Staying Ahead with ESG 2025: Key Regulatory Updates and Strategic Actions

As ESG (Environmental, Social, and Governance) integration deepens, the financial sector faces an evolving regulatory landscape that demands agility and foresight. The year 2025 is poised to be a pivotal moment for funds, banks, financial institutions and insurance companies as regulatory shifts reshape sustainable finance practices worldwide. Institutions that prepare early will not only ensure compliance but also position themselves as leaders in sustainable finance. Here is a guide to the critical updates and how organizations can proactively adapt.

ESG Terminology and Fund Naming Guidelines

The European Securities and Markets Authority (ESMA) has introduced stringent guidelines on ESG-related fund names, effective for new funds since November 2024 and mandatory for existing funds by May 2025. These guidelines aim to eliminate ambiguity in the use of sustainability-related terminology in financial products. According to the new rules, funds must allocate at least 80% of their investments to environmental or social objectives, while avoiding exposure to controversial sectors such as fossil fuels, arms manufacturing, and tobacco.

This regulatory push is designed to combat "greenwashing"—the practice of overstating sustainability claims to attract investors. Fund managers will need to scrutinize their investment strategies, ensuring that marketing materials and pre-contractual documents provide transparent and verifiable ESG claims. To stand out in a competitive market, organizations can consider adopting voluntary ESG labels and certifications that enhance investor trust. Furthermore, third-party verification of ESG claims can provide a competitive edge, fostering greater transparency and long-term market confidence.

SFDR and Simplified Categorization

The Sustainable Finance Disclosure Regulation (SFDR) is undergoing a significant transformation with the introduction of a simplified framework that classifies financial products into three distinct categories: sustainable, transition, and non-categorized. This streamlined structure enhances clarity for investors, helping them distinguish between fully sustainable funds, funds in transition, and those without a specific ESG focus.

To meet these requirements, financial institutions will face increased scrutiny on their ESG due diligence processes, particularly around the adverse impact of their investments on environmental and social factors. Institutions must not only meet minimum sustainability criteria but also demonstrate active management and mitigation of negative impacts. Advanced ESG data platforms and AI tools can be instrumental in streamlining data collection, analysis, and reporting, helping organizations monitor their ESG impact and ensure regulatory compliance. Furthermore, a potential sustainability grading system could set a new benchmark for fund performance evaluation, enabling investors to make more informed decisions. In this context, our ESG Consulting Team is actively contributing to the current discussion at the Luxembourg level on the evaluation of SFDR. We are observing that this is part of the 2024 supervisory priorities of the CSSF, which issued a communication on it in March 2024.

Corporate Sustainability Reporting Directive (CSRD) Expansion

The expansion of the Corporate Sustainability Reporting Directive (CSRD) in 2025 marks a critical milestone for financial institutions. Under the revised directive, even entities previously exempt—such as UCITS and AIFs—may find their managers subject to sustainability reporting under the Accounting Directive. This broader scope reflects the growing demand for comprehensive ESG reporting across the financial sector.

A key feature of the CSRD is the introduction of digital tagging through the European Financial Reporting Advisory Group’s (EFRAG) XBRL Taxonomy. By 2026, all ESG data will need to be digitally tagged, enhancing data comparability and accessibility. While this adds a new layer of complexity, it also presents an opportunity for firms to differentiate themselves by adopting robust ESG reporting systems. Early investment in digital capabilities will attract ESG-conscious investors and establish organizations as innovators in transparent reporting. Those who adopt these systems early will likely benefit from increased market visibility and investor confidence.

As organizations prepare for CSRD compliance, addressing foundational challenges is critical. The first wave of implementation has highlighted the importance of readiness in areas such as conducting materiality assessments (DMA), streamlining data collection processes, engaging stakeholders effectively, and ensuring alignment with evolving policies. By reflecting on these lessons, firms can refine their strategies, mitigate risks, and position themselves to navigate the complexities of ESG reporting with greater efficiency.

IFRS S1 & S2: A New Global Standard

The International Financial Reporting Standards (IFRS) Foundation has introduced two groundbreaking standards: IFRS S1 (General Requirements for Sustainability-related Disclosures) and IFRS S2 (Climate-related Disclosures). These standards aim to create a unified global baseline for ESG reporting, addressing the long-standing challenge of fragmented reporting practices across jurisdictions.

IFRS S1 emphasizes comprehensive sustainability disclosures, including governance, strategy, risk management, and performance metrics. IFRS S2 focuses specifically on climate-related risks, requiring firms to disclose their exposure to both physical and transition risks and explain how they manage these challenges. Companies will need to integrate ESG considerations into existing financial reporting processes and involve cross-functional teams from finance, legal, and ESG departments. Aligning with IFRS standards could open doors to international capital markets, where ESG compliance is increasingly a prerequisite for investor interest.

Corporate Sustainability Due Diligence Directive (CS3D)

The Corporate Sustainability Due Diligence Directive (CS3D) introduces a new era of corporate accountability, requiring large companies to implement due diligence practices addressing human rights and environmental impacts throughout their supply chains. Although direct implementation for financial institutions will begin in 2027, their upstream business partners—particularly those in high-risk sectors—will be affected much earlier.

CS3D mandates that companies identify, prevent, and mitigate adverse impacts within their supply chains, fostering greater responsibility and transparency. While financial institutions are not directly targeted, they will need to adapt their lending and investment strategies to ensure that their business partners comply with these standards. Enhanced due diligence frameworks will become essential for managing supply chain risks, particularly as non-compliant partners could pose significant reputational risks. Leveraging technologies such as blockchain for supply chain transparency will not only facilitate compliance but also strengthen stakeholder trust and bolster long-term resilience.

Now is the Time to Take Action

As 2025 approaches, ESG readiness is no longer a matter of choice but a necessity. Financial institutions must view these regulatory changes not just as compliance obligations but as opportunities to innovate and lead in sustainable finance. By refining their ESG frameworks, engaging stakeholders, and investing in advanced reporting technologies, organizations can transform regulatory challenges into strategic advantages.

Start by reassessing fund names, ensuring alignment with SFDR categorization, and building capacity for CSRD and IFRS compliance. Those who act now will not only meet regulatory expectations but also foster investor confidence, enhance their market position, and contribute meaningfully to the global sustainability agenda.

With a proactive approach, 2025 can become a year of transformation, positioning institutions to thrive in the evolving ESG landscape. During our most recent AIF Club webcast on December 11, we discussed these critical updates with our clients and found a shared consensus on the urgency and importance of these changes. Key points included the necessity of early action, the benefits of advanced reporting technologies, and strategies for aligning with new regulatory frameworks.