ESG+ Newsletter – 13 March 2025

Impact investors and international aid cuts may present opportunity to corporates

The international aid system may be facing its biggest crisis in decades, as the Trump administration dismantles the U.S. Agency for International Development (USAID) and rejects the UN’s Sustainable Development Goals, as noted by ESG Today. With European nations simultaneously reducing foreign aid, the Financial Times looks at the threat to global development efforts.

However, the Financial Times article is not all doom and gloom, as evidence is emerging of impact investors, who prioritise social and environmental goals alongside financial returns, taking steps to fill the void left by governmental shifts. Funds focused on sustainable development have grown 21% annually over the past five years, with over $1.5 trillion of assets under management. Leaders in this space see both a challenge and an opportunity. Investors anticipate greater contributions from wealthy individuals, family offices, and development finance institutions, with a shift toward debt and equity investments rather than grants. The shift also presents an opportunity for corporations to drive social impact while strengthening their global presence, reputation and reporting. By seeking opportunities to fund causes and projects which are aligned to business priorities, companies can fill the gap left by dwindling aid, whether through inclusive supply chains, social finance initiatives, or direct investment in underserved markets. 

While impact investing cannot replace traditional humanitarian aid, it can mitigate some effects of these funding cuts. For corporations, this means taking the opportunity to bolster their reputation and attractiveness as an investment, with growing alignment between social impact efforts, licence to operate and ability to create value for stakeholders. 

EU banks urge suspension of climate disclosures amid policy uncertainty

Following the large-scale revision of sustainable finance regulations under the Omnibus package, speaking to Responsible Investor, the European Banking Federation has suggested that mandatory climate disclosure requirements for banks should be deferred. Amidst significant policy uncertainties within the EU, but also globally, EU banks are seeking assurances that the simplification of sustainable finance rules will not exclude banking regulation. With strong links between EU banking regulations and legislation governing the EU taxonomy and CSRD, the reduction in sustainability “red tape” in a bid to boost competitiveness for European countries will have significant knock-on effects for banks operating in the region. Banks are due to begin reporting taxonomy alignment KPIs and Scope 3 emissions data in 2025 but will need to draw upon disclosures made by EU companies captured by the CSRD within their value chains. The European Commission has now proposed a delay to the effective date for mandatory disclosures under the CSRD for two years, although this change has yet to be finalised. Much like other sectors, EU banks are voicing concerns that the prospect of compliance with Europe’s extensive rules around disclosure and climate risk management run in stark contrast to the regulatory freedom exercised in the US and other jurisdictions. 

Geopolitical events place focus on defence sector and ESG 

Against a backdrop of political upheaval and growing global tensions, defence spending has taken centre stage. In response to heightened tensions across Europe and the US’s indifference toward supporting the EU and NATO, countries are increasing defence spending to support Ukraine and safeguard their future. Last week, The Guardian reported on the EU’s plans to unlock €800 billion for defence; the Financial Times analysed Germany’s plans to relax fiscal rules to direct more funds to defence; and, the New York Times covered Britain’s commitment to boost defence spending by £6 billion annually. The wide-ranging calls for greater investment in security has led to a wider debate on the treatment of defence companies by investors, including calls for pension funds to reconsider their ESG criteria when evaluating the industry which, historically, has been excluded for being deemed “unethical“. Certain  pension funds are holding their ground. In response to an open letter from 100 Labour MPs, first reported by the Financial Times, urging fund managers to invest in the UK’s domestic arms industry, two of the UK’s largest pension schemes, managing £83 billion in assets, told that same paper that they would continue to exclude firms involved in weapons production from their ethical funds. 

There has been a clear shift in how the defence sector is being viewed – largely against the backdrop of growing political support for greater investment in the sector. Pressure on ESG investors to deploy capital to defence stocks will likely continue, with the argument potentially focusing on how national security and stability is not fundamentally misaligned with overarching ESG objectives. The ongoing debate demonstrates that sustainable and ethical investments represent significant pools of capital, with politicians taking steps to try and unlock their value for a particular industry. Regardless of sector, companies should take note – ensuring you understand how different segments of the market view your industry and your individual company may well allow for access to a wider range of investments and lower your cost of capital.

