It’s no secret that the ESG landscape is undergoing something of a shift. As Carine Smith Ihenacho, Chief Governance and Compliance Officer at Norges Bank, stated at a recent press conference: “We are in the middle of an ESG backlash: it impacts the market, it impacts companies, it impacts investors.”

The evidence of this backlash is hard to ignore, particularly in the US. President Trump’s second term has already featured a series of anti-ESG measures, including the announced withdrawal of the US from the Paris Agreement, as well as a series of executive orders scrapping DEI measures. The impact of this shift has already proved significant. In recent weeks, companies including Google, Accenture, Meta and Amazon have reportedly scaled back or scrapped their diversity programmes and recruitment targets. Meanwhile, a number or large US banks have recently withdrawn from the Net-Zero Banking Alliance (NZBA), a group of banks committed to aligning their lending, investment and capital markets activities with net-zero greenhouse gas emissions by 2050.

According to an article by Bloomberg Law, the Trump administration’s recent actions are also contributing to a rise in ‘greenhushing’, whereby businesses play down their sustainability efforts due to concerns about political attention, shifting regulatory goalposts and accusations of greenwashing.

Polarised environment

The ESG climate in the US may be changing rapidly, but the picture in Europe is somewhat different. While there are numerous ESG-related legislative initiatives in the pipeline, Mario Draghi’s September 2024 report on the future of European competitiveness highlighted the impact of Europe’s regulatory burden on the competitiveness of companies in the EU.

“If Europe’s ambitious climate targets are matched by a coherent plan to achieve them, decarbonisation will be an opportunity for Europe,” the report states. “But if we fail to coordinate our policies, there is a risk that decarbonisation could run contrary to competitiveness and growth.”

Given the recent developments in the US, companies that operate in both the US and Europe may face particular challenges as they seek to balance evolving guidance in the US with regulatory requirements in the EU. As global law firm Freshfields outlines in a recent blog, in one possible scenario, “a US company could be required to certify that its EU affiliates do not operate DEI programmes that would be unlawful in the US,” leading to challenges regarding global compliance/sustainability programmes.

“Amidst a more polarised business environment, there is a growing reluctance to make strong statements on ESG topics by companies,” observes Dr Arthur Krebbers, Managing Director, Head of Corporate Climate and ESG Capital Markets at NatWest Markets. “However, there is still a lot of work happening behind the scenes to integrate sustainability into corporate strategies.”

Hannah Simons, Head of Sustainability, Markets, Lloyds Bank Corporate and Institutional, notes that treasurers have an important role to play in embedding sustainability into financial decision-making, “with multiple levers at their disposal.” She adds that sustainable finance options, such as green bonds, sustainability-linked loans (SLLs), and sustainability-linked supply chain finance, can help align financial structures with corporate sustainability ambitions.

Amidst a more polarised business environment, there is a growing reluctance to make strong statements on ESG topics by companies.

Dr Arthur Krebbers, Managing Director, Head of Corporate Climate, ESG Capital Markets, NatWest Markets

Sustainable finance: a maturing market

Where sustainable finance is concerned, Kathrine Meloni, Special Adviser and Head of Treasury Insight at law firm Slaughter and May, argues that the idea of a backlash “is a bit overstated.” She adds, “If you look at sustainable finance – by which I mean the labelled products overall – across the EMEA region, we’re not seeing a contraction of issuance overall. What we’re seeing is a market that’s maturing because it’s becoming better understood.”

According to Meloni, the market for sustainable finance products is not shrinking, but is experiencing something of a rebalancing of the product mix, “with more focus on use-of-proceeds products, and a move away from sustainability-linked products.”

She explains that many early movers in the sustainability-linked loan market were larger listed companies, which have subsequently developed sophisticated sustainability strategies and credentials. “So the role of the sustainability-linked instrument is just not needed anymore as a tool for amplifying your sustainability credentials for your financial investors.”

That’s not to say that these types of instruments no longer have a role to play. According to Meloni, work is underway to explore the creation of sustainability-linked loan products that might work for SMEs that might otherwise lack the capacity to align with sustainability-linked loan principles.

Meanwhile, Europe’s sustainability landscape continues to evolve at pace, with Meloni highlighting the “huge amount of development and innovation” currently underway. “At a high level, there are 35 major initiatives coming to land in the UK and EU in the next 12 months across sustainability, regulation and policy generally,” she notes.

Focusing on long-term success

In the current market, Simons argues that understanding the importance and complexity of sustainability remains key to long-term business resilience and success. “Companies that embed ESG principles, that are part of a well-articulated long-term business strategy, into their operations and financing strategies are better positioned to manage risk, attract long-term investment, and drive competitive advantage,” she says.

Simons adds that customers, employees and investors often look for companies that demonstrate progress on their sustainability credentials, while shareholders can seek greater transparency and action on climate transition plans.

As such, “Businesses that proactively integrate sustainability considerations into their strategy can help mitigate risks while better positioning themselves for future developments.”

So what should companies be doing now? In the coming months, says Krebbers, “It will become more important for companies to explain what they mean when discussing sustainability objectives and drivers: how are they measured, reviewed and additive to the risk and/or commercial goals of the company? The latter linkage will help convert sustainability topics into the ‘normal’ language of treasurers.”

And companies still have much to gain by pursuing ESG goals. Krebbers notes that integrating relevant sustainability factors into a business strategy “ensures you take into account all elements relevant to the success of your company as well as specific projects and products it is investing in.

It also ensures you maintain access to finance, as many of your investors and lenders are making these assessments.” As such, Krebbers says treasurers should be focusing on how to integrate their companies’ sustainability goals into relevant aspects of their treasury strategy, such as funding, risk management, liquidity or counterparty selection.

“All of these have potential sustainability consequences, meaning treasury teams can be catalysts of a company’s sustainability strategy,” he adds.