2025 Look Ahead ESG & Sustainability
Posted: January 16th, 2025
Authors: Connie P.
In the Sustainability and Environmental, Social, and Governance (ESG) spaces, 2025 will see the parallel drivers of regulatory obligation and market requirements accelerate both domestically in the United States and abroad. These drivers will also compel a significant “back-to-basics” movement focusing on resource consumption optimization and conservation and material recovery and reuse to secure domestic supply.
Market requirements will dig in on familiar themes compelled by business imperatives including exposure to disruption, operating costs, energy, supply chain, and risk disclosure.
Market actors with mature sustainability programs are now turning their attention to their supply chains, requiring quantification and disclosure by suppliers on material issues such as greenhouse gas (GHG) emissions, water consumption, biodiversity impacts, and material origin. Compliance with customer disclosure requirements may mean quantification of Scope 1, 2, and 3 GHG emissions, product level carbon footprint, environmental product disclosures, life cycle assessments, or certificates of provenance.
Regulatory requirements will include quantification and disclosure of sustainability related impacts at the company and product levels. European Union (EU) regulations will be the heaviest lift for many companies in 2025, including the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), the EU Taxonomy and the new EU Deforestation Regulation, and for industries like iron and steel, aluminum, cement, and fertilizers the EU Carbon Border Adjustment Mechanism (CBAM). Each of these regulations will demand significant data and resources for compliance and include companies located outside of the EU who conduct significant business within the EU. Some relief may be on the horizon. According to Michael Littenberg of Ropes and Gray, “The eagerly awaited EU omnibus regulation will be more than a consolidation and harmonization of CSRD, CSDDD, and the Taxonomy Regulation. It will reduce compliance requirements, but not as much as most companies would like to see. Changes will include both extended phase-ins and scaled back substantive compliance requirements.” In the meantime, depending on where your organization lands on the implementation timelines, at a minimum, obligated companies need to be gathering data and preparing for disclosure.
In the U.S., twenty-four states plus the District of Columbia have adopted specific greenhouse gas reduction targets to address climate change. The most ambitious state-level climate regulations, the California Climate Accountability Package, comprising Senate Bill 253 (SB-253) – the Climate Corporate Data Accountability Act, and Senate Bill 261 (SB-261)- Greenhouse Gases: Climate-related Financial Risk, have so far survived litigation. Companies subject to the disclosures will need to publish climate-related risk disclosures in 2025 and prepare 2025 Scope 1 and 2 data for disclosure in 2026. Similar to the EU regulations, the California regulations also impact companies located outside of California who conduct business within the state. See 4 The Record for more details.
Both Vermont and New York have implemented Climate Superfund laws requiring fossil fuel companies to pay into climate mitigation and adaptation funds. The U.S. Chamber of Commerce is challenging the Vermont law in Chamber v. Moore claiming that the Constitution and the Clean Air Act do not allow for states to impose liability or costs ”extraterritorially”.1 The outcome is likely to influence similar legislation in other states across the U.S.
At least 13 cities including New York, Washington DC, Boston, Denver, Seattle, and St. Louis and four states, Washington, Oregon, Colorado, and Maryland, have implemented building performance standards, which mandate energy efficiency requirements for commercial and industrial buildings and activities, with at least 34 more cities and two more states committed to doing the same. These regulations will drive companies to focus on energy efficiency and energy data management within their operations.
It is expected that the U.S. will once again withdraw from the Paris Agreement in 2025; however, 24 states and U.S. territories, representing 54% of the U.S. population and 57% of the economy, have committed to the U.S. Climate Alliance and declared net-zero goals. 350 U.S. mayors have recommitted to climate action in anticipation of federal action abandoning the Paris Agreement.
