The era of ESG as a marketing hook is over – or so it seems. ESG is facing a wave of political pushback, regulatory rollback, crumbling alliances and public scepticism. But while the acronym may be losing its shine, the underlying forces it sought to address – climate risk, social instability, and resource dependency – are only becoming more urgent and remain financially material for parties across the banking sector and beyond.

The numbers are sobering. In the first half of 2025, global economic losses from natural catastrophes reached $162 billion, with the United States alone accounting for $126 billion. In 2024, disasters inflicted $417 billion in direct economic costs worldwide – 63% of which were uninsured. Banks are responding by integrating climate risk into credit models and expected credit loss (ECL) calculations, a sign that sustainability is moving from aspiration to risk management.

For banks and businesses, the message is clear: sustainability is not a box-ticking exercise. It is becoming a strategic imperative – central to risk management, regulatory compliance and competitive positioning. The shift is from rhetoric to resilience. While ESG as a label may appear politicised and somewhat tarnished, the underlying economics of climate and social risk are hardening. Those who treat sustainability as a temporary trend risk significant value losses to their portfolios.

This article explores how businesses and banks are navigating the new-look ESG landscape – where success depends not on slogans, but on the ability to adapt to structural risks that markets can no longer ignore.

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In this episode, Heike Schmitz sits down with Ed Woolcock, Co‑Head of Energy Transition and Sustainability at Marsh Risk Consulting, to unpack why ESG‑related challenges continue to escalate across the banking sector.

Read the Marsh report here: ISSB and the future of global sustainability reporting

Navigating divergence – Serving two masters

The political and regulatory pendulum is swinging forcefully — and not in one direction. Different jurisdictions see the topic of ESG through the lens of their own politics, culture and business environment. 

For global banks, this divergence creates operational complexity. A coherent response requires a hierarchy of standards, anchored in credible global frameworks (for example, IFRS S1 and S2), with an ability to “dial up” for double materiality and sector-specific nuances in Europe, and to “dial down” language where terminology is contested in the US, whilst maintaining outcome equivalence in governance, risk management and decision-useful data.

Product governance and marketing controls should be tuned to the strictest regime (for example, the EU Sustainable Finance Disclosure Regulation (SFDR)) to minimise re-work and mis-selling risk, supported by country-by-country variants for nomenclature and disclosures.

Other practical moves to be considered include: a single, board-approved sustainability risk appetite, supported by country-specific addenda that tailor implementation to local regulatory, political, and market contexts. These addenda wouldn’t adjust the level of risk tolerance but would define how the overarching appetite is operationalised – such as adapting disclosure language in the US, incorporating double materiality in the EU, or phasing in controls in emerging markets. As Heike Schmitz puts it: “Labels are local, but economics is global. You do not change the physics of risk simply because you cross a border.”

Additional moves include harmonised methodologies for financed emissions and transition planning that can be reconciled to local rules; cross-border scenario analysis with jurisdictional overlays for local compliance; and a local language approach for restricted claims and terms in sensitive markets.

From compliance to capital allocation – Sustainability as a strategic lever

Sustainability is rapidly evolving into a structured financial discipline, as common standards for reporting and assurance will be lifting the quality of information. Leading financial institutions are embedding sustainability in their core engines processes origination, pricing, capital allocation and conduct. Standard-setters are reinforcing this shift: for instance, the SBTi’s new Net-Zero standard for financial institutions (2025) proposes concrete requirements such as ending project finance for oil & gas expansion and setting climate targets for capital markets underwriting.

In wholesale lending, credit policies are being recast to consider counterparty transition plans, asset-level exposures and pathways for hard-to-abate sectors, albeit in some cases to the ire of activistic NGOs seeking accelerated ‘action’. Transition finance is maturing beyond exclusionary screens to structured support for credible decarbonisation, using performance-linked covenants with meaningful ratchets, step-ups and information rights.

In capital markets, issuer-level diligence now interrogates the integrity of sustainability-linked features and the feasibility of KPIs. In M&A and private capital, due diligence is focusing on topics such as physical climate risks, potential stranding, supply chain human rights exposure, remediation and adaptation costs as well as sound sustainability governance.

Within banks, sustainability moves from being an add-on to full integration into the operating system. Boards continue sharpening oversight through dedicated committees and clearly articulated accountability for sustainability-related risks across the three lines of defence. Senior management remuneration is increasingly tied to sustainability-related outcomes, particularly climate transition targets, financed emissions reductions, volumes of sustainable finance, and workforce engagement and well-being, alongside traditional financial performance metrics. Banks are developing sustainability data governance frameworks with robust internal controls that enable audit-ready ESG disclosures, ensuring end-to-end traceability from transaction origination to external reporting.

The UK is a strong example of this, with banks awaiting the outcome of the PRA’s recent consultation to update the 2019 Supervisory Statement on managing financial risks from climate change. The updated supervisory expectations will focus on the need to understand and embed climate-related risk management across banks and insurers to improve resilience. The proposals address matters from Board management information, to the use of climate scenario analysis in capital adequacy processes, and suggest that banks and insurers develop quantitative risk appetite metrics and limits for each material climate-related risk that they face.

Board oversight and governance

As of 2024, 77% of S&P 500 companies now link executive compensation to ESG performance metrics, up from 66% in 2021. Common targets include emissions reduction, diversity and inclusion, and workforce safety, with a growing emphasis on quantifiable, forward-looking metrics. In Europe, 90% of listed companies now include ESG metrics in executive pay, with 70% using quantitative targets.

Risk, data and accountability in the prudential era

Supervisors have shifted from nudging to mandating. Prudential authorities in Europe, the UK and Australia now expect banks to identify, measure and manage climate-related financial risks, with results evidenced in ICAAPs, stress testing and board papers. The European Supervisory Authorities (EBA, ESMA and EIOPA) have gone further: draft Joint Guidelines on ESG stress testing instruct national regulators to integrate ESG factors into supervisory stress tests. The rollout will start with climate-covering physical shocks such as extreme weather and transition risks arising from policy shifts – before expanding to social and governance risks as data improves.

Conduct regulators are tightening rules on how sustainability is described, to curb greenwashing and protect consumers and markets. In the UK, the Digital Markets, Competition and Consumers Act empowers the CMA to fine firms up to 10% of global turnover if they break consumer law, including misleading green claims. From May 2024, the FCA’s anti-greenwashing rule requires that any reference to a product’s sustainability characteristics be “fair, clear and not misleading” and consistent with its actual profile. Australia’s ASIC has pursued enforcement for overstated environmental claims, while in Europe, regulators have been active. France’s AMF recently fined a fund manager €40,000 for failing to substantiate ESG criteria as advertised. In Germany, prosecutors imposed a €25 million penalty on an asset manager for negligent omissions in its sustainability documentation.

Conclusion: The reset

The post-hype phase is not a retreat from sustainability; it is a reset towards disciplines that create advantage. The banks which will outperform are those which treat sustainability as a system – aligning strategy, risk, data and client engagement – rather than seeing it as add-on to their business or marketing tool.

Practically, that means anchoring in a strong global sustainability approach a consistent strategy, tailored execution, and robust governance. This means a strategy which can be adapted smartly to local rules; embedding transition and reputation considerations in origination, pricing and portfolio steering; building data and model capabilities suitable for scrutiny and assurance; hard-wiring safeguards against greenwashing into product governance and communications; and using digital partnerships to speed up data delivery, compliance and new forms of financing.

In short, move beyond marketing and labels. Build the operating capabilities which will stand up in the boardroom, in the market and, if necessary, in court. Competitive sustainability is earned quietly, through execution.