ESG+ Newsletter – 20 February 2025

Investors lack sufficient insight on ESG risks of AI

New research from VentureESG highlights a significant knowledge gap among investors regarding ESG risks associated with AI and data. In a survey of 39 asset allocators, only 19% felt they had sufficient expertise on the topic, yet over 75% acknowledged that AI and data-related externalities pose long-term investment risks. Investors are increasingly concerned about AI’s impact on intellectual property, data privacy, algorithmic bias and its substantial carbon footprint. These risks are closely tied to the Social pillar of ESG, which Bloomberg Law notes is becoming central to investor assessments. Key concerns include AI’s role in workforce management – where automated performance monitoring could reduce job satisfaction and biased hiring practices may lead to legal challenges – as well as its impact on communities, particularly regarding data centre land and energy use. The effect of AI on supply chains is another critical but often overlooked issue. AI-driven efficiency-based decision-making could disrupt economies in supplier regions, leading to sudden economic shifts that disproportionately affect certain countries. In the EU, new regulations will soon require companies to conduct due diligence on both their own activities and the activities of direct and indirect business partners, including the use of AI, to identify, prevent and mitigate negative impacts. Addressing these AI risks in the supply chain could be particularly challenging due to their complex and multi-jurisdictional nature. 

To navigate these challenges, we recommend ESG teams establish AI governance frameworks and policies that go beyond technical compliance. ESG teams will need to ensure they are involved in the company’s AI Governance approach, by collaborating with other departments, and include relevant KPIs to monitor and manage ESG AI-related risks – spanning legal, social and economic factors. The next step for companies and their ESG teams will be to disclose and communicate effectively to satisfy any potential investor concerns. 

Attract capital, not controversy: how to do ESG right

Despite recent legal and political challenges, ESG factors remain critical to any investment strategy, according to FTI Consulting’s experts. Last month, the US District Court for the Northern District of Texas  ruled  that a major American company had violated federal law by taking into account ESG considerations in the management of its employee retirement plan. They breached the law by allowing asset manager BlackRock to incorporate non-financial factors into its investment strategy. While the resulting headlines speculated that ESG was now ‘dead’ or ‘illegal’, sustainable investment has continued to grow rapidly, with global sustainable funds reaching a record $3.2 trillion in assets under management at the end of 2024, according to Morningstar – an increase of 8% on 2023. With the second Trump administration reversing ESG-friendly policies, political opposition is proving to be a challenge; 18 US states have introduced anti-ESG laws since mid-2023. On the flip side, ESG regulation is still widely supported in places such as California and the EU, while many asset managers integrate ESG factors into investment strategies for long-term value creation. We recommend that companies avoid potentially overreacting to political or legal changes, instead prioritising aligning their ESG initiatives with business goals, ensuring transparent communication in terms of value and risk. ESG should serve as a means of improving efficiency, managing risk and driving innovation, with well-structured ESG plans likely to support long-term investor confidence, especially if they can demonstrate how they plan to navigate changing regulation.

Evolution in the landscape of environmental and social shareholder proposals    

Sticking with the ESG Landscape in the US, the  Financial Times reported earlier this week that the SEC has reversed a 2021 decision that allowed investors to submit more ambitious and prescriptive shareholder proposals. This shift follows a significant decline in support for environmental and social resolutions. According to research from the non-profit ShareAction, only 1.4% of 279 shareholder resolutions aimed at improving corporate environmental and social impact received majority support in 2024 – down from 3% in 2023 and 21% in 2021. The research also highlights a stark contrast in voting behaviour between US and European asset managers. Among the 13 US-based asset managers analysed annually since 2021, average support for such resolutions fell from 40% in 2021 to 19% in 2024. In contrast, 36 European asset managers increased their average support from 68% to 82% over the same period. However, a separate study by Majority Action suggests that not all US investors are retreating. Major US pension funds—including those in New York, California and Wisconsin—have shown strong backing for climate-related resolutions in their directly held share portfolios. This aligns them more closely with European and Asian asset owners, who continue to prioritise the long-term risks posed by climate change. Reuters also reported that an investing rule that allows 401(k) and other retirement plans to use ESG in their considerations for investment decisions was upheld in court on 14 February. The rule had replaced a previous action made during the first Trump administration to bar plans from considering non-financial factors in investment decisions. The argument against the rule was an initiative by Republican-led states and other major names in oil and gas. 

Calls to protect EU Sustainability Rules amid deregulation push 

Spain has opposed weakening EU sustainability reporting rules, stressing that maintaining key regulations is essential for unlocking capital flows toward the green transition, reports Euractiv. While open to easing compliance burdens, Spain has warned that removing core obligations could signal a retreat from Europe’s sustainability commitments. It also opposes reopening the EU’s green finance taxonomy but supports refining the ‘Do No Significant Harm’ principle to qualify more investments as sustainable. A coalition of investors share Spain’s concerns according to ESG News, warning that excessive regulatory changes could create uncertainty and weaken Europe’s economic competitiveness. They argue that targeted refinements, rather than sweeping revisions, are necessary to maintain a stable sustainability framework and ensure clear rules for directing capital toward greener investments. 

Germany’s stance is more divided. While its government supports delays and deregulation, its sustainable finance advisory board warns against weakening sustainability laws, as reported by Responsible Investor. The board backs the CSRD and CSDDD, emphasising that sudden changes could undermine policymaking credibility. It also supports the double materiality principle, which considers both financial and environmental impacts, and warns that removing it would be a step backward for corporate accountability. Despite differing views, the general consensus is that regulatory changes should be cautious to preserve the EU’s sustainability goals and leadership in the green transition. 

ECB doubles down on sustainability in spite of political headwinds

Environmental Finance reports that the European Central Bank (ECB) has reinforced its commitment to managing climate and nature-related risks, regardless of political or macroeconomic trends. As regulations and methodologies change, the ECB has urged banks to ensure their risk management practices keep up with the increasing threat of climate and nature-related risks. While central banks are not climate policymakers, the ECB reaffirmed that its role is to ensure banks manage such risks effectively. This commitment stands in stark contrast to recent developments in the US, where multiple regulatory bodies, including most recently the Office of the Comptroller of the Currency, have withdrawn from the Central Banks and Supervisors’ Network for Greening the Financial System. Furthermore, the EU is also taking a step back in its sustainability reporting regime, proposing instead an ‘Omnibus’ regulation which would simplify existing regulations. There are concerns that this could potentially weaken sustainability measures. As detailed in the previous story, while other EU bodies may be shifting away from sustainability, the ECB is standing by its commitment to ensuring that banks don’t conceal or ignore climate and nature-related risks.

ICYMI 

• A 2025 CSRD Pulse Check Survey by Datamaran revealed a major shift in corporate sustainability governance. According to ESG News, the survey found that companies are treating CSRD as more than just compliance and they are embedding ESG priorities into decision-making structures. 
• Indian Union Minister of Commerce and Industry, Shri Piyush Goyal, announced an India-Qatar future partnership focused on the pillars of Sustainability, Tech and Energy, SME Street reports. 
• UAE firm Emirates Global Aluminium (EGA) is exploring clean energy options in Indonesia but has denied reports it planned to build a nuclear power plant. According to Reuters, the Indonesian government corrected its statement that EGA would build a nuclear facility to address a power shortage in North Sumatra.