecast the first school, the neo-classical, which considers externalities worthy of executive attention only if they might damage enterprise value. Their materiality lens is financial impact on investors, no more.

The second school, the liberal, considers negative corporate externalities as socially irresponsible, to be reported to the public because they could do material harm to a wider set of stakeholders beyond the company’s owners. Hence ‘double materiality’ (the idea of measuring, reporting and managing impacts on multiple capitals belonging to investors as well as other stakeholders) is their preferred materiality yardstick. It is thus no surprise that the US mainstream follows the first school of thought, whereas EC regulators favour the second. 

Impact materiality permeates EU regulations for ESG designated assets, determines compliance with CSRD and CSDDD, and will be a key determinant of the emerging lexicon for recognising and managing risks and opportunities as we transition towards sustainability. In economic terms, a company’s impacts include its negative and positive externalities, profits, other GDP value addition, as well as consumer surpluses. Therefore, a defining role will be played in the ‘great transition’ by how society understands ‘impacts’ and responds to corporate externalities.  

Leading investors are already uncovering and economically sizing investees’ externalities, and they see that discounting these over the time horizons and uncertainties of ‘internalization’ is the next great challenge for the investing world. 

Quo Vadis, ESG?

In the run-up to 2025, politics was further radicalised and transformed across Europe and the US, with reverberations felt globally. In the investing world, ESG ratings and rankings suffered collateral damage. High-profile controversies have dogged the life of ESG ratings for over a decade. There was the Musk fiasco (Exxon included in an ESG index whilst TESLA was excluded); the DWS fiasco (BaFin, the German regulator, and then SEC, the US regulator, investigated DWS, the Asset Management arm of Deutsche Bank for using misleading ESG ratings); the BAT fiasco (British American Tobacco won #3 position in an ESG Award by the London Stock Exchange), and others. All these dealt significant blows to the credibility of ESG ratings. 

More recently, the unchecked proliferation of ESG ratings and escalating risks of their use for ‘greenwash’ caught the attention of regulators. The EU Commission responded by announcing tighter regulations (for what can or cannot be branded as “ESG”) which require the double materiality principle to be used and scientific rationale to be evidenced. However, the final coup-de-grace to “ESG 1.0” was the Republican backlash, branding ESG ratings as Democratic “woke” discrimination. Many Republican states subsequently withdrew their Pension Fund investments in ESG funds.

The EU introduced regulation 2024/3005 of the European Parliament and of the Council on the transparency and integrity of Environmental, Social, and Governance (ESG) rating activities. This regulation, adopted in 2024, establishes a framework to enhance the transparency, integrity, and reliability of ESG ratings within the European Union.

Key provisions of this regulation include:

• Double Materiality Principle: ESG rating providers are encouraged to address both aspects of the double materiality principle. This means considering both the financial risks to the rated entity and the entity’s impact on the environment and society.
• Methodology Disclosure: Providers must disclose whether and how their methodologies are based on scientific evidence. This requirement ensures that ESG ratings are grounded in robust and transparent methodologies, enhancing their credibility and usefulness to investors and other stakeholders.

These new EU ESG regulations have arrived at the same time as much easier and cheaper availability of disclosed data (or AI-assisted imputed data) on any and all dimensions of corporate sustainability. Thus, a drift has begun towards a more data-focussed, impact-based assessment of the sustainability of assets, companies, portfolios, funds and indexes. I call this new world “ESG 2.0”, although it still lacks a formal name because the terms ‘ESG’ and ‘sustainability’ are anathema to the ascending far-right demagoguery of our times.

GIST Impact’s view on “ESG 1.0” has been expressed consistently for years: we saw a clear need for ‘recasting ESG’ by separating the environmental (“E”) and social (“S”) impacts of companies from the governance (“G”) drivers of these impacts (read our article here). Furthermore, we framed sustainability and ESG as an important corporate governance issue for boards, not merely an operational issue for executive oversight. 

Who’s afraid of CSRD?

