A few years ago, the global push towards ESG (environmental, social, and governance) felt coordinated and inevitable. Net-zero alliances multiplied, disclosure standards tightened, and sustainability targets became mainstream.

Today, the picture is more complicated.

While sustainability continues to shape global markets, the world seems to be splitting into pro-ESG and anti-ESG camps.

ESG regulation, policy shifts, and changing capital allocations are creating opportunities and risks across local and offshore stock markets, as well as commodity pricing – factors that can materially impact investment portfolios.

We had an in-depth discussion with Dr Penny Byrne, ESG and climate change investment analyst at SBG Securities, about how this split is unfolding and what it means for markets.

The US and Europe: pullback or pragmatism?

The US, under the Trump administration, has rolled back ESG policies, withdrawing from the Paris Agreement, hollowing out USAID funding, which will affect climate projects around the world, and clawing back $20 billion in funding for clean energy and transportation from the Greenhouse Gas Reduction Fund.

But this is not a clean break from sustainability considerations.  

“There’s definitely been a divergence,” Byrne explains. “Within the US, you still have people who care a lot about ESG. You’ve still got statewide support.”

Rather than outright reversal, Byrne says we’re seeing what’s known as “green shushing” – companies maintaining sustainability practices, but keeping quiet about them to avoid political backlash.

Europe, widely regarded as the global leader in ESG policy, has also softened aspects of its regulatory regime in the last year, including the Carbon Border Adjustment Mechanism (CBAM).

CBAM is a levy on emissions embedded in imported products. It covers 303 energy-intensive products, including iron and steel, cement, fertilisers, aluminium, electricity, and hydrogen. Together, these products account for about 3% of EU imports.  

“Europe has changed the companies that will be impacted by CBAM. It has cut about 90% of companies that would have been impacted, but these were the smaller ones.”

However, the mechanism itself remains in effect.

Byrne says what’s interesting about CBAM is that the EU is not collecting revenue on it until February 2027.

“Companies exporting items on the CBAM list into the EU over the next year are effectively accruing a debt to the EU and will be hit with the full amount in February next year. For companies not paying attention to that, it could be a bit of a shock.”  

Other regulations have also been postponed, including the EU Deforestation Regulation, which aims to combat climate change and biodiversity loss by ensuring that products sold in the EU are not sourced from deforested land. Its application has been delayed to December 2026, for large operators and traders, and to 30 June 2027 for small operators.

These moves may look like deregulation, but Byrne suggests they reflect practical adjustment rather than abandonment.

“We’ll see some shifts that appear like deregulation, but aren’t necessarily. They’re marrying the idealised approach with the practical reality of the world we live in.”

Stricter rules elsewhere

While the US and parts of Europe soften, other regions are tightening.

Countries like China and India, for instance, are considering mandatory regulations.

“China has modernised its framework, largely to protect export competitiveness in the face of mechanisms like CBAM,” says Byrne.

It’s finalising national climate disclosure standards aligned with the International Sustainability Standards Board’s IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and S2 (Climate-related Disclosures), with an added requirement of double materiality.  

That means companies must disclose not only how climate risk affects them financially, but also how they impact the environment.

China has also relaunched its local carbon pricing mechanism. This matters because exporters can offset embedded emissions under CBAM by the carbon tax they pay locally.

That dynamic partly explains why South Africa’s carbon tax increased by 30% this year. Regulators aim to keep more of that carbon-pricing value within the country rather than have it flow to the EU.

For major emitters, the impact is material. “For companies like Sasol that are paying over a billion rand already in carbon tax, that's going to go up quite substantially.”

In India, the shift has been from voluntary sustainability guidelines to mandatory assurance.  

The country is looking at many supply chain stories, which will affect South Africa as well, given that SA exports coal and minerals to India.

“Indian companies will increasingly require suppliers, including South African exporters of coal and minerals, to provide detailed emissions and labour practice data so that they can satisfy their regulatory obligations,” Byrne says.

Central banks step in

Regulation is also moving through financial supervision.

More central banks around the world are embedding ESG principles into banking supervision, with some even moving from guidance to enforcement.

Byrne says the South African Reserve Bank’s Prudential Authority has updated its banking supervision to align with global IFRS S1 and S2 standards.

“This is all still voluntary. However, it’s giving a forewarning of what banks are going to require from their clients if this becomes mandatory.”

Aside from the Reserve Bank, the Companies and Intellectual Property Commission (CIPC) is also examining governance reforms.

“The commission conducted a survey last year asking companies if they support mandatory sustainability reporting, and 70% said yes. When asked how many were ready to begin disclosures, only 28% said they were.”

While there is an appetite for sustainability reporting and recognition of its importance among companies, there appears to be a readiness gap.

Looking ahead

Byrne expects to see continued divergence, with countries either pro-ESG or anti-ESG.

“I think we'll continue to see this fracture as the world aligns itself either with the US or with Europe, essentially.”

Political pressure, particularly in the US, is complicating the ESG narrative. In some contexts, companies face legal challenges when considering environmental factors if they are perceived as compromising returns.

At the same time, legal risk linked to non-compliance with environmental or governance standards is rising globally.  

“We’re seeing an increase in the number of cases around this. As case law starts to form through rulings, you could start to see countries or companies being forced into behaviour they don't necessarily want to take,” Byrne says.

Net-zero targets also face scrutiny.

“Every net-zero target you've seen includes carbon capture technology that doesn't exist yet. We have some carbon capture technology, but we currently capture only 0.1% of annual emissions, and most net-zero targets require capturing much more.”

These tensions contribute to fragmentation, with some alliances fracturing. But the regulatory architecture in many regions remains in place.

The views and opinions shared are for informational purposes only. They are not intended to serve as investment advice and do not represent the views or opinions of Standard Bank. This information should be used as a starting point for generating investment ideas and should not be relied on as the basis for making investment decisions. The Standard Bank of South Africa Limited will not be responsible for the results of any investment decisions made based on the views provided.