The Politics and Policy of ESG
Harri Coldray Senior Associate, Global Counsel
Micol Sagal Ambroso Associate, Global Counsel
As Q2 draws to a close, the politics of sustainable finance across Europe and the UK have entered a new phase, from an introspective re-valuation among policymakers in Q1, to a wave of (very!) public political debate in Q2.
ESG has now moved materially further away from its early age of political idealism — not just in narrative, but now, critically, in substantive policy proposals. The far more volatile territory of “pragmatism”, to use a term coined by several policymakers in recent months, means the real test now lies in the execution of simplification measures under the weight of political pressure from seemingly all angles.
Q2 has necessitated a shift, therefore, not just in approach to policy but also, perhaps more critically, in approach to policymaking: policymakers looking for partners they can trust to help them navigate an increasingly murky political territory — “critical friends” from business who can offer honest assessments and solutions.
Nowhere is this clearer than in Brussels. EU policymakers, once resolute in building the most comprehensive sustainable finance framework in the world, have set out a range of simplification measures which have only served, to date, to underline deep-rooted political and industry divisions as well as providing a new lesson; often, taking one’s time initially, can help to speed things along over the medium to long term.
Having heard, loud and clear, that their framework has become too complex without sufficiently moving capital in the direction of Green Deal (now, the Clean Industrial Deal) ambitions, the prioritisation of a new set of “pragmatic” proposals in the first 100 days met with a mixed response within the EU’s political institutions and wider industry. This new approach to ESG is no longer an aspiration confined to reports from the likes of Mario Draghi, but a policy imperative now meeting its political foes on the left, right, and centre.
What we are witnessing are quiet lessons in humility: in the importance of getting industry buy-in the first time around, and in recognising that high ambition, without credibility among those it impacts, creates ever more political friction. Q2 therefore marks the moment the EU is now choosing to turn to business not just for compliance, but for guidance. To understand what, ultimately, is within the parameters of the palatable.
As we cross the Channel, UK Ministers watch the EU’s pivot with equal doses of interest and concern as they themselves embark on a journey to deliver a “world-leading green finance regulatory framework”. The response in Q2 has been to freeze and hope the EU’s journey from aspiration to action on simplification offers a glimmer of clarity on what such a world-leading regulatory framework might look like in the UK.
It has promised much to date: a mandatory green taxonomy, ISSB-aligned disclosures, and sector-level transition planning, to name just a few proposed interventions. Yet in practice, the pace has slowed. Consultations are being delayed whilst political caution creeps in. With intensifying Republican rhetoric in the United States around the “concerning” global reach of European ESG rules, a desire not to poke the bear has led to a clear instinct to tread carefully in Q2. Eyes now turn to Q3, where an expected suite of consultations will likely be framed by Ministers as meeting obligations on sustainable finance without exposing firms doing business in the UK to any competitive disadvantage.
For banks, credit institutions, and wider market participants, Q2 has therefore opened a window across Europe. As the EU redirects mid-flight and the UK weighs up its direction of travel from the relative comfort of the departure lounge, this appears to be a moment for industry voices to step forward as informed, constructive voices on the ground. Being a “critical friend” as we look to Q3 means exactly this: providing real-world insights on what works, what doesn’t work, and what solutions will make ESG frameworks durable, investment-aligned, and globally credible.
Q2 therefore charts the story of a political reality check, with muted optimism (at best) that Q3 holds the way out. This lends itself to an emerging recognition amongst policymakers that they can’t go it alone on this agenda. Simplification, therefore, is not being positioned by advocates within political institutions as equivalent to retreat — instead, it is positioned internally as an opportunity to bring industry closer to the helm.
Political divisions creating policy uncertainty in the European Union
Navigating political crosswinds
With the Commission’s omnibus proposals set out in Q1 to simplify the ESG framework, policymakers have truly entered a political battle which is defined by divisions and, so, looks far from certain in terms of where it may land on precise policy.
The Commission has only fired the starting gun on ESG simplification, launching a negotiation cycle at member state and European Parliament level which won’t be resolved quickly. We should recall that the files in question — the Corporate Sustainability Reporting Directive, Corporate Sustainability Due Diligence Directive, and Taxonomy — each took roughly two years to negotiate first time around. ESG policy has, however, now only become more fractured along deep and increasingly visible political lines in the time since.