The EU Commission’s Corporate Sustainability Reporting Directive (“CSRD”) requires large companies (starting 2025) to include external stakeholder impacts in their disclosures (“ESRS”, the European Sustainability Reporting System) following the principle of “double materiality”. In doing so, they endorse the precautionary principle, recognising and responding to corporate externalities.

‘Double materiality vs only financial materiality’ is not an ideological debate: it is central to resolve many pragmatic challenges that must be addressed as we transition from today’s dominant economic model, plagued by fossil fuel addiction and abuse of the natural commons, towards a regenerative economy. Firstly, investors are concerned about the effects of internalisation, especially on large or universal owners’ portfolios, because today’s externalities are tomorrow’s risks and the day after’s portfolio losses. Secondly, the oft-used terms “materiality” and “significance” make most sense for business executives only if they are framed in economic terms, such as by valuing externalities and their impacts to quantify impact materiality. Third, corporate externalities lead to transition risks and can therefore also damage enterprise value over time.

In a recent political about-turn, three German ministers wrote last month to the EU Commission to delay implementation of CSRD for a couple more years. Ostensibly, they wanted the EU to slim down sustainability reporting requirements that are “overly extensive” and seen as a burden for companies that can use their “resources for the benefit of sustainable growth and innovation in the EU”. They urged the EU Commission to “come forward with rapid and tangible regulatory measures” to simplify the European Sustainability Reporting Standards (ESRS). In the same vein, in January 2025, the French government asked for an ‘omnibus’ reduction in EU regulations, including pushing back CSRD by two years and focussing it on climate issues alone. Climate and biodiversity are both fundamental planetary boundary risk domains, and social and human health considerations are integral to sustainability, therefore an ask to focus on climate issues alone misses entire and important dimensions of sustainability.

As it happens, impact valuation provides an elegant route to the simplification sought by these countries, because it includes the ‘impact materiality’ yardstick of economic value in its framework and methodology, and because its feasibility has been demonstrated by numerous corporate pilot projects. It remains to be seen whether the EU Commission provides some such ‘track-2’ approach for companies which have already invested in impact materiality toolkits and can be exempted from the larger data reporting demands of ESRS? This will naturally need a common standard (such as IFVI/ VBA are evolving³) against which future auditors can provide assurance.

In conclusion…

We are entering an era of high turbulence. The storm-winds of change are churning up debris from the past, fragments from the present and flashes of the future, whipping them all into a perfect storm. This maelstrom is a danger zone, but from it can emerge “ESG 2.0”, more efficient and effective data-backed pathways for corporate regulatory compliance, and new investor opportunities. Some innovators are already pushing the boundaries of Modern Portfolio Theory, tackling how to reflect investor preferences beyond classical risk and return. And many data providers have devised and are already marketing practical, simplified toolkits for cheap, efficient reporting of CSRD requirements. Ignoring all of this in a shortsighted knee-jerk reaction to ‘Trumpism’ is, to say the least, a travesty of common sense.Navigating 2025 will be like navigating a stormy sea: you watch the biggest waves to avoid dangerous broadsides, and you watch the compass of sustainable competitiveness to keep direction. I wish you the very best for your journey ahead.

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¹A notable example is an article by ISSB chair Emmanuel Faber in Le Monde, 10^th Oct 2023, timed for the eve of scrutiny by the European Commission’s co-legislators prior to definitive adoption of standards proposed by CSRD, sharply dismissive of ‘double materiality’ & its social purpose. See EDHEC response https://climateimpact.edhec.edu/triple-illusion-double-materiality

²‘The New Nature of Business’, Wiley 2024, by André Hoffmann & Peter Vanham.

³Value Balancing Alliance (“VBA”) https://www.value-balancing.com/ and the International Foundation for Valuing Impacts (“IFVI”) https://ifvi.org/ are collaborating to produce a single global standard framework and methodology for impact valuation and impact accounting. A consensual framework and several methodology papers have already been published, see websites.