The year of hard choices: Why 2025 matters

Why 2025 will demand a step change in climate strategy, capital allocation and commercial clarity

In brief:

• Climate action has moved from ambition to obligation, and the strategic window is closing fast.
• Six critical, interacting challenges will separate compliance from competitive advantage.
• Success in 2025 requires alignment across strategy, risk finance and sustainability – and the courage to move decisively.

1. From first steps to step change: Operationalise your ambition

By 2035, many national targets will be halfway to their net zero deadlines. From here, progress will depend on step change in operations and serious capital investment.

Stakeholders now expect climate performance to be baked into core strategy — and for that to be backed by appropriate C-suite accountability. Think operational, not just aspirational.

And yet, too many companies are still taking their first steps and setting distant targets.

Hard fact: 66% of ASX200 companies have made a net zero commitment, but that doesn’t mean they are on track to achieve it.

Response: Define what true leadership looks like in your sector. Quantify what it will cost — and what it could return. Prove your ambition — not in presentations, but in procurement.

2. The energy transition is faster, harder and more complex than expected – and that’s OK

Demand for electricity is rising rapidly. From EV fleets to heat pumps to smart grids, demand for electricity is soaring. At the same time, the digital economy is fuelling relentless growth in data centres. And a warmer planet is pushing up demand for air conditioning.

New transmission infrastructure isn’t coming online fast enough, and grid resilience is under pressure.

Hard fact: Global electricity demand rose by 4.3% in 2024, according to the International Energy Agency, and is forecast to grow at around 4% out to 2027.

Response: Build electrification into your strategy, not just your ESG statement. Modernise fleets, buildings and operations. Invest in distributed energy, storage and orchestration. These strategies build resilience and realise savings as you decarbonise.

3. We’ve breached 1.5°C, and businesses must adapt

In 2024, we crossed the 1.5°C threshold. This brings greater risk of ‘runaway’ climate change and rising disruption from extreme weather events.

Communities at the frontline, who are impacted by extreme events, are unlikely to be sympathetic to businesses that are caught unprepared.

Businesses can bank on more frequent and severe climate-related disruptions, higher insurance premiums, and a sharper government focus on practical action that reduces risks and impacts.

Hard fact: Just 19% of Australian companies have adopted plans to mitigate the physical risks of climate change, according to the 2024 EY Global Climate Action Barometer.

Response: Build resilience into operations, not just ESG reports . Plan for disruption (and design for failure). Make your flexibility a core business strength.

4. Offsets are under the spotlight, but still essential

Carbon credits are a critical lever to support ambitious emissions reduction. But scrutiny is rising. High-integrity, transparent credits are valued. Vague or cheap credits, on the other hand, won’t stand up to stakeholder scrutiny.

High-integrity carbon credits allow businesses to set ambitious targets and achieve timely and cost-effective abatement.

Hard fact: EY research finds complementing internal abatement with the use of credits can reduce total abatement costs by 50% or more.

Response: Consider how your business will integrate credits as part of a clear, credible strategy – not as a substitute for reductions. Communicate transparently and prepare for rising costs.

5. Decarbonisation is a strategic contest

Geopolitics are reshaping global supply chains – and that means every step towards decarbonisation is now a strategic contest.

Businesses should avoid over-interpreting the short-term ebb and flow. Instead, look to longer-term trends and drivers when making significant investment decisions.

Hard fact: By late 2024, more than 5,500 climate-related trade measures were in place globally, according to the World Trade Organization – a clear signal that decarbonisation is a core lever of economic and geopolitical strategy.

Response: Alleviate ambiguity by doubling down on fundamentals. Determine: What underpins your returns and shareholder value? What is your advantage? What political or policy risks might impact these?

6. Sustainability disclosure is now mandatory, so differentiation is in the detail

From January 2025, climate reporting became mandatory in Australia. This will expose the gap between strategy and action. In a compliance regime, there is nowhere left to hide.

Competition will intensify as investors, customers and market participants have better information to compare and contrast performance with promises.

Hard fact: Even if your business isn’t directly captured by Australia’s mandatory climate disclosure regime, your partners, customers and financiers almost certainly will be. That means new expectations, new information flows and new accountability pressures across the value chain.

Explore what this means for your business >

Response: Treat reporting as a strategic opportunity. Align risk, finance and strategy teams, and frame your climate narrative thoughtfully so it stands up to audit.

Capital, conviction and a clear commercial case

These six challenges are interconnected, not incremental. They mark the moment where ESG ambition must become ESG execution with clear commercial logic, credible governance and committed investment.