Sustainable finance – regulations and trends 2025

Published on January 23, 2025 by Shubham Rastogi

Introduction

Sustainable finance has become a critical theme internationally to pave the way for investment choices presented by incorporating environmental, social and governance (ESG) criteria alongside financial considerations. The idea, however, seeks to implement sustainable long-term economic growth amid real and pressing climate change, societal disparities and corporate governance. All these factors make sustainable finance critical, enabling redirecting the flow of finances to a more sustainable, inclusive form of economic interaction and activity.

Regulation remains integral to driving sustainable finance, with frameworks that help set standards, ensure transparency and mitigate risks associated with greenwashing. New regulations are expected to change the landscape of sustainable finance and enhance accountability, leading to a stronger financial system.

The current regulatory landscape

Current sustainable finance regulation comprises fragmented initiatives and standards in a number of regions: the EU, the US Securities and Exchange Commission (SEC) and the International Organization of Securities Commissions (IOSCO) have been at the forefront of such efforts.

The main initiatives driving the sustainable finance agenda in the EU are the Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation. The SFDR requires companies active in financial markets to report on the integration of ESG factors into investment decisions; the Taxonomy Regulation is a list of criteria for environmentally sustainable economic activities. The EU's non-financial reporting directive requires large companies to report on their non-financial performance, making the system more transparent and responsible.

The SEC recently issued proposals to strengthen and provide greater parity in climate risk reporting for investors. These rules are intended to give companies and investors comparable and consistent information on climate change-related risks and opportunities, improving investment decisions. The US Department of Labor too has provided regulations relating to factoring in ESG considerations in retirement plans, a positive step towards sustainability management.

New regulations in 2025

A number of significant regulations are expected to come into effect in 2025, advancing the sustainable finance agenda:

Corporate Sustainability Reporting Directive (CSRD): The CSRD is expected to increase the number and details of sustainability indicators in the EU. It is intended to provide a better understanding of ESG information outcomes and a better comparison of companies, enabling investors to make the right decisions. European companies meeting any one of three criteria – 250+ employees, EUR50m+ in turnover or EUR50m+ in assets – must comply with the CSRD, with reports containing reliable data due in 2026 to assist investors.
International Sustainability Standards Board (ISSB) Standards: The ISSB aims to hold and agree on its global baseline for sustainability reporting by 2025. The standards will allow for more standardised climate- related and broader ESG risk-management across jurisdictions. The goal is to make this uniform, as the ISSB standards will be implemented globally, easing the pressure on multinational firms that publish sustainability reports.
Enhanced ESG fund-naming rules: The European Securities and Markets Authority (ESMA) aims to tighten provisions relating to the use of ESG-related terms in fund names. These rules will help avoid situations where funds denoted as being sustainable do not meet the criteria. It also stipulates that investment funds whose names include the terms environment, sustainability, impact, transition, social or governance invest at least 80% of their finances in assets with environmental or social characteristics or those with sustainable investment objectives.
EU Taxonomy: The EU Taxonomy began a phased rollout in January 2022, starting with mandatory disclosure on the compatibility of financial products with the objectives of climate change mitigation and adapting this for organisations outside the financial sector. This transparency-related obligation for financial institutions was enforced in January 2024. Integration of the two new environmental objectives (eligibility only) with other environmental goals came into force in 2024 (FY 2023), with integration of four additional environmental objectives (eligibility and alignment only) to be implemented in 2025 (FY 2024) for non-financial undertakings and from 2026 for financial institutions.
Climate risk disclosure requirements: The SEC expects to finalise climate risk disclosure rules, which require companies to report climate risks and their approach to risk management, by the end of FY 2025. This regulation would ensure investors have the information required on how firms manage climate change and its effect on their business and financial statements.

Global trends and regional variations

The approach to sustainable finance regulations varies significantly across regions, reflecting different priorities and regulatory philosophies:

