Latest / The Freshfields Podcast / ESG trends to watch in 2026: Part 2: How AI, climate transition planning, supply chains and environmental rules are evolving

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ESG trends to watch in 2026: Part 2: How AI, climate transition planning, supply chains and environmental rules are evolving · The Freshfields Podcast

• 0:05
  Welcome back to another discussion with members of our Freshfields
• 0:08
  ESG Risk and Advisory group concerning the ESG landscape
• 0:12
  in 26.
• 0:14
  My name is Juliana Hilf, and I'm delighted to be joined again today
• 0:17
  by co-leads of our ESG Risk and Advisory Group.
• 0:21
  Today we are joined by Doug Bryden, Marlen Vesper-Graeske
• 0:25
  and Vanessa Jakovich.
• 0:28
  In our last discussion, we talked about the global ESG
• 0:30
  set back in 25 and how it has impacted ESG litigation in particular.
• 0:36
  Today, we would rather focus on the future and on 26
• 0:38
  and on key aspects that we all be facing this year.
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  We will touch upon AI, climate transition planning,
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  human rights and corporate governance in particular.
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  So Doug, let's start with one of the most headline
• 0:52
  grabbing topics, artificial intelligence.
• 0:55
  It seems that barely a day goes by without new developments.
• 0:59
  Can you share your views on this trend and basically also let us know
• 1:03
  what, in your view, the risks are that are associated with AI in the ESG space?
• 1:10
  Well thank you, Juliane.
• 1:12
  I'll look at the positives first of all, and I think we're excited.
• 1:16
  Artificial intelligence, especially in the context
• 1:20
  of sustainability reporting,
• 1:23
  has very clear use cases and I think will add real value.
• 1:27
  So let's look at reporting.
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  When you get into it, what we're being asked to do requires
• 1:33
  significant data sets.
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  And we can see use cases and applications where they will help in the processing
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  of those data sets, analyse the information at scale, assist
• 1:43
  in navigating that information across to the global standards.
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  And if we take the EU sustainability reporting
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  standards, which I appreciate, they've been simplified.
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  There's still a huge number of data points.
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  So we see that as a real welcome potential benefit of AI
• 2:00
  to help us get through those reporting kind of hurdles.
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  One last thing on reporting that I would also assist in mitigating,
• 2:08
  future compliance and litigation risks by adding some accuracy and consistency
• 2:14
  in the reporting, particularly across multiple jurisdictions.
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  So that's a big benefit.
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  Other kind of challenges.
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  Supply chains, we see, is one of the big focal points
• 2:26
  for the next couple of years in our sustainability world.
• 2:30
  These are often complex, that cut across
• 2:33
  multiple jurisdictions, multiple parties.
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  And if AI is able to assist, which we understand, it will be able to
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  with understanding and managing those supply chains,
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  looking at the compliance obligations which are coming
• 2:48
  online, as well as the legal risks, that will be a real benefit.
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  So we're talking there about real time monitoring of incidents,
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  adverse media screening, the ability for our clients to be able to
• 3:01
  assess those risks in a timely manner will be a huge benefit.
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  Also support resilience and transparency
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  in how they manage it and be able to communicate that with others.
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  The difficulty to date has been it's expensive.
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  And if AI can produce a cost effective solution, then that has to be,
• 3:21
  a big benefit.
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  Other areas, maybe bias and discrimination.
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  We're hearing of applications where it will be able to assist in reducing
• 3:31
  such discrimination in hiring processes and lending decisions, for example.
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  So that would be a benefit as well as other data rich areas
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  such as bribery, corruption, data protection.
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  It is all going to assist in that compliance.
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  On the last one, which is probably a good one
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  to finish on before looking at the negatives, is climate.
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  Improved energy
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  efficiency, driving and mitigation of emissions.
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  Lowering those emissions overall has to be something
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  which we should try and develop.
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  But also looking at the other big challenge for the next couple of years
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  is everyone's now focusing on climate adaptation and physical risk.