Emerging member state divisions
Within the Council of the European Union, divisions have sharpened significantly over the course of Q2. The principle of simplification may be broadly accepted, but consensus quickly disappears when it comes to what that simplification should actuallyentail — and how far it should go. Some member states, notably Luxembourg and Czechia, have aligned closely with the Commission’s proposals, eager to accelerate implementation and reduce corporate friction. Others, including Spain, have voiced concern that the simplification agenda risks undercutting the EU’s sustainability commitments, arguing instead for a retention of wider reporting scopes and more rigorous frameworks.
The sharpest divergences, however, have come from France and Germany. In the space of just two weeks, President Macron and Chancellor Merz each publicly called for the scrapping of the Corporate Sustainability Due Diligence Directive (CSDDD). Macron used an address to business leaders to advocate for outright repeal. Merz, meanwhile, announced plans to scrap Germany’s national supply chain law and is pushing for similar action at the EU level.
Yet this is not, in practice, a coordinated move toward repeal. The political will to dismantle ESG rules entirely is not yet shared across the Council, nor is there any formal majority for doing so. Rather, France and Germany’s posturing is best read as a negotiation tactic to influence the Polish Council Presidency’s expected compromise text. Their interventions are designed to secure major concessions rather than to blow up the process altogether.
The coming months will test the ability of the Council to reconcile these positions under Poland’s presidency, and then Denmark’s presidency to follow from July. The Danish government have already publicly rejected movements from Germany and France, warning against conflating “better regulation” with overt deregulation of sustainable finance. Whilst an important signal ahead of Denmark’s presidency, the challenge will nevertheless be immense—squaring calls for full repeal with concerns over backsliding—against a backdrop where compromise texts can become deeply political documents.
No clear coalition in the European Parliament
If divisions at member state level are challenging, those in Parliament are even more pronounced. Here, the two traditional pillars of majority-building — the centre-right European People’s Party (EPP) and the centre-left Socialists & Democrats (S&D) — have found themselves fundamentally misaligned on ESG.
The EPP, which has broadly supported the Commission’s direction of travel and counts Commission President Ursula von der Leyen among its ranks, is pushing for simplification measures to move forward largely as drafted. The S&D, however, views many of the same proposals as a capitulation — an overt deregulation effort that undermines the Green Deal’s (now, Clean Industrial Deal) integrity at a critical moment.
This is not an abstract disagreement. It strikes at the heart of legislative viability. Most parliamentary majorities hinge on cooperation between the centre-right, centre, and centre-left. Without the S&D on board, the EPP would be left looking rightward — to groupings further to the right that have made no secret of their desire to rip up ESG rules entirely. To “swap the letter opener for the chainsaw” is the rhetoric from the right of the EPP. While that bloc could theoretically provide the votes, the political optics — aligning the EU’s sustainable finance agenda with its most vocal detractors — would be deeply uncomfortable for many in the EPP.
How the politics is shaping the policy
Political divisions are already reshaping policy in ways that may depart from the European Commission’s original proposals. The European Parliament is where political strategy is often most transparent, although Q2 debates signal only early stages in a volatile policymaking process which could take us well into 2026. We can, however, draw out a sense of direction of travel moving into Q3.
Firstly, reports suggest that Warborn is considering raising the Corporate Sustainability Reporting Directive (CSRD) threshold to 3,000 employees. Indeed, the most contentious point arguably remains company scope. It is difficult to envision the S&D bloc agreeing to such a narrowing of scope. They will see this as a well-worn negotiation strategy from the EPP: start with an extreme position in order to make subsequent compromises appear reasonable. This is in the hope that, faced with the threat of further dismantling of the sustainable finance framework, progressive voices in the European Parliament may reluctantly gather around the Commission’s original proposal on scope as a compromise position.
Beyond the clearly politically charged debate over scope, political debates are also seeping into technical areas. Warborn has also floated the deletion of the requirement for corporate climate transition plans from the CSDDD — and possibly from the CSRD as well.
There is also an expectation that the European Sustainability Reporting Standards (ESRS), underlying the CSRD, will be targeted in Q3. This could include capping mandatory ESRS datapoints at one hundred — which would be tied in with the ongoing efforts of the European Financial Reporting Advisory Group (EFRAG) to simplify reporting and better align them with global standards.
Tracking the reshape: where do we stand?
Charting the UK’s ‘third way’ amidst global ESG crosswinds
Practical politics on ESG?
If the EU is now mid-flight in its pivot on ESG policy, the UK remains firmly in the departure lounge—watching closely for cues from both Brussels and Washington. Across Whitehall, Q2 has marked a period of quite visible stasis on sustainable finance, driven not by disinterest, but by a nervous political awareness. UK Ministers, particularly within HM Treasury, are increasingly conscious of the backlash faced by the EU’s expansive ESG framework and the growing hostility towards ESG regulation in the United States under President Trump’s administration. The UK’s policy instincts, in response, have shifted to cautious pragmatism.
