The Evolving ESG Landscape: Trends to Watch in 2025

As we move into 2025, the ESG landscape is set to undergo further transformation, driven by regulatory developments, stakeholder expectations and evolving market practices.

In place of “ESG” we’ve witnessed the proliferation of changing terminology, for example, the use of “Responsible Investment,” “Sustainable Investment” and “Value-Driven ESG Analysis” as alternative ways to describe ESG-related practices.  This shift is consistent with evolved mechanisms for considering material risks and opportunities and allows for a clearer description of how such risks and opportunities are integrated into the investment process, without over-stating their weight or independent impact on investment decision making.

Looking ahead, we expect to see continued evolution in terminology and practice. Regardless of its description, the common thread remains: managers view the evaluation of material risks and opportunities as consistent with fiduciary duty, including those related to, among other things, climate (e.g., physical and transition risks), human capital management, supply chain, labor, bribery, tariffs, resource availability and geopolitical risks. 

As we reflect on 2024 and anticipate 2025 and beyond, we view the following five trends as imperative to ensuring managers’ risk-focused policies align with their practices; their practices align with communications; and that communications are true, accurate, reliable and substantiable across an increasingly diverse client base.

1. Enforcement Actions Will Continue 

2024 brought a flurry of activity from the SEC’s enforcement division, including several instances of identified failures related to investment managers’ ESG-related claims and commitments.  We expect this trend to continue in 2025.

Notable ESG-related Enforcement Actions:  

November 2024: Invesco Advisors faced SEC charges for misleading statements regarding its ESG integration efforts in investment decision making.  From 2020 – 2022, Invesco’s marketing materials claimed that 70-94% of the company’s assets under management incorporated ESG considerations. However, this claim included the firm’s assets held in passive exchange traded funds that did not employ ESG integration processes. Moreover, the firm lacked a clear policy defining ESG integration. Invesco agreed to cease and desist from violations of the charged provisions, be censured and paid a $17.5 million civil penalty.

Silver’s View: Claims related to polices and procedures, including those related to ESG, must be true, sustainable and defensible. Overstatements result in outsized risk to a manager and the teams ultimately responsible for overseeing ESG-related practices.  

October 2024: From 2020 – 2022, WisdomTree listed certain investment exclusions, including fossil fuels and tobacco, for three of its ESG-marketed ETFs.  Despite the binding obligation to avoid investments in certain industries all three funds were found to have exposures to the restricted industries. It was found that third-party data used by WisdomTree did not screen out all companies involved in tobacco and fossil fuels. WisdomTree did not have policies or procedures related to its investment restrictions to ensure inadvertent exposures were identified and removed in a reasonable timeframe.  WisdomTree paid a $4 million civil penalty to settle the charges.

Silver’s View: Managers must ensure that any investment restrictions are managed and monitored in accordance with investor disclosures.  The use of third parties to execute on a manager’s obligations does not alter the chain of liability; proper controls, polices and procedures can help a manager guard against risk. 

September 2024: Keurig Dr. Pepper was charged with making inaccurate recyclability claims made about its K-Cup beverage pods. Keurig’s annual reports for FY 2019 and 2020 indicated that the K-Cup was approved for recycling by test facilities but did not include details that two of the largest recycling facilities in the U.S. expressed concerns about the feasibility of curbside recycling and did not intend to accept the product. A significant portion of sales was attributed to the K-Cup in 2019 and previous research had demonstrated that environmental concerns are a key factor for certain of Keurig’s customers when making purchasing decisions.  Keurig agreed to pay a $1.5 million civil penalty to settle the charges.

Silver’s View:  Claims have an impact on consumer and investor behavior. Claims should be reasonably stated and qualified where limitations are likely to occur, when applicable. 

September 2024: From 2019 – 2024, Inspire Investing LLC represented that it would not invest in companies that had “any degree of participation” in those business practices that Inspire deemed did not align with biblical values, powered by the firm’s data-driven methodology.  The SEC found that Inspire relied on manual research rather than data to evaluate its investments; did not research individual companies to evaluate their business practices; and did not have a policy or process in place to describe how the firm was to evaluate a company’s business practices. Accordingly, Inspire applied its exclusion criteria inconsistently and ultimately made investments that violated its investment criteria. Inspire paid $300,000 penalty and agreed to retain an independent compliance consultant to settle charges. 

