While the United States (U.S.) had begun to diverge from the European Union (EU) on sustainability policy in 2024 due to political and legal shifts, that trajectory accelerated in 2025. Under the current administration, the U.S. has taken a markedly different path from the EU in addressing climate change, renewability, and environmental, social and governance (ESG) priorities. As the EU continues to advance green development goals, enforce disclosure mandates and strengthen international climate commitments, the U.S. has pursued broad deregulation, reducing the role of climate-related rules in corporate governance and financial markets.
This growing divide is especially evident across five areas: international climate diplomacy, regulatory frameworks and disclosure, green finance, governance accountability and cross-border business strategy.
1. Divergence in Climate Commitments
On January 20, 2025, the current U.S. administration initiated steps to withdraw the U.S. from the Paris Agreement for the second time, citing concerns about economic sovereignty and the impact on domestic energy industries. The withdrawal is expected to take effect in early 2026 and reflects a renewed commitment to domestic energy development and regulatory reform.
In contrast, the EU has reaffirmed its alignment with the Paris Agreement. European Commission President Ursula von der Leyen stated, "The Paris Agreement continues to be the best hope of all humanity. So, Europe will stay the course and keep working with all nations that want to protect nature and stop global warming." The EU's climate ambitions are embedded in binding law through the European Climate Law, which mandates a 55% emissions reduction by 2030 and climate neutrality by 2050. Complementary initiatives, including the European Green Deal and Carbon Border Adjustment Mechanism (CBAM), further support this approach.
On July 24, 2025, the EU and China — two of the world's largest emitters alongside the U.S. — issued a joint statement emphasizing that "it is crucial that all countries, notably the major economies, maintain policy continuity and stability and step up efforts to address climate change." They pledged bilateral collaboration on energy transition, methane management, carbon markets and low-carbon technologies "to drive their respective green and low-carbon transition processes together."
2. Regulatory Divergence: U.S. Deregulation vs Europe's ESG Realignment
The U.S. has shifted rapidly toward deregulation under the current administration. Key moves include the suspension of support for the Securities and Exchange Commission's (SEC) climate disclosure rule, issuance of Department of Labor guidance discouraging ESG considerations in retirement planning, and passage of the One Big Beautiful Bill Act (OBBBA), which defunded provisions of the Inflation Reduction Act, including incentives for clean energy and decarbonization.
Additional changes include the Environmental Protection Agency's (EPA) rollback of methane and emissions controls for the oil and gas sector. On July 29, 2025, the agency also proposed rescinding the endangerment finding — the foundational legal basis for federal climate regulation. The Department of Energy (DOE) has slowed renewable energy permitting, while a Department of the Interior order on August 1 restricted new solar and wind projects on federal lands unless they match the energy density of fossil fuel sources.
In comparison, the EU has maintained its ESG regulatory infrastructure, including the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD), EU Taxonomy, and Fit for 55 package. These mandates require robust corporate disclosures, integrate sustainability into governance and enforce emissions targets through pricing and sectoral regulation.
However, as a result of mounting political pressure from some of its members, particularly Germany and Italy, the EU has moved toward easing some of its regulatory standards. In February 2025, the European Commission proposed the Omnibus Simplification Package, aiming to ease compliance burdens for small and medium-sized enterprise (SMEs) by raising thresholds, delaying implementation deadlines and consolidating reporting standards. The European Financial Reporting Advisory Group (EFRAG) followed with a July 31 proposal to simplify the double materiality assessment and reduce the volume of required disclosures by two-thirds. A new voluntary sustainability reporting standard proposed by EFRAG was also adopted on July 30 by the EU for SMEs expected to be exempted under the revised CSRD.
Critics of these changes — including eight non-governmental organizations (NGOs) such as ClientEarth and the European Coalition for Corporate Justice — argue that the EU bypassed civil society input and risks diluting its climate ambitions. In response, the EU Ombudsman has launched an inquiry into these and other procedural concerns.
Additionally, a consortium of 323 organizations that includes investors, companies, banks and other financial institutions, have issued a joint statement on the Omnibus initiative, expressing concern about limiting sustainability reporting, transition plans, climate targets and corporate due diligence The group urged EU policymakers to preserve the core elements of the CSRD and CSDDD.
While Europe remains focused on sustainability enforcement, the shift marks a more cautious and politically responsive approach. In contrast, the U.S. trajectory reflects a more comprehensive shift away from ESG, sustainability and climate mandates. The U.S./EU divergence reveals contrasting legal cultures and public expectations around corporate accountability while highlighting that sustainability frameworks in both regions remain politically contingent.
3. Climate Finance and Market Signals
In 2025, climate-related financial signals have increasingly diverged across the Atlantic. In the U.S., defunding of the Inflation Reduction Act has contributed to reduced clean energy investment. Green bond issuance declined amid diminished regulatory support, and several financial institutions scaled back ESG commitments in response to legal and political risks.
