Navigating Rapidly Increasing ESG Disclosure Requirements: 2025 outlook

This  article was first published by the International Compliance Association, www.int-comp.org.

As the dust settles on the 29th Conference of the Parties to the UN Framework Convention on Climate Change (COP), investors and corporates will only have little time ahead of what promises to be a significant year for global sustainability and ESG efforts.

The sustainability rollercoaster 2023 – 2025

By almost any metric, 2023 was a watershed year for ESG-related developments globally, particularly regarding corporate sustainability reporting. It saw the release of no fewer than four key disclosure standards. The International Sustainability Standards Board (ISSB) reporting standards were published and these were swiftly followed by  the first set of European Sustainability Reporting Standards (ESRS) under the EU Corporate Sustainability Reporting Directive (CSRD), the final guidance of the Task Force on Nature Related Disclosures (TNFD) and the final UK Transition Plan Taskforce (TPT) Disclosure Framework.

By comparison, 2024 has largely been a year of anticipation, rather than action. The mid-point of the year saw the long-awaited Corporate Sustainability Due Diligence Directive (CS3D) come into force, albeit in a significantly amended form compared to the initial legislative proposal. However, the pace of ESG-related regulation slowed down overall, with a number of regulatory developments delayed.

The pace of new sustainability regulation is likely to subside

Looking ahead to 2025, the results of the US elections cast a long shadow of doubt over the immediate future of sustainability-related regulation in the US. In Europe, too, following parliamentary elections held in July 2024, the newly elected European Commission has signalled an intention to prioritise considerations of industrial competitiveness more highly on its legislative agenda, as exemplified by the proposed deferral  of the date of application of the Deforestation Regulation from 30 December 2025 to 30 December 2026. At first glance, indications are that we are not likely to see an influx of new sustainability-related regulation announced in 2025. However, the year ahead nonetheless promises to be a significant one from a corporate sustainability reporting perspective – a year of implementation.

Publication of first CSRD reports will be closely monitored

Most notably, the first batch of CSRD reports by some EU-listed large undertakings or EU-listed parent undertakings of large groups are required to be published in 2025. Their publication is keenly awaited by stakeholders, with many eager to see the level of detail included in the reports and, most crucially, how they are received by investors and regulators.

It is important to note that, as a Directive, the CSRD is required to be transposed the national legal systems of Member States, with regulatory oversight taking place at Member State level. In September 2024, the European Commission formally commenced infringement proceedings against 17 Member States, for failure to transpose the CSRD by the transposition deadline of 26 July 2024. The CSRD does not prescribe any penalties for non-compliance, meaning this will be dependent on the implementation regime in each Member State.

While regulatory oversight of CSRD reports in 2025 is likely to be limited as a result of delayed Member State transposition, reactions from investors and wider stakeholders are likely to guide the direction of travel for corporates reporting in 2026 and beyond.

What is in store for the UK Sustainability Reporting Standards?

In September 2024, the UK government confirmed its intention to publish a decision in the early part of 2025 announcing the endorsement of IFRS S1 and IFRS S2 and the adoption of the ISSB standards in the UK by way of the 'UK Sustainability Reporting Standards' or 'UK SRS'. It is currently expected that reporting in accordance with the UK SRS will be made mandatory for public companies, but a number of uncertainties remain.

First, it remains to be seen from what year public companies will be required to report in accordance with the UK SRS, particularly as the UK has been a relatively slow mover, so far, as far as adoption of the ISSB standards is concerned.

Second, it is not yet clear whether reporting in accordance with the UK SRS will be made mandatory for private companies. For reference, while China has indicated that reporting will be made mandatory for both public and private companies in due course, key financial markets such as Japan, Singapore and Hong Kong have indicated that reporting in line with modified versions of the ISSB standards will be made mandatory only for public companies.

Lastly, the extent of alignment between the UK SRS and the ISSB standards will be a key concern for many stakeholders. Global approaches vary widely in this respect. For example, the Sustainability Standards Board of Japan announced earlier this year that the ISSB standards will be adopted in full in Japan, and the extent of deviation of the ASRS from the ISSB standards is minimal. By contrast, the draft Corporate Sustainability Disclosure Standards issued by the Chinese Ministry of Finance in May 2024 deviate from the ISSB baseline in a number of key respects. It is important to note that the disclosures required under the UK TPT disclosure framework published in 2024 are generally more detailed than the ISSB standards. Yet, it remains to be seen to what extent  these will be incorporated in the UK SRS, particularly given that the TPT was recently dissolved, with the ISSB assuming responsibility for its materials.

Interoperability and mutual recognition of reporting standards will be top of mind for corporates

Many companies are likely to report against more than one sustainability reporting regime, either on a mandatory or voluntary basis. Ensuring the interoperability of reporting standards – most notably CSRD and ISSB variations – will therefore be a key concern for corporates in 2025. So it is encouraging that the ISSB and the European Commission's technical advisors, EFRAG, recently published technical mapping documents intended to aid the alignment of disclosure requirements to facilitate compliance. A similar story can also be told with respect to how the TNFD recommended disclosures correspond to ESRS disclosure requirements.

Such mapping documents are helpful in aiding companies' understanding of the degree of overlap between disclosure requirements under the various standards they report against, and therefore help streamline the administrative burden and cost of preparing appropriate disclosures.

They do little, however, to combat the perception that the ever-expanding universe of sustainability standards and topics against which corporates are expected to report is becoming overwhelmingly burdensome. It is also far from clear that the increasing complexity of sustainability disclosures succeeds in helping investors and stakeholders understand companies' sustainability risks, impacts and performance.

Accordingly, corporates will need to keep a close eye, throughout 2025, on the extent to which national regulators issue guidance or decisions regarding the mutual recognition of disclosures made under various reporting standards, particularly the CSRD and national ISSB variants.

Assurance requirements

The CSRD currently requires reports to be assured on a limited assurance basis, rising to reasonable assurance from 2028. Some jurisdictions adopting mandatory ISSB reporting are also introducing assurance requirements, although approaches vary. A market study published by the UK Financial Reporting Council in October 2024 indicated that there is currently a lack of uniformity across assurance providers in their approaches to assuring sustainability-related disclosures. For corporates commencing mandatory reporting in 2025, this lack of uniformity poses a significant challenge to their ability to discharge their regulatory obligations. As a result, both corporates and regulators will need to work with assurance providers in order to standardise assurance of sustainability-related disclosures.

Bottom line outlook for 2025

This year has in many ways been one of waiting following the surge of sustainability-related regulation and reporting standards introduced in 2023, as the pace of new regulation has subsided and companies and regulators have been waiting for the commencement of obligations under key regulatory frameworks, including most notably the CSRD.

By contrast, 2025 is set to be a year of implementation, as the introduction of new regulation looks likely to subside, while regulators focus on implementation of the measures introduced over the past two years, including the CS3D. Many large corporates will already begin preparing for discharge of the due diligence obligations introduced under the CS3D from 2027 onwards. The European Commission, for its part, will be keen to ensure that Member States meet the transposition deadline of 26 July 2026. 

The impact of the second Trump administration on US and global sustainability regulation will undoubtedly be closely monitored. From a corporate sustainability reporting perspective, however, the key themes to watch out for in 2025 will be the publication of the first CSRD reports by large EU-listed companies as well as the continued adoption of ISSB-based sustainability reporting standards by non-EU countries, including the UK. The scrutiny with which the first mandatory CSRD and ISSB-aligned reports are received in 2025 from regulators and stakeholders is likely to be crucial in setting the tone for companies reporting over the coming years.