2025 J.S. Held Global Risk Report: Sustainability Investments & Headwinds

Introduction

Sustainability continues to be a hot issue around the world. While many jurisdictions are creating additional frameworks in support of greater consideration of sustainability, others, most notably the US, are either dragging their feet or even backsliding. When examining Environmental, Social & Governance (ESG) regulations from different parts of the globe, new ESG regulations are creating a challenging backdrop for businesses and organizations as conflicting compliance requirements come into effect. Significant uncertainty will affect multinational companies selling into the EU market, driven by the EU’s Corporate Sustainability Due Diligence Directive (CS3D). Adopted in 2024, CS3D requires EU and non-EU companies to conduct due diligence to identify and prevent adverse environmental and human rights impacts within their business and supply chain. Conflicts in climate-related reporting and disclosures requirements in different jurisdictions remain among the most significant challenges facing companies today. Meanwhile, in the US, the term “ESG” itself has become controversial, leading many to now refer more widely to sustainability and discuss ESG as the reporting component of efforts under the broader banner. Several US states have mandated ESG criteria – including climate risk assessment – for investment decisions in state-related retirement funds, while other states have opposed such ESG considerations. Even so, organizations will need to be mindful according to overall sustainability practices since certain permits in many jurisdictions cannot be obtained without addressing environmental impact. With the arrival of the second Trump Administration, environmental justice directives established by the Biden administration will be early targets for elimination, as well as grants and tax credits enacted for sustainability. Businesses can also expect closer judicial scrutiny in the wake of recent Supreme Court opinions, such as the Loper Bright ruling, which undercut agency authority to define regulatory compliance or noncompliance. The ruling will make challenges to sustainability and other environmental compliance regulatory programs more likely.

Sustainability Investments & Headwinds: Risks

1. Regulations under the EU’s Corporate Sustainability Due Diligence Directive (CS3D) as violations of the directive could result in fines and civil liability
2. A growing wave of regulations and litigation to combat greenwashing, the intentional or unintentional practice where exaggerated or false claims are made – or greenhushing, intentionally withholding or underreporting information – about the sustainability of a product, service, or company
3. US regulatory uncertainty, the pending US Securities and Exchange Commission’s Climate Risk Disclosure rules for public companies (both domestic and foreign issuers filing annual reports with the SEC), which would require disclosure of:
   1. Material climate-related risks
   2. Activities to mitigate or adapt to such risks
   3. Organizational leadership and board of directors’ oversight of climate-related risks and management
   4. Climate-related targets or goals that are material to the business, results of operations, or financial condition
   5. In the end, these are likely targets for a second Trump administration cut entirely or may never finalize
4. The SEC’s reporting requirement of a company’s Scope 1 and 2 greenhouse gas emissions on a phased-in basis by larger companies when emissions are material
5. Increased shareholder activism demanding more detailed insight into corporate sustainability goals
6. Litigation to enforce previous commitments to unwind downward revisions of commitments and disclosures, and to generally push goals that may not track with overall corporate strategy around sustainability

The Corporate Sustainability Due Diligence Directive (CS3D) Broken Down

CS3D applies to three main groups:

• Companies in the EU with 1,000+ employees and EUR 450+ million global net turnover
• Non-EU companies (“third-country companies”) with EUR 450+ million net turnover in the EU
• Companies that do not meet these specific thresholds but are a parent company of a group that does

Companies must apply their ESG due diligence policies to the following direct and indirect business partners in their supply chain:

• Upstream business partners: Those related to the production of goods or provision of services, such as design and manufacturing
• Downstream business partners: Those related to distribution, transport, and storage of goods

Companies must comply starting with the largest in size in 2027, and continuing over the following two years with additional smaller-sized companies:

• 2027: Companies with 5,000+ employees and 1,500 million turnover
• 2028: Companies with 3,000+ employees and 900 million turnover
• 2029: Companies with 1,000+ employees and 450 million turnover

Anti-Greenwashing and Greenhushing Rules to Watch For

• European Union: Enacted the Directive on Empowering Consumers for the Green Transition. Effective March 26, 2024, it is designed to eliminate deceptive environmental claims.
• United Kingdom: Revised guidelines for its Sustainability Disclosure Requirements (SDR), which focus on environmental advertising and emphasize the truthful marketing of a product’s ecological advantages.
• United States: The Federal Trade Commission is revising its “Guides to the Use of Environmental Marketing Claims,” or “Green Guides,” which advise on environmental marketing and how to substantiate claims to avoid consumer deception.

50 US States and the District of Columbia: Many have their own laws prohibiting deceptive practices, with some specifically enacting anti-greenwashing laws. Several consumer class actions have been brought in state courts.

Sustainability Investments & Headwinds: Opportunities

1. Green funds – Backers are paying more attention to these investment vehicles that fund companies and projects focused on ESG issues
2. Carbon technology start-ups are becoming an emerging sector with the US Inflation Reduction Act putting $800 billion into the commercialization of decarbonization solutions

• Sub-sectors include:
  1. Energy
  2. Climate adaptation
  3. Green fintech
  4. Carbon accounting and offsets
  5. Fundamental scientific research

3. Companies with higher levels of ESG performance will continue to see a higher return on investment and less volatility in economic performance

Supporting Statistics