Meanwhile, the EU has provided more consistent policy and market signals. The Sustainable Finance Disclosure Regulation (SFDR) mandates ESG disclosures to counter greenwashing, and the EU Green Bond Standard — expected to become mandatory for public issuers in 2026 — has further formalized expectations for taxonomy-aligned instruments. The European Central Bank (ECB) has continued to integrate climate risk into its operations, including a July 2025 adjustment adding a 'climate factor" to its collateral framework.
The European Investment Bank (EIB) also approved €15 billion in new green transition funding and reaffirmed its commitment to climate-related financing through 2027. These coordinated efforts help maintain a relatively stable green investment environment, contrasting with greater policy variability in the U.S.
4. Governance and Legal Accountability
Legal accountability for ESG and climate governance has also split along transatlantic lines. In the U.S., the administration has scaled back ESG-related oversight mechanisms across federal agencies. This includes rescinding or halting ESG-linked rules in public procurement, grantmaking and financial regulation. Federal contracts no longer prioritize climate risk, and agencies such as the Department of Transportation have removed sustainability criteria from infrastructure funding.
At the state level, ESG governance tools have also faced legal and legislative pushback. By mid-2025, ten states had passed new anti-ESG laws, and several lawsuits have been filed challenging ESG-aligned investment practices. ESG Today reported that in late July, financial officers from 21 states warned major asset managers against incorporating sustainability and climate considerations, including EU rules like the CSRD, into proxy activities or portfolio strategies.
California is the only state that has enacted climate disclosure laws, though their future remains uncertain due to ongoing litigation. Senate Bill (SB) 253 requires large companies to report Scope 1 and 2 emissions starting in 2026, and Scope 3 in 2027. SB 261 mandates firms with over $500 million in revenue to disclose climate-related financial risks beginning in 2026. On July 9, the California Air Resources Board (CARB) released FAQs on implementation. Legal challenges persist: the U.S. Chamber of Commerce's First Amendment claim was argued on July 1 in federal court, with a ruling pending.
In contrast, the EU continues to advance ESG accountability through legal mandates. The CSDDD, despite some potential narrowing in scope under the Omnibus Simplification Package proposed modifications, still imposes obligations on companies to identify and mitigate environmental and human rights impacts across global operations and supply chains. Civil liability provisions remain in place, potentially exposing firms to lawsuits within EU member states for failures to comply with mandated due diligence standards.
The EU has also seen a growing number of climate accountability lawsuits, where courts in countries such as the Netherlands, Belgium and France continue to expand legal theories that hold governments accountable for failure to meet emissions targets and diligence requirements.
In one of the more significant climate litigation developments this year, on July 23, 2025, the International Court of Justice (ICJ) issued an Advisory Opinion confirming that states have binding obligations under international law to prevent and mitigate climate change. While not legally binding, the opinion supports evolving legal interpretations in favor of intergenerational equity and could influence domestic rulings in Europe and beyond.
5. Business Strategy and Cross-Border Compliance
For multinational companies operating on both sides of the Atlantic, the divergence in ESG regulation presents growing complexity in legal compliance, reputational risk and investor engagement. Many U.S.-based firms that are either listed in Europe or conduct substantial business within the EU are subject to the CSRD and its detailed ESG reporting mandates, regardless of shifts in U.S. policy. This creates a de facto dual compliance regime: one voluntary or weakened at home, the other legally binding abroad.
This split presents practical challenges. Decisions aligned with deregulatory frameworks in one jurisdiction may present compliance issues or litigation exposure in another. Moreover, as international legal norms — including the ICJ's advisory opinion — gain traction in litigation and policy circles, companies may find that global ESG standards are evolving beyond the contours of domestic policy.
To navigate this landscape, companies are adjusting compliance systems to meet varying legal obligations. Many are implementing cross-border protocols to align ESG tracking with EU expectations and reduce regulatory discrepancies. This often requires coordination among legal, sustainability and investor relations teams to manage documentation, reporting and due diligence obligations efficiently. While some firms apply uniform procedures globally to reduce complexity, others tailor compliance strategies by jurisdiction. In either case, regulatory asymmetry has become a routine consideration in cross-border operations.
Conclusion
The transatlantic divergence on sustainability policy has become one of the defining features of the post-2025 regulatory landscape. The EU continues to embed sustainability across corporate and financial systems, albeit with signs of recalibration. The U.S., by contrast, has reversed many climate-related policies and weakened federal support for ESG and sustainability integration. For global companies and investors, this divide presents both strategic challenges and opportunities. Success will depend on the ability to adapt to multiple frameworks, anticipate regulatory evolution, and align business practices with both market and legal expectations across jurisdictions.
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