The year is drawing to a close - a perfect time to reflect on recent developments in the ESG landscape. The year 2024 was particularly transformative for Environmental, Social, and Governance (ESG) criteria, as sustainability and social responsibility gained greater prominence while companies and investors faced new challenges and opportunities. This article provides an overview of the key trends and events that shaped ESG in 2024, along with a look ahead to 2025.
Criticism of Sustainability Regulations and Reporting Obligations
Since 2023, the ESG movement has faced increasing scrutiny, particularly in Europe and the U.S. Mandatory sustainability regulations, such as the Corporate Sustainability Reporting Directive (CSRD), have been met with both praise and criticism. Since 2024, the CSRD requires publicly traded companies, public-interest entities, and financial institutions to disclose detailed information on environmental, social, and governance issues. The directive is introduced in stages, with the scope expanding in 2025 to include companies meeting two of three size criteria, regardless of their public listing status. In Germany, where family-owned businesses dominate, many question the cost-benefit ratio of these new disclosure requirements. Numerous organizations feel overwhelmed by the complexity.
In the U.S., similar debates surround the planned SEC reporting regulations, which require companies to disclose greenhouse gas emissions, among other topics. Critics in both countries argue that these measures impose high costs and disproportionately burden smaller businesses. Concerns about the practical feasibility of the regulations have also been voiced by business associations, conservative politicians, and government-aligned organizations in the U.S.
Energy Costs as a Critical Factor for Competitiveness
During the transition from fossil fuels to renewable energy, the carbon price serves as an effective steering instrument. However, the weak Chinese demand for German products has made companies more sensitive to energy price fluctuations as a key driver of production costs. As the EU continues to pursue the ambitious goal of reducing greenhouse gas emissions by 90% by 2040, the balance between climate protection and competitiveness is a key issue that was also heavily discussed in 2024.
To remain a successful industrial hub, Europe, particularly Germany, must ensure competitive energy prices and a stable supply. Various industries have criticized the EU’s current transformation strategy, with the oil and gas sector raising concerns about the affordability of a rapid fossil fuel phase-out for consumers. Furthermore, there is an ever-increasing need for a stable energy supply. Deindustrialization risks due to high energy costs and stringent regulations are are placing an increasing burden on companies and are therefore a point of concern for Europe. Industrial representatives are calling for simplified legislation, lower energy costs, and reduced regulatory burdens to secure the competitiveness of European firms.
ESG activism on the rise
Despite these tensions, the trend of growing ESG activism continued unabated in 2024. Activists increasingly used legal measures and corporate governance structures to push ESG objectives. A landmark example came from the European Court of Human Rights (ECHR). In April 2024, the court ruled that Switzerland’s insufficient efforts to reduce greenhouse gas emissions violated Article 8 of the European Convention on Human Rights, which guarantees the right to respect for private and family life. The case was filed by a group of elderly Swiss women, the “Swiss Climate Seniors,” together with five other individuals, who argued that inadequate climate action endangered their health and well-being. This was the first case of its kind for the ECHR and signals the possibility of more similar cases in the future. It illustrates how ESG issues and legal responsibilities are increasingly intertwined, presenting new challenges for both, businesses and governments.
Public opinion and NGO influence also gained traction in 2024. In the fashion industry, fast-fashion giants SHEIN and Temu faced public protests and growing consumer pressure after scoring poorly in the 2024 Ethical Fashion Report for lacking transparency and failing to protect workers’ rights and the environment. SHEIN and Temu received low ratings due to their undisclosed supply chains, which led to public protests and increasing pressure from consumer organizations.
Regulatory developments in 2024
The year 2024 marked an important milestone for ESG, driven by new European regulations that are reshaping the legal framework. Here is an overview of the key provisions:
Corporate Sustainability Reporting Directive (CSRD): Since January 2024, large publicly listed companies and financial institutions must report extensively on ESG aspects. From 2025, the directive will also apply to companies meeting at least two of the following criteria: more than 250 employees, over €50 million in revenue, or over €25 million in total assets.
Green Claims Directive: Aimed at combating greenwashing, this directive seeks to build trust in sustainable products. In March 2024, the European Parliament established its position on the Commission’s proposal during the first reading. Once the legislative process is complete and the directive comes into force, EU member states will have 18 months to transpose it into national law. Companies will be required to comply with the new regulations within 24 months of its enactment.
Deforestation-Free Products Regulation: Effective December 2024, this regulation imposes stricter due diligence requirements to ensure that imported products do not contribute to deforestation.
COP29: World Climate Conference in Baku
The COP29 conference, held in November 2024 in Baku, Azerbaijan, was a significant international event in the context of climate policy. The conference once again emphasized the urgent need to combat climate change and to implement measures that primarily benefit developing countries.
The key issues addressed in Baku included:
- Climate financing
The funding of climate adaptation and mitigation measures in developing countries was a central topic at COP29. It was agreed that financial contributions from industrialized nations would increase to $300 billion annually by 2035 as part of the New Collective Quantified Goal. However, countries heavily impacted by climate change, such as Nigeria, expressed disappointment, citing an investment need of $1.3 trillion. While it was agreed to supplement public financing with private capital to reach this target, no concrete implementation proposals were developed. - Legal framework for global emissions trading
Bilateral Trading:Article 6 of the Paris Agreement already establishes the possibility of transferring emissions reductions between member states. Two mechanisms are outlined: bilateral transfers and an internationally centralized CO2 market (Paris Agreement Crediting Mechanism).
If Country A provides financial support to Country B for implementing climate protection measures, Country A can count the resulting CO2 reduction toward its national targets -provided that Country B agrees and no double counting occurs. Specific guidelines have been established for bilateral trading to ensure transparency in the identification and evaluation of projects, as well as their monitoring and accounting.
PACM:
Through a centrally organized and UN-monitored platform, emissions reductions will be reliably tradable in the future. At COP29, it was decided that eligible climate protection projects must not harm the environment or violate human rights. If the projects affect the territories of Indigenous peoples, their consent must be obtained. The key now is that the UN task force develops quality standards for accreditation and establishes concrete processes for trading.
Looking ahead to 2025: what to expect?
The year 2025 is likely to be characterised by a number of global challenges and geopolitical developments that will influence the economy and the importance of ESG.
For the German automotive industry, two regulatory requirements will continue to fuel debates in 2025: fleet emission limits and the "ban on combustion engines" by 2035. Both measures are designed to accelerate the transition to electric mobility and provide long-term investment security. However, both are under political pressure. In light of the German automotive crisis, suspending the fleet emission limits for 2025 and postponing the combustion engine ban currently seem possible.
Another significant issue could be the deregulation of fossil fuels in the United States during Donald Trump's second term. A renewed withdrawal of the U.S. from the Paris Agreement is also likely. While both developments would not immediately change the legal conditions for companies in the EU, they could lead to an increase in the relocation of fossil fuel business models to the U.S. and, overall, result in a slowdown of green innovations.
A ray of hope from China: As the world’s largest coal consumer, China could already reach its coal peak by 2025 - the highest point of coal usage, after which consumption is expected to decline. This would be extremely positive for mitigating global warming, as China is the largest emitter of CO2. Due to China’s significant economic importance, the peak would also send a clear signal to fossil fuel producers and related industries: the transition away from coal is happening faster than expected.
In summary, 2025 will be a year in which companies worldwide will continue to respond to public pressure from NGOs and governments, while geopolitical and economic developments create new challenges and opportunities for the implementation of ESG standards. German companies should remain attentive to developments in Brussels, Washington, and Beijing.