EU: The EU remains at the forefront in the provision of sustainable finance regulation, comprising the SFDR, Taxonomy Regulation and, soon, the Corporate Sustainability Reporting Directive (CSRD). The emphasis is on key principles constituting a system that enables sustainable investment in the region. This includes the EU's Green Deal, a headline programme to put the EU on the path to climate neutrality by 2050.
US: The US is slowly but steadily following the global trend; the SEC's proposed rules for climate disclosure are a good example. The requirements are still less rigid than EU standards, with the requirement for voluntary disclosure and market-driven solutions. The US has introduced the Inflation Reduction Act (IRA), its largest investment in clean energy and climate action expected to deliver 1bn tons of greenhouse gas reductions by 2030. The IRA supports numerous initiatives, including renewable energy projects, energy efficiency improvements and electric vehicle incentives.
Asia: Continental Asia is also headed in the right direction in terms of sustainable finance, despite Japan and China having slightly different action plans. In Japan, the Financial Services Agency has come up with certain frameworks on ESG investment, while the Chinese authorities are in the process of building a green taxonomy to optimise international standards. China has issued a catalogue of green bond-endorsed projects that defines rules for green bonds, to prevent information leaking and enhance standardisation of the green bond segment. ASEAN has implemented the ASEAN Taxonomy for Sustainable Finance as a general and coherent approach to categorising sustainable economic activity.

Impact on financial markets

These new regulations are expected to have a profound impact on financial markets, influencing investment strategies, capital flow and market dynamics:

Investment strategies: The broad expectations for the new disclosure standards suggest that asset managers and investors are to use ESG-related pledges at a far more complex level in investment processes. Demand for sustainable assets is likely to increase, together with the need to increase the availability of ESG investment products. Impact investing – which relates to social and environment-related returns along with financial returns – is also likely to grow.
Capital flow: The increased transparency and legal requirements in reporting are improving the way in which risk is priced in and capital is provided. They also indicate a shift in capital from high-emitting sectors to low-emitting ones. Green bonds, sustainability-linked bonds and other sustainable financial products are also expected to grow due to the risk of marginally attractive and substandard assets that investors employ to transition to quality ESG assets.
Market dynamics: New regulations will increase the cost of compliance and liabilities for financial institutions. Those that embrace such changes in time would benefit in terms of meeting investor preferences and addressing ESG risks. Companies with higher ESG scores are expected to have easier access to borrowing or issue more bonds in capital markets with lower rates. Those that do not consider ESG issues as managed risks are likely to pay the price either in terms of reputational damage or forced divestment.
Corporate governance: Attention to ESG factors would also impact corporate governance. ESG management would need to be improved to better integrate sustainability into the entire spectrum, starting with the board of directors. This means that ESG performance would need to be linked to executive pay structure, to encourage working towards sustainable goals.

Conclusion

An analytical assessment of changes in sustainable finance regulation indicates increasing recognition of ESG factors in making financial decisions. The new regulations in 2025 will likely enhance innovation and bring about a positive change in terms of sustainability of financial systems.

The changes expected would affect not only investor action but also the social and economic environment. These regulations are expected to drive positive change in the development of a more sustainable and resilient financial system able to respond to challenges including climate change, social inequity and loss of biodiversity. Joint action on the part of governments, regulators, corporates and investors is needed to initiate the process of creating a sustainable economy.

How Acuity Knowledge Partners can help

Our wide range of customised analysis and support covers the entire spectrum of financing products along the sustainable finance investment lifecycle and enables investment banks and advisory firms to establish and grow their sustainable finance practices:

Coverage and solutions
ESG advisory	Green/social bonds	Nature-based solutions research
Sustainable bonds	Blended finance	ESG/sustainable transaction detailing
Green loans	Impact finance	ESG institutional/framework analysis
ESG strategy	ESG reports	Decarbonisation assessment

Our focused support
Identifying sector-wise ESG taxonomy	Climate change framework analysis
Mapping climate targets	Analysis of sustainable initiatives
Climate bonds – opportunity analysis	Climate bonds – market updates
Benchmarking ESG standards and regulations	ESG newsletters
ESG scoring	Climate revenue share
SDG trackers	Building/analysing – portfolios or index
ESG thematic study	ESG indicators and controversies
SDG impact analysis	ESG rating

Our ESG domain expertise helps banks ramp up their onshore verticals, focusing on incorporating ESG in client analysis, saving a significant amount of senior bankers’ time. We also standardise templates and provide coverage across APAC, EMEA, the US and Sub-Saharan Africa.

We provide ESG data management for regulatory reporting and client transition planning, and management information support in structuring and post-disbursement monitoring for commercial banks.

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About the Author

Shubham Rastogi

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Shubham brings nearly 3 years of experience in ESG research and benchmarking, underpinned by a robust academic background in finance. His expertise encompasses the development of ESG competitor intelligence, Sustainable financial transactions, strategic management, and ESG benchmarking. Additionally, he is well-versed in ESG ratings.