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  So if we're able to better diligence and model those risks,
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  particularly for investors and lenders, then that will be a real benefit as well.
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  And then lastly, and this is where the big hope is that
• 4:25
  AI will help drive technological change and operational solutions.
• 4:30
  So in summary, there is a lot to be excited about by AI.
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  But and I'll stop there and pass back.
• 4:38
  But there is a but.
• 4:40
  Thank you Doug.
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  And indeed that sounds very exciting and very positive.
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  Vanessa, are there any risks as
• 4:48
  well associated with AI in industry?
• 4:51
  Of course. And thanks.
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  I've got the negative side of this argument
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  after hearing all the positives from Doug.
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  The negatives from an ESG angle on AI,
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  are less around the use of AI, which obviously poses
• 5:10
  lots of benefits in the ESG space.
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  But the downsides are more macro in terms of the substantive impacts
• 5:19
  of AI generally on the environment and on people.
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  With the most obvious downside of AI from an ESG angle
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  being its intense demand for resources,
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  with the number one issue being energy.
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  The carbon footprint of data centres and broader
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  AI infrastructure is well understood.
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  And not just from a point of view of climate.
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  There's also an ESG angle to
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  t energy security impacts of AI
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  and the demand for constant uninterrupted power.
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  And the potential for that to cut across energy security for the communities
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  and grids where data centres supporting AI are embedded.
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  There are
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  broader resource demands as well, obviously.
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  The water required for cooling is quite intense,
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  and we've already seen companies that have large
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  use of data centres and AI,
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  having to track water,
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  water usage and impact on water scarcity
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  in a way that hasn't been done before.
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  There's also other demands, demands on local infrastructure
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  around the very fast rollout of data centres.
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  In terms of taking away from the finite
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  resources of construction.
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  Thank you,
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  Vanessa.
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  So indeed, I mean, just listening to the two of you,
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  it's pretty obvious that there are a lot of benefits,
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  of AI in ESG, but also a number
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  of risks attached to it.
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  Let's shift to ESG transition planning, which is a topic
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  that is front of mind for investors as well as stakeholders.
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  And we've discussed about it quite a lot in the last year.
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  When there
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  were political developments in the European Union.
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  So, Vanessa, can you tell us a bit more about it and whether, in your view,
• 7:18
  this is something people should care about
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  or whether transition planning is something we don't need anymore in 26.
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  Climate transition planning, has been a focus
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  for quite some time now, growing out of the early
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  push towards the adoption of corporate net zero targets.
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  And the big driver over the last couple of years
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  has been the Corporate Sustainability Due Diligence Directive
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  that the EU's CS3D, which despite its name,
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  had a very substantive obligation on companies
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  to not just set and disclose their transition plans,
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  but to actively adopt a Paris aligned
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  so 1.5 degree aligned net zero plan
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  that would decarbonise business by 2050.
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  It was the world's first large corporate
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  substantive obligation to effectively decarbonise business.
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  And it was having a lot of impact on the focus that corporates
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  had been placing on the need to adopt meaningful climate transition plans.
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  During 2025, with the Omnibus
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  changes to the sustainability laws in the EU.
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  One of the key changes, which was only agreed
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  at the very last minute in the EU Parliament
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  late last year, was to remove that obligation from CS3D.
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  So we end 2026 with a real sense of uncertainty around whether corporates
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  will change the direction on climate transition planning
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  given th move away from that binding obligation.
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  Of course, there's still the social licence to operate
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  in the general investor and normal economic pressure around decarbonisation,
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  and managing the risks of climate change.
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  And so we will still see corporates coming under a lot of pressure to adopt climate
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  transition planning and the growth towards disclosure and reporting obligations
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  is continuing.
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  So we're seeing more and more countries adopt ISSB,
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  which is the IFRS sponsored global standard
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  that is being rolled out
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  in more and more countries and the CSRD, which is the reporting obligation
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  that has survived the Omnibus amendments in the EU,
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  they all require a disclosure of climate transition plans.
