ESG regulation will continue to pose major challenges for the financial sector in 2025. The Sustainable Finance Disclosure Regulation (SFDR) is currently being revised, with far-reaching consequences for asset managers and banks. „As long as the regulatory framework remains unclear, the industry is holding back on new ESG strategies,“ says Alexandra Themistocli, Head of ESG at SEB in Germany.

The regulatory requirements are a hurdle for smaller companies in particular. The EU Commission is therefore planning to simplify the regulations for sustainability reports in order to ease the burden on small and medium-sized companies. „The regulatory requirements for smaller companies must be simplified. The reporting obligations are a major challenge for many SMEs,“ emphasises Themistocli. A key point is that sustainability reporting only works efficiently if all players along the supply chain are involved. If smaller suppliers do not provide sufficient ESG data, this has a direct impact on large companies, which in turn have to fulfil their reporting obligations.

Climate risks will also remain a challenge in 2025, regardless of whether they are currently playing a central role in the public debate. „Our climate risks have not changed – droughts, floods and forest fires cause enormous damage and costs. The risks continue to exist, regardless of whether they are in the public eye or not.“ One example of the dramatic consequences are the fires near Los Angeles, which cost around 150 billion dollars. The crucial question for companies is therefore not whether sustainability should be pursued, but how much risk they are willing to take in dealing with the consequences of climate change.

In recent months, some banks and insurers have withdrawn from international climate alliances. This raises questions as to whether long-term climate targets are actually being abandoned, or whether these pullbacks are merely symbolic.

„Many large banks and insurers have withdrawn from net zero alliances, but the key question is are their climate targets really being abandoned?“, says Themistocli. While some financial institutions are rethinking their ESG strategies, the importance of transparency for investors remains undisputed. „We stand by the goals of the Net Zero Banking Alliance – transparency is essential for investors,“ she says.

Another important aspect in the coming months will be the EU's Green Claims Directive, which obliges companies to substantiate their sustainability promises with reliable and verifiable data. „The Green Claims Directive will mean that companies will have to provide concrete proof of their sustainability promises – mere assertions are not enough," says the expert from the Nordic bank. The aim is to prevent greenwashing even more effectively, and ensure that consumers and investors receive reliable information. The directive envisages stricter rules for environmental claims, which would require companies to document their ESG strategies more precisely.

In addition to the regulation of ESG reporting, the importance of carbon removals, in other words measures to remove CO2 from the atmosphere, is growing. As not all emissions can be avoided directly, carbon removal is increasingly being integrated into net zero strategies as a supplementary measure.

„Carbon removals are gaining in importance. The EU Green Claims Directive will define this year how these measures can be used for net zero targets.", she says. New standards and guidelines, including those from the Science Based Targets Initiative (SBTi) and ISO, will define how these measures can be credibly utilised. „This will make them part of companies' future net zero strategies for their irreducible emissions.“

Financing the transition will be a key issue in the coming years. „It's not just about promoting green projects, but about supporting all companies in their transition to more sustainable structures,“ says Themistocli. This applies to energy-intensive industries, as well as small and medium-sized enterprises, that need investment for climate-friendly technologies.

Sustainability remains far more than just a trend, but is a long-term necessity in order to minimise risks in portfolios. The financial sector is faced with the task of overcoming regulatory challenges, and at the same time promoting innovative solutions for sustainable economic development.