We should expect that, in 2025, as fast as states and local governments roll out climate-related requirements, they will be met with legal challenges. As those cases move through the legal system in the U.S., it will create uncertainty and hinder investment. At the same time, the promulgation and enforcement of sustainability regulations, including climate-related legislation in the usual jurisdictions, will drive market access requirements and compel market actors to comply in the near term. Micheal Littenburg of Ropes and Grey predicts “California’s climate disclosure laws will survive legal challenge. Additional blue states will move forward on mandatory disclosure of greenhouse gas emissions and climate risk.”2
Supply Chain
In the wake of the Covid-19 global pandemic and driven by federal incentives such as the Inflation Reduction Act, the Chips and Science Act, and the Buy American Act, the U.S. has seen renewed vigor and investment to build up the domestic supply chain for manufacturing. A key element of establishing reliable raw material and component supplies is efficient and effective recovery of material resources rather than disposing of end-of-life products in landfills or incinerators domestically or sending them abroad.
Market incentives favoring suppliers who include recovered or recycled materials in the products they sell will continue to proliferate. Savvy manufacturers are investing in closed loop processes with supplier partners and logistics providers. This will create competitive advantage by qualifying for those incentives, ensuring unfettered access to high risk materials, or insulation against pricing volatility.
Extended producer responsibility (EPR) laws at the state, provincial, and country level continue to increase. As of publication, according to the Product Stewardship Institute, 33 states have implemented over 140 laws covering 20 products in the U.S. Initially, these types of regulations targeted high value or hazardous materials such as electronics, batteries, motor oil, mercury, medical sharps, and vehicles. But presently, high volume and problematic materials such as plastics, packaging, and textiles are motivating producer take-back schemes. Several markets are requiring companies to participate in Producer Responsibility Organizations (PRO) including California, Oregon, and Ontario, Canada.
Life Cycle Assessments, Carbon Footprint, Carbon Intensity
In 2025, really knowing your products will offer opportunities for competitive advantage, cost advantage, compliance, and innovation. This will mean understanding your raw materials, including provenance of materials down to the bill of substance, understanding the business practices of your suppliers, anticipating the impacts of the product, understanding how customers are using your products, and the ultimate disposition of the product. These metrics will need to be robustly quantified using transparent and accepted methods and citable data.
Investing in the development of a Lifecycle Assessment (LCA) will position organizations to understand risk points across the supply chain. It is especially valuable to undertake an LCA in parallel with product development to ensure material choices result in the best possible environmental product profile.
Certain circumstances call for subsets of LCA, such as carbon footprints or Carbon Intensity (CI) values, which measure GHG impacts of a product from cradle to grave. A carbon footprint can ensure competitiveness, particularly when importing into markets such as the EU, where carbon taxes seek to level the playing field for domestic organizations complying with GHG management regulations. Carbon Intensity values can qualify products in the U.S. for significant tax credits such as 45z, as well as provide a competitive advantage when customers compare your product to other available offers.
Energy
Global electricity demand is forecast to grow at least 4% annually for the next five years according to several sources including the International Energy Agency. This growth is driven by multiple factors including electrification, increased use of air conditioning, intense growth of data centers, artificial intelligence and quantum computing, and strong economic activity. Adding capacity to the grid is hindered in the U.S. due to long interconnection queues and other factors, including long lead times for transformers and years-long permitting processes.
Access to grid electricity threatens to be a limiting factor for growth, persuading market actors to look for opportunities to reduce energy consumption and to consider projects for self-generation and on-site storage, including renewable energy generation. Self-generation of renewable energy is increasingly appealing due to capital cost improvements, incentives, and zero marginal costs. New and innovative energy procurement mechanisms will continue to become available for companies seeking to meet carbon reduction commitments or increase reliability, including Virtual Power Purchase Agreements and Renewable Energy Credits.
Conclusion
In 2025 successful sustainability practitioners will focus on pecuniary risks and opportunities to elevate the conversation, consistently quantify key metrics and communicate strategies and action plans using the language of business. Pragmatic solutions to really hard problems will bring decision makers to the table to drive meaningful maturation of standard business models addressing existential sustainability risks and long-term value creation.
Regardless of where your company stands, ALL4 has resources and capabilities to help you find value. From developing your first GHG inventory to developing transition plans to decarbonize your portfolio, from dumpster-diving to generate your first waste inventory to creating a comprehensive circularity strategy, or from responding to customers’ questionnaires to publishing Environmental Product Declarations for your products. Contact us to get started!
1 https://www.uschamber.com/assets/documents/Complaint-Chamber-v.-Moore-D.-Vt.pdf