While the government has not formally disavowed its previous commitment to deliver a “world-leading green finance framework” (and, in fact, still regularly coins this phrase) the openness towards any kind ESG scepticism has shifted. This means that Ministers and officials are treading carefully, seeking to avoid the political missteps they perceive in the EU’s initial regulatory overreach and mindful of the market risks associated with drawing fire from US-based institutions.
The UK is, in effect, attempting to plot a third way from the outset: preserving credibility on ESG while stepping back from perceived regulatory excess. This speaks to an agenda driven right from the top, with Prime Minister Sir Kier Starmer committing to “cut the weeds of regulation”. Officials across government speak openly — if cautiously — about finding a pragmatic path, one that maintains investor confidence and positions the UK as a competitive jurisdiction for sustainable capital.
This is not to suggest the UK is abandoning sustainable finance. Rather, it is a recalibration of both pace and posture. The government’s rhetoric on transition finance and green investment remains intact, and behind closed doors, departments are bringing corporate voices more squarely into the policymaking process.
The question being posed internally is straightforward, if politically fraught: how can the UK deliver meaningful ESG policy outcomes while avoiding the backlash currently playing out in the EU and pre-empting resistance from influential US actors? The government’s response to date has been tentative — delays, re-scoping, and quiet reassurances to business that no unnecessary burdens will be imposed. As they continue to promise a suite of interventions coming down the line, they will view the current hesitancy as offering a strategic advantage. The story being told will be that the UK has an opportunity to build from a more “informed” baseline, applying the lessons of overreach and under-engagement before regulation is locked in.
Moreover, fiscal and political headwinds raise the bar for sustainable finance regulations. With new spending pressures emerging and shifting priorities no doubt pointing towards defence, trade, and growth, future ESG regulatory interventions now must be less about compliance and more about being genuinely catalytic. Designed to mobilise green investment, but not to force it through heavy-handed regulation.
In this context, the UK government has also shown a willingness to invite “critical friends” into the room in recent months — industry actors (including from overseas) who can speak plainly about what ESG frameworks are workable, which interventions would actually shift capital, and what kind of policymaking process builds rather than erodes market confidence.
Over the next 6–12 months, that openness may prove decisive. As consultations are redrafted, reporting thresholds debated, and the broader green finance roadmap refreshed, those around the table — especially from the financial services sector — will be expected not only to respond, but to help shape. The coming quarter will test whether that can be converted into policy that is simpler and smarter, but for now the UK remains firmly grounded.
Watching from the stands: delays to green finance regulations
If UK politics in Q2 has been defined by a cautious pause on sustainable finance, the policy reality is beginning to reflect this—sometimes through quiet reversal, sometimes through strategic delay. That is to say that this political shift, like in the EU, has real-time policy consequences.
The clearest signal of this shift came in May, when three trailed consultations — covering the UK’s Sustainability Reporting Standards (SRS), mandatory climate transition plans, and sustainability assurance standards — were withdrawn from publication at the last minute as Ministers decided to consider these further. Clearly it is not just sustainable finance regulation in the EU which must now clear a de-facto “competitiveness test” before it proceeds. The lesson from Brussels also appears to be that taking a little extra time to consider options can be especially useful over the long run.
In practice, this has meant reassessing commitments once seen as settled within a Labour Party in opposition. Officials have yet to make a final call (that had been largely expected in Q2) on whether the UK will proceed with a green taxonomy at all, following the pivot in Q4 2024 to consult on the “value” of pursuing a taxonomy altogether. The government’s previous endorsement of 1.5°C-aligned transition plans, a manifesto commitment, is now under quiet review. The UK is not abandoning ESG regulatory policy — but it is seeking a model of regulation that prioritises buy-in.
The forthcoming consultation package, now expected in Q3, will also be viewed in the context of Transatlantic dynamics. As US political hostility towards ESG intensifies — particularly among Republican lawmakers who have labelled EU rules a “non-economic trade barrier” — UK ministers are increasingly focused on avoiding friction with US stakeholders. There is little appetite in Whitehall to “poke the bear”, particularly at a time when the UK is seeking closer economic ties with Washington and a wider deregulatory reset at home. That instinct could heavily influence, for example, how international firms are treated under the UK’s green finance regime.
Tracking the third way: where do we stand at the end of Q2?
Copyright © 2025 Loan Market Assocation