As sustainability-minded investors look to 2025, six themes are likely to dominate their lists. These include environmental, social and governance regulation, carbon transition investing, sustainable bonds, reshaping the global ESG fund landscape, biodiversity finance, and the ethics of artificial intelligence. We will discuss them below.
We expect 2025 to be an important milestone for the EU’s credibility. Particularly with the results of the upcoming review of sustainable finance disclosure rules and the first wave of reports from the Corporate Sustainability Reporting Directive. Companies and politicians are putting pressure on EU regulators to demonstrate the value and effectiveness of ESG policies.
In the US, the new Trump administration is widely expected to roll back ESG initiatives, posing challenges to the low-carbon transition and sustainable investment. For example, President Trump is likely to withdraw from the Paris Agreement again, Congress may reduce or eliminate some of the Clean Energy Subsidies in the Inflation Control Act, while the SEC will require public companies to reduce their greenhouse gas emissions. and potentially roll back rules requiring disclosure of climate-related risks. .
Meanwhile, the U.S. Department of Labor’s guidance on ESG factors for plans covered by ERISA requires fiduciaries to prioritize financial returns and avoid ESG-related costs unless they are clearly tied to long-term value creation. A return to stricter rules is likely.
In other parts of the world, there will continue to be a focus on developing climate and sustainability disclosures, such as standards from the International Sustainability Standards Committee. In parallel, several jurisdictions plan to launch or expand voluntary taxonomies.
Reshaping the global ESG fund landscape
By this time next year, the global ESG fund situation will have changed significantly.
A key driver of change is the ESG fund naming guidelines published by the European Securities and Markets Authority. The guidelines aim to protect investors from the risk of greenwashing by introducing minimum standards for EU funds that use ESG-related terms in their names.
We expect between 30% and 50% of EU ESG funds to change their names by mid-2025, while others will adjust their investment objectives and portfolios to keep ESG-related terms in their names. Some of these will move away from fossil fuels, while others will rebrand their transition strategies.
The UK will see more adoption of sustainability labels next year, but it is likely to remain in just 150-200 funds.
Meanwhile, fund closures are expected to accelerate around the world. In the US, the US$353 billion ESG fund market has already begun to shrink in terms of subscriptions (but not in terms of assets, which continue to grow supported by market gains). The number of ESG funds was 595 at the end of September, compared to 647 at the beginning of the year.
ESG fund assets in the rest of the world account for 5% of global ESG fund assets and should continue to grow, but at a slower pace than in the past.
Transition investing: From goals to concrete actions
As in 2024, one of the key themes for 2025 is transition investing. We hope that investors will take a more pragmatic approach to the low carbon transition and ensure that companies take concrete actions, rather than simply encouraging them to set targets. I am.
Investors will also increasingly focus on the significant opportunities arising from the energy transition. According to the International Energy Agency, a successful energy transition will require more than $6 trillion a year by 2030.
Since 2021, green solutions sectors such as wind, solar, batteries, and electric vehicles have struggled to generate sufficient returns for investors in public markets, mainly due to high interest rates. But central banks are expected to lower interest rates and businesses become more efficient next year, despite uncertainty brought about by the incoming Trump administration’s plans to cut tax credits for green projects. The outlook for solutions is bright. Structural factors such as technological advances, falling costs, and increasing electricity demand favor green solutions in both public and private markets despite short-term uncertainties.
Meanwhile, companies operating in the electrical equipment sector are expected to continue to benefit from the growing demand for green infrastructure and building efficiency, supported by solid fundamentals.
Sustainable bonds: lower interest rates increase issuance to USD 1 trillion
In 2025, supported by a more favorable interest rate environment, green, social and sustainable sustainability-linked bond (GSS+) issuance will again exceed USD 1 trillion, up from just under USD 1 trillion at end-2024. I predict that. and investor demand for sustainable investments. GSS+ bonds have become a popular bond for transition financing.
We will also see the birth of the EU green bond market. The EU aims to further strengthen investor confidence in the green bond market with new voluntary standards requiring enhanced reporting and verification. Bonds issued under the EU GBS are required to allocate at least 85% of their proceeds to sustainable activities in accordance with EU taxonomy.
Additionally, we expect to see more green bond issuance to fund green enablement activities that will play a key role in facilitating the transition. Examples of green-enabled projects include investments in companies that extract materials essential for green technologies (such as lithium) or that produce materials that help reduce emissions in the building sector (such as insulation).
Biodiversity finance: time to scale up
Heading into 2025, it is widely recognized that nature as an asset class is mispriced. This false pricing signal is driving the ongoing degradation of biodiversity, which ranks as one of the most serious global risks over the next decade.
Over the past two years, initiatives such as the Task Force on Nature-Related Financial Disclosures, the adoption of the Global Biodiversity Framework, and the United Nations Conference on Biological Diversity (COP16) have enabled investors to more effectively address this issue. Ta.
The need to scale up nature finance is expected to continue the focus on biodiversity in the year ahead. The rise of innovative financial mechanisms signals a growing appetite among investors for nature-related investments, but key challenges remain, including regulatory uncertainty and undefined nature transition pathways. Masu.
Rapid adoption of AI increases environmental and social risks
Finally, artificial intelligence is a prominent investment theme in 2024 and is likely to remain on the agenda of sustainability-minded investors in 2025.
AI has great potential to help fight climate change and achieve sustainability goals across industries.
However, rapid adoption in recent years has revealed significant ESG risks for investors, and these risks could increase in the likely scenario of loosening US regulations under the Trump administration.
On the environmental front, the AI-powered data centers run by tech companies like Google and Microsoft require vast amounts of energy (not all of which is green), making their net-zero efforts difficult. Not only is this at risk, but there is also the possibility of diverting green power from other companies. Critical sectors that need it more urgently to achieve decarbonization goals.
On the social side, AI introduces a number of new risks that could cost companies significant amounts of money if they materialize. These risks include privacy invasions, bias, fake news, copyright infringement, and more. For example, in May 2023, Meta was fined US$1.3 billion by the EU for data mismanagement.
The full report, “6 Sustainable Investment Trends to Watch in 2025,” can be viewed here.
