As we approach the February 2025 reporting season, several important environmental, social and governance (ESG) themes are emerging that will impact businesses and investors alike. Understanding these trends is crucial for organisations navigating the evolving regulatory landscape and stakeholder expectations.
Climate and Decarbonisation: Growing Challenges
The urgency of climate action continues to intensify, highlighted by recent events such as the Los Angeles wildfires and 2024 being confirmed as the warmest year on record. In Australia, rising temperatures and high risk for bushfires in 2025 create significant concerns for various industries.
With Australia's mandatory climate laws coming into effect in January 2025, companies face increasing pressure to reassess and act on their climate and net zero targets. However, challenges with decarbonisation technologies are becoming more apparent:
- High costs and lack of green premiums have led companies like Fortescue, Origin Energy and Woodside to scale back green hydrogen commitments
- Air New Zealand dropped its 2030 emissions reduction target partly due to high prices for sustainable aviation fuel
- As 2030 approaches and proposed technologies and costs are further explored, more companies may revise their targets
Companies are increasingly acknowledging the challenges in measuring and reducing Scope 3 emissions, with a growing focus on collaborative approaches. For example, BHP, BlueScope and Rio Tinto have partnered to develop low-carbon steel smelting technology.
Methane has emerged as one of the most viable near-term decarbonisation levers for coal, oil, gas and waste companies, with potential for greater regulatory action and increased scrutiny.
Environmental Issues: Beyond Carbon
Environmental topics beyond carbon emissions are gaining prominence due to regulatory and community focus:
- Pollution concerns, particularly PFAS
- Plastics and waste management
- Nature and biodiversity protection
- Water scarcity
Initiatives like the Taskforce on Nature-related Financial Disclosures (TNFD) are driving companies to analyse their operations' impacts on nature. In Australia, 23 companies including Brambles, GPT Group, Qantas and Telstra have committed to adopting TNFD in their reporting.
Water scarcity and its intersection with community and Indigenous groups, mining operations, data centres, and nuclear power will continue to be a critical focus as global warming accelerates.
Workforce: Safety, Culture, and Industrial Relations
Safety remains a critical concern for companies, with mixed progress across industries in 2024. Psychosocial safety and workplace culture are gaining increased attention, particularly in mining and retail sectors.
Recent landmark class actions against major mining companies for alleged widespread sexual harassment and gender discrimination highlight the need for companies to go beyond policies and take decisive action to prevent and address harassment.
With Donald Trump returning to the US presidency, many US companies have retreated from some of their diversity goals. Australian companies will be closely watching these developments in 2025.
The impact of industrial reforms and strikes in 2024 is likely to continue affecting wages and operational costs in 2025, with potential implications for inflation and company performance.
Artificial Intelligence: Opportunities and Governance
Mentions of AI and machine learning increased significantly during the August 2024 reporting season, a trend expected to continue in 2025. While companies explore AI use cases, responsible AI governance is crucial to address challenges including:
- Energy consumption for data centres
- Ethical, social, and privacy considerations
- Compliance with new regulations like the EU AI Act
AI is also playing an increasingly important role in ESG data collection, reporting, and supply chain monitoring, particularly for addressing modern slavery risks.
Corporate Governance and Social License
Leadership governance issues and regulatory challenges have significantly impacted companies' social licenses in 2024. Looking ahead, investors will increasingly expect boards to:
- Hold CEOs accountable
- Ensure leaders demonstrate focus, integrity and freedom from conflicts of interest
- Maintain shareholder confidence and organizational stability
Companies that fail to demonstrate genuine commitments to governance risk losing investor confidence and facing regulatory or legal action.
Regulatory and Political Uncertainty
Significant regulatory and political uncertainties loom in 2025:
- The incoming Trump administration may affect ESG initiatives, including the Inflation Reduction Act
- Australia's Federal Election (expected April-May 2025) will focus on cost of living pressures
- The main pillar of the Coalition's energy plan includes nuclear power
- Proposals to roll back mandatory emissions reporting could create further uncertainty for companies
These political shifts could significantly impact how companies navigate the energy transition and climate reporting requirements in 2025 and beyond.
As we move through 2025, companies that proactively address these ESG themes will be better positioned to meet stakeholder expectations, navigate regulatory changes and create long-term sustainable value.