Silver’s View: Policies and procedures are key to a manager’s ability to consistently apply its stated practices and to ensure the mechanisms by which its practices are executed are reasonable and aligned with investor commitments.

Takeaway: These cases collectively emphasize the importance of establishing clear policies; conducting thorough due diligence; and making accurate disclosures that match investment processes.  For private fund managers, ensuring alignment between any stated objectives and actual practices is paramount, whether it relates to an ESG program, side letter or investment thesis. 

2. Enhanced Reporting and Transparency on Sustainability Themes is Expected

Momentum for standardized and expanded sustainability reporting continued in 2024, driven by evolving regulatory frameworks and stakeholder demands, as well as organizations such as Principles for Responsible Investment (PRI), Institutional Limited Partners Association (ILPA), ESG Integrated Disclosure Project (ESG IDP) and ESG Data Convergence Initiative (EDCI). Enhanced disclosures on climate-related risks, nature conservation and supply chain practices were central to these efforts, and both investors and corporates should be conscious of upcoming requirements. 

Below, we have summarized some key events from the past year:

Climate regulations are becoming more standardized globally, with many more countries (including Canada, Australia and Japan) introducing and implementing climate-related disclosures that broadly align with the International Sustainability Standards Board (ISSB) sustainability standards and the Taskforce on Climate-related Financial Disclosures (TCFD). Additionally, voluntary standards such as the Taskforce on Nature-related Financial Disclosures (TNFD) are gaining further prominence within the market. 

In the European Union (EU), the Corporate Sustainability Reporting Directive (CSRD) mandates enhanced disclosures, including environmental key performance indicators (KPIs), with the first disclosures under the regulation required in 2025. Investors with CSRD exposure through portfolio holdings should be acutely aware of impending deadlines and compliance costs for in-scope companies. In addition, the California climate reporting bills, SB 251 and SB 263, remain in place and will take effect from Jan. 1, 2025, with reporting due as soon as January 2026. 

For a deeper dive into climate disclosure trends, see our Q3 writeup here. 

With investors increasing focus on nature issues surrounding investment options, nature-based disclosures have also emerged as a critical focus, with initiatives such as the Science Based Targets Network (SBTN) encouraging companies to set measurable goals to protect biodiversity, reduce freshwater usage and combat deforestation. From a regulatory perspective, both the European Union Deforestation Regulation (EUDR) and Corporate Sustainability Due Diligence Directive (CSDDD) will have a profound impact on supply chains for a number of companies, including those outside the EU. EUDR is set to take effect December 30, 2025, for large and medium companies and June 30, 2026 for micro- and small enterprises, which further amplifies the emphasis on sustainable supply chains. This regulation prohibits the sale, import or export of seven commodities linked to deforestation and forest degradation, including cattle, cocoa, coffee, palm oil, soy, rubber and wood. Furthermore, the implementation of the CSDDD within the EU, as soon as 2027 for certain companies, will standardize the legal framework guiding due diligence requirements for companies within their supply chains (both within and outside of the EU) around additional environmental factors, as well as the protection of human rights. 

For more information on key regulatory insights, see our Q2 writeup here.

Takeaway: The march for enhanced disclosures continued in the past year, with jurisdictions and stakeholders across the globe driving this trend. Investors and corporates should remain cognizant of impending requirements and deadlines in order to appropriately strategize for upcoming disclosures. 

3. Review and Audit of Sustainability-Related Programs Will be a “Must” 

For many managers, 2024 marks a milestone year—the first, third, fifth or even tenth year—since the implementation of sustainability-focused practices. These programs have often gone untested, as they were not included in regular compliance reviews, lacked oversight by the compliance department or were executed by various teams, resulting in a disjointed approach to evaluation.