ESG and DEI – the great relabelling might not change much on the ground 

As political pressure mounts on investors and companies, particularly in the US, a new buzzword is emerging: “resilience”. According to The Wall Street Journal, investors increasingly use the term as a catch-all for investments aimed at mitigating the effects of climate change. Despite political headwinds, long-term investors, especially pension funds, continue to view climate change as a structural trend and prioritise energy transition related investments. 

The “environmental” pillar of ESG isn’t the only one facing scrutiny. The backlash against DEI (Diversity, Equity, and Inclusion) has led to reassessments of workplace equity efforts. An article in the Harvard Business Review suggests a shift from individualised and isolated DEI initiatives to an outcomes-based, systems-focused model emphasising fairness, access, inclusion, and representation (FAIR). 

Ultimately, ESG’s relabelling may not change much on the ground. Climate risks persist, and workplace inclusivity remains popular and key to reducing workforce challenges. While shifts in language may help navigate current political pressures, maturing ESG strategies focused on material risks and opportunities will likely prove more impactful in the long run, whatever they are called.

Filling the void on climate action: challenges for BRICS

As the U.S. shifts its focus inwards, and the EU becomes increasingly vocal on the need for “competitiveness”, other nations may have grasped an opportunity to fill the leadership gap in climate negotiations, Reuters reports. The BRICS nations – Brazil, Russia, India, China, and South Africa (and now including Egypt, Ethiopia, Indonesia, Iran and the United Arab Emirate) – are seeking to capitalise on their recent success at the COP16 nature talks, where their proposal helped secure an agreement in Rome, potentially unlocking billions for ecosystem protection. Given South Africa’s G20 presidency and Brazil’s role as COP30 host, the nations are well-placed to influence the outcomes of negotiations this year.  

However, it is impossible to ignore the internal divisions which threaten their ambition. While Brazil pushes for faster decarbonisation, Russia remains committed to fossil fuel sales and is embroiled in sanctions and its war in Ukraine. Furthermore, BRICS nations are refusing to assume the official financial obligations of donor countries. As wealthier nations cut development aid while demanding more responsibility from biodiversity-rich countries, the reluctance of BRICS to fill the financial vacuum left by the US will complicate climate finance negotiations. Upcoming meetings in Bonn and Seville will test BRICS’ cohesion and their ability to push for greater influence over global financial mechanisms like the Global Environment Facility (GEF). Advocates argue BRICS can act as a “bridge” between the Global South and shifting governmental outlooks in the West. Yet, ultimately, their chance at success depends on their presentation of a unified agenda to reshape global climate financial governance. 

China’s balancing act on green energy

Indeed, BRICS’ largest economy, China, through its National Development and Reform Commission (NDRC), has unveiled plans to ramp up investment in major renewable energy projects, including new offshore wind farms and large-scale solar and wind power sites as reported by Time. These steps align with China’s broader strategy to lead the global green energy transition while working towards carbon neutrality by 2060. Since 2020, the country has made significant strides, exceeding its 2030 renewable energy capacity target ahead of schedule. In 2024, China led global green energy investments, accounting for two-thirds of the world’s USD 2.1 trillion in clean energy spending. 

However, despite advancements in renewables, China still heavily relies on coal (including approvals of new coal plants in 2024), which continues to be a key part of its energy mix and creates tension between meeting climate goals and ensuring energy security. While China’s green energy exports and initiatives like the Belt and Road focus on global green infrastructure, emissions continued to rise in 2024.  As the world’s largest emitter, China’s ability to balance its coal dependence with renewable growth can play a pivotal role in achieving global climate objectives. 

ICYMI 

• The United States has officially withdrawn from the board of the United Nations’ ‘loss and damage’ fund, designed to support developing countries and vulnerable nations devastated by climate-driven disasters, ESG News reports.  
• The Sustainability Standards Board of Japan released its finalised sustainability disclosure standards, based on the standards developed by the IFRS Foundation’s International Sustainability Standards Board. As reported by ESG today, this marks a significant step towards internationally-aligned sustainability reporting requirements for companies in Japan.