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  So whilst we don't have that overarching mandatory substantive obligation,
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  we are probably going to continue to see corporates wanting to adopt
• 9:47
  a very transparent and meaningful approach on climate transition planning.
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  And of course, the frameworks around, for example, the Science
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  Based Targets Initiative and some of the other global frameworks,
• 10:01
  along with litigation pressures, are pushing corporates to ensure
• 10:05
  that they have a broad enough scope three plan as part of that.
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  And I think that's going to be a real trend during 2026.
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  A bit of a consolidation of how corporates treat
• 10:18
  broader scope three emissions.
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  And if clients would ask you what they should prioritise
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  to ensure their climate transition
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  strategies are robust enough and fit for purpose, so to say.
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  What would be your advice?
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  I think the key point is to make sure that the methodology that's been adopted
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  has been applied consistently, and there is a lot of transparency around
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  how the different aspects of that methodology have been applied in practice.
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  And then the key is to make sure that there is regular
• 10:54
  reviews of how that is being applied,
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  that stakeholders are brought in and that disclosure is honest.
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  And to the extent the targets and ambitions, are unlikely to be achieved,
• 11:07
  to be transparent about that early
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  and, just to be honest,
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  which is always the best policy.
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  That's so right. Thank you.
• 11:17
  Let's turn to another challenge, which is supply chain.
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  Again, one of the pressing issues that we have identified.
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  Marlen, a lot has changed in the past few years.
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  And in the last year in particular, what is your view of the current momentum?
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  How has the landscape really changed, and what is it
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  that companies and businesses need to be aware of in 2026?
• 11:45
  Thanks.
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  Yes, Juliane you are absolutely right.
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  So supply chain regulation has definitely entered a new phase.
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  We can say this. Until 2025, we have witnessed
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  increased regulation globally on national and supranational levels.
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  Especially, of course, at the EU level
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  with the EU supply chain legislation like the Corporate Sustainability Due
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  Diligence Directive or Deforestation Regulation, forced labour regulation.
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  But also on the national side on national supply chain regulations.
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  We have seen in Germany and France and Norway and Switzerland,
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  focusing on the EU, right now,
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  and it should also be noted that there are still some jurisdictions,
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  who are starting to legislate on human rights compliance right now.
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  For example, in Asian countries like,
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  South Korea, Thailand, and Indonesia, where we see some movement, right now.
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  But 2025 has clearly marked a turning point in the EU legislative landscape.
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  The year was shaped by legal simplification and deregulation
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  efforts, mainly to make compliance more manageable
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  and helping businesses to stay globally competitive under EU supply chain rules.
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  Yet part of the truth is also, although there were a lot of changes,
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  the fundamental principles and obligations that are imposed on companies globally
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  did not change much in its substance.
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  So the biggest change yet is the timing.
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  So we will not see hard public enforcement on these new supply chain and human
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  rights laws very soon, as application was generally delayed for some years.
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  Nevertheless, as companies were already preparing
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  for the regulatory changes, we recommend continuing with these efforts.
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  And this is due mainly as we we expect NGOs to be filling
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  regulator space now and stepping in again, becoming more active and driving
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  corporate human rights compliance,
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  as they did
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  actually prior to the regulatory ESG push in 2020.
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  So hence we expect to see more public and media
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  attention being brought to human rights compliance.
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  Therefore, at least the risk of reputational harm will continue to grow.
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  Another trend we see is to focus on operations in high risk regions,
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  like conflict areas.
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  So businesses with supply chains and operations and high
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  risk to addiction will face an increasing range of civil and criminal law
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  related risks, notwithstanding the simplification measures
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  as to scope of grounds for litigation and regulation
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  permitting enforcement beyond the company's domestic borders,
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  will continue to grow, just at a slightly reduced pace
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  and with the use of new or also traditional,
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  civil law measures, for example.
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  Thank you. Marlen.