As sustainability programs grow and mature, their evaluation becomes increasingly important as they form the basis of many investor communications and external disclosures. Review and audit will help identify gaps, and verify that sustainability commitments are credible, accurately represented and aligned with both regulatory requirements and investor expectations on an ongoing basis. 

Three key drivers to motivate a 2025 review and audit: 

Risk of Regulatory Deficiency and Enforcement Action
Review and audit of a manager’s ESG/sustainability- related program serves as a tool to identify gaps, misalignment between policy and practices and inconsistencies between practices and external disclosures (e.g., investor DDQs, industry reporting, etc.). Managers that undertake a proactive review and audit of their practices and address findings proactively may lower the likelihood that a regulator will identify significant deficiencies during a routine or surprise examination. 

In the case of WisdomTree, Inspire and Invesco, undertaking a review and audit of polices, disclosures and practices may have reduced or prevented some or all of the SEC’s findings noted in the respective enforcement actions and reduced the negative publicity associated with these actions. 

Risk of Investor Scrutiny
Investor pressure is driving managers to evaluate the inputs and outcomes of their ESG/sustainability programs. In the past year, investor demand for tangible examples of a manager’s progress related to: (i) the sustainability program overall; (ii) program enhancements and outcomes; and (iii) clear explanations for a manager’s investment decisions and how ESG risks and opportunities were accounted for have increased. 

This enhanced attention from LPs has driven managers to assess their practices, gaps in execution and identification of future opportunities to guard against scrutiny. We anticipate this trend continuing in 2025, fueled by regulation in certain jurisdictions, investor preferences and evolving industry best practice.

Risk of Misstatements
Managers are aware of the risks of overstating efforts (greenwashing), under-representing practices (green hushing) or describing efforts in substantially different ways to different stakeholders. To reduce this risk, all claims regarding ESG/sustainability practices must be substantiated with reasonable documentation, supported by evidence and should be subject to ongoing updates. 

Transparent, well-documented and regularly reviewed ESG claims help managers build trust, mitigate risks and uphold the integrity of their commitments.

Managers conducting a first-time or formal review can benefit from considering the following approach:

• Review ESG-related descriptions and claims made in marketing and communications materials 
• Review existing practices 
• Review policy (or similar) documents 
• Assess the governance framework (e.g., committees or personnel who have responsibility to execute on policy commitments and marketing claims)
• Identify areas where policy language, practices and claims are substantially different
• Determine whether reasonable documentation and substantiation of practices exists and if it would be sufficient to address an investor inquiry
• Ensure parties with responsibility are reasonable based on organization structure
• Based on review, identify gaps and undertake updates as needed

Takeaways: We encourage our clients to assess their ESG-related policies and programs to adapt to emerging risks and opportunities within the sustainability landscape. Proactive reviews can minimize enforcement risk for the managers, promote positive relationships with LPs, and limit misrepresentation of practices. Learn more about Silver’s audit support here.

4. Investments Driving Their Investors:  Firms Will Need to Manage Sustainability Claims at the Investment Level

ESG and sustainability practices entered the ‘mainstream’ for private fund managers between 2019 – 2021. Since then, institutional investors have been viewed as a primary driving force of corporate commitments, whether those commitments are related to climate, diversity, supply chain transparency or any other topic. However, in the past year we have begun to observe a new dynamic as sustainability practices in private markets mature: portfolio investments are driving investment managers’ sustainability efforts. Specifically, investment managers are beginning to grapple with the management of sustainability targets and actions, not simply target setting. 

Silver has observed the following reactions to this changing landscape:

Increased Attention to Sustainability Claims during Diligence

In the wake of increased sustainability claims made by corporates, investment managers are grappling with the veracity and relevance of these claims when evaluating current or prospective investments. As examples, sustainability claims are often related to environmental topics, such as GHG emissions reduction (e.g., using offsets or setting reduction targets), waste and recycling or similar. 

