In December 2024, EY noted that 2025 was “poised to be a pivotal moment for funds, banks, financial institutions and insurance companies as regulatory shifts reshape sustainable finance practices worldwide.”

While the year may be young, it has already brought some significant developments where ESG is concerned – not least in the US, where a flurry of executive orders following President Trump’s inauguration has heralded a significant shift to the ESG landscape.

But in Europe, where the picture is somewhat different, a large volume of ESG-related regulation is due to come down the pipeline in the coming months.

Continuous evolution

Kathrine Meloni, Special Adviser and Head of Treasury Insight at law firm Slaughter and May observes that the sustainability arena “doesn’t stand still for a minute”, citing the numerous developments currently shaping the market.

One recent milestone was the Transition Finance Market Review (TFMR), an independent review commissioned by the UK Treasury and the Department for Energy Security and Net Zero (DESNZ). The TFMR’s report, which was published in October 2024, provided recommendations on how to scale the market for transition finance.

“This was such a wide-ranging piece of work, but it made it clear that robust and credible transition plans need to be available to the financial sector, so they can make sure they are directing their capital towards strategies that are actually going to work,” says Meloni. “And we need some blended finance solutions, because the private sector can’t finance energy transition and climate transition on its own.”

Major initiatives

Meloni also highlights the “huge amount of development and innovation” currently underway, noting that the coming 12 months are expected to bring 35 major initiatives in the UK and EU across sustainability, regulation and policy more generally.

These include the upcoming EU Omnibus proposal, which is intended to reduce the administrative burden faced by companies by simplifying sustainability reporting, due diligence and taxonomy. Other notable developments affecting sustainable finance specifically include the EU green bond standard, which Meloni describes as well intentioned in terms of improving integrity, although challenging in terms of usability at this stage.

At the industry level, market-led standards continue to develop – for example, the results of a review of the green, social and sustainability-linked loan principles are anticipated shortly.

“This year is also an important year for the implementation of the ISSB standards,” Meloni adds. “As those initiatives move forward, both financial and non-financial corporates will be able to refine their approach to reporting and disclosure, and become more efficient.”

Also significant is the work currently being done to develop the range of KPIs usable for sustainability-linked instruments. Meloni explains that until now, the sustainable finance market has largely focused on environmental factors, in part because investors can look at clear benchmarks in areas such as carbon emissions. “That can be more challenging when you’re putting forward social targets, so there’s a lot of thought on how benchmarks for social KPIs can be improved,” she says.

Twists and turns

Of course, the current landscape could also bring some unexpected twists and turns, not least due to the evolving climate in the US. France, for example, recently urged the EU to implement a “massive regulatory pause” on sustainability legislation such as the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D), in light of the evolving competitive landscape.

Nevertheless, as law firm Taylor Wessing’s Paul Thorpe predicts in a recent blog, “it’s unlikely that the shadow cast by ESG-scepticism from across the Atlantic will translate into a bonfire of ESG policies.”