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  So it sounds that we've spoken about transition planning, reporting
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  human rights compliance in a changing world.
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  And it seems as if simplification
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  is the best word for these areas,
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  but it also seems that it's, well, still complex if you so want.
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  So complexity,
• 14:49
  certainly hasn't gone away.
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  And I guess in particular for global operations
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  who need to navigate in that complex environment.
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  Let's take a step further.
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  Maybe I'll look at another angle, which is what we call the E in ESG.
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  So when it comes to environmental and product regulation,
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  is that something we see in that area as well or are the rules
• 15:16
  in that area still very complicated and not yet simplified?
• 15:21
  Doug, What's your view?
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  Look, the short answer is
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  we have a very expansive rulebook at an EU level in relation
• 15:30
  to environment, chemicals, products and other kind of trade areas.
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  But yeah, you're completely right.
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  To say is there simplification regulatory form because there is.
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  Hot off the heels of the sustainability Omnibus,
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  we now have an environmental Omnibus proposed which will look to do
• 15:50
  a lot of the same simplification, streamlining,
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  reducing red tape, which has to be welcome.
• 15:56
  In many ways because there are some bad bits of regulation in there
• 15:59
  which could be simplified and will promote business within the block.
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  But I
• 16:07
  pause because there is still, even if simplified,
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  an extremely complicated rulebook to navigate.
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  So in some ways that we have a quite a difficult situation of regulatory reform.
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  But even when reformed, it
• 16:22
  is going to be fairly challenging for businesses to comply.
• 16:26
  And at the same time, there are new rules rolling out of Brussels as well.
• 16:31
  We've got delayed sustainability rules,
• 16:35
  such as the deforestation regs, but we also have other proposals
• 16:40
  around extended producer responsibility.
• 16:43
  The emissions trading scheme is up for review.
• 16:46
  We have PFAS regulation in one of these, forever chemicals
• 16:50
  being regulated at an EU level,
• 16:53
  cross-border mechanisms, carbon cross border mechanisms,
• 16:58
  are also coming through.
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  So yes, there is going to be regulatory simplification.
• 17:04
  But I think putting it in the correct context is it's still going
• 17:07
  to be challenging for businesses.
• 17:09
  I think there is quite a bit of frustration around this as well as businesses
• 17:15
  will welcome the ability to maybe advocate for changes,
• 17:18
  but at the same time, this is a complexity which they could do without.
• 17:23
  When we've heard all of the changes and developments
• 17:26
  from Vanessa and Marlen in other areas of ESG,
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  this is another challenge, which I think is just a complication.
• 17:33
  And for in-house legal and ESG
• 17:37
  operational teams, it's quite a headache for them to get through.
• 17:40
  So, yes, it's rolling out the simplification,
• 17:45
  but I think it's still going to be challenging for big,
• 17:48
  large multi nationals who have to navigate
• 17:51
  this in the EU as well as rules which are developing globally.
• 17:55
  Thank you, Doug, for this insight into the E in ESG.
• 17:58
  And indeed,
• 17:58
  it seems as if the environmental rules will remain very complex
• 18:03
  in 26, even though we might see an environmental Omnibus,
• 18:08
  which is a dedicated simplification, of these rules.
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  This brings us to the end of our conversation.
• 18:17
  Thank you so much for listening in and thank you in particular,
• 18:20
  Doug, Vanessa and Marlen for joining me today.
• 18:24
  To sum up, we expect 26 to be
• 18:28
  a very exciting year in the ESG space. While
• 18:31
  25 was all about wait and see
• 18:36
  and monitor what's going on globally,
• 18:40
  the dust seems to have settled now a bit at least.
• 18:45
  So now is the time to make sure
• 18:47
  you are aware of the rules that are in place,
• 18:50
  and make sure your business is positioned
• 18:55
  in a way to navigate this environment.
• 18:58
  If you have any questions, please feel free to reach out to us.
• 19:02
  Thank you so much for listening.