The risks related to such claims that investment managers must be attentive to are two-fold. First, reputational and market risk from disproven or overstated claims made by corporates may impair its revenues or market share; and secondarily, regulators are eager to stamp out greenwashing and other instances of sustainability-related fraud. This regulatory crackdown is exemplified by recent enforcement actions (see the SEC’s decision against Keurig); controversies (see allegations of greenwashing against JBS ahead of a rumored US listing); and regulations (see the recent EU and UK anti-greenwashing rules). 

Sustainability claims no longer solely represent reputational upside for corporates.  Such claims create real risks and investment managers across the capital spectrum must digest and react to this landscape pre-investment to gauge the viability and credibility of a prospective investment’s targets and claims, as well as the potential impact on its businesses as a whole.

Engagement on Target Achievement

While pre-investment analysis, as discussed above, is an important first step in evaluating sustainability claims, equity investors, in particular, are increasingly exposed to holdings that have made prior commitments and established targets around sustainability topics. In these cases, managers must engage with investee company management to ensure that realistic plans are made to achieve such targets. In Silver’s experience, effective engagement is both targeted and practical, ensuring that specific and achievable action items and milestones are set. 

This effort is further complicated in instances of target underachievement. In these cases, engagement and collaboration on remediation may include the following: 

• Walk back or reset of existing targets/claims
• Operational-level engagement to increase performance and realign with stated goals
• Establishment of formal controls and governance processes to monitor progress internally within the company 

Unlike equity investors, lenders and other debt investors are generally less inclined to engage directly with corporates. For these managers, issuance of sustainability-linked loans to incentivize target achievement, as well as collaborative engagement, often through investor collectives such as the CDP or Climate Action 100+, remains a key component in the engagement playbook. 

Leveraging Experiences across Portfolios

While diligence and engagement on existing targets and claims may be primarily risk based, many investment managers have seized opportunities to leverage best practices and insights within portfolios to raise understanding and build sustainability knowledge. 

Silver has observed each of the following practices under this umbrella: 

• Best practice guides: These guides seek to take best-in-class programs from across portfolios and use them as models for other companies to adopt. Often targeted at a specific topic (safety, climate, human resources), these guides help laggards and less mature companies quickly and effectively scale sustainability programs. 

• Roundtables and Summits: Similar to best practice guides, these live events leverage knowledge and insights to facilitate proactive discussions on sustainability topics.
• Firm-level trainings: Elements of both practice guides and roundtables are often included in internal trainings at the investment manager level, to help educate teams on portfolio company best practices and how to implement such practices on a broader scale.

Takeaways: Investors should continue to be aware of both opportunities and risks of corporate sustainability targets and claims. As companies continue to mature their sustainability approaches, admirable progress will be made and can serve as a model for other companies, but ongoing attention, via both diligence and engagement, is required.  

5. Sustainability Data Will Become a More Important Lever in Investment Analysis and Decision-Making

Data collection allows investment managers to evaluate performance on risk metrics, including sustainability-focused metrics. Data collection and analysis has become an assumed part of an investment manager’s ESG/sustainability program. A recent Boston Consulting Group report on sustainability trends in private equity indicated that over 150,000 data points EDCI-aligned data points were collected in 2023, a 45% increase from the previous year.  

However, although it is a common place to gather data, transitioning collected data into actionable insights has been an ongoing struggle for managers. In 2024, managers began to move away from reporting-focused data collection efforts (i.e., collecting data with the primary purpose of aggregation and reporting to stakeholders) to action-oriented approaches designed to align with and integrate into investment management practices.  Silver observed this trend driving better data quality, deeper portfolio insights, prioritization of risks and opportunities across different timelines and constructive engagement with company management on key issues.

Takeaways: As we move into 2025, Silver expects this trend to continue as investment managers seek to continue effectively utilizing the broad expanse of sustainability data at their fingertips to mitigate risk and drive value. 

Conclusion: Navigating the ESG Landscape in 2025 and Beyond

In the wake of political and economic changes, private fund managers must remain agile and proactive in addressing emerging challenges and opportunities related to the complex interplay of ESG-related regulations, stakeholder demands and market dynamics.

Please feel free to contact us at [email protected] with any questions or inquiries for Silver’s ESG team.