When sustainability-minded investors look ahead to 2025, six themes are likely to dominate their lists. These are environmental, social and governance regulations, carbon transition investing, sustainable bond funds, reshaping the global ESG fund landscape, biodiversity financing and the ethics of intelligence artificial. We analyze them below.
We believe that 2025 will be a critical moment for the EU's credibility, particularly with the upcoming results of the review of the Sustainable Finance Disclosure Regulation and the first reporting wave of the Reporting Directive business on sustainable development. Businesses and politicians are putting pressure on European regulators to demonstrate the value and effectiveness of ESG policies.
In the United States, the new Trump administration is widely expected to roll back ESG initiatives, posing challenges for the low-carbon transition and sustainable investments. For example, Trump is likely to exit the Paris Agreement again, Congress could reduce or eliminate some of the clean energy subsidies under the Inflation Reduction Act, while the SEC could roll back the rules requiring public companies to disclose greenhouse gas emissions and climate-related risks.
Separately, the U.S. Department of Labor's guidance on ESG factors for Erisa-covered plans should return to stricter rules requiring fiduciaries to prioritize financial returns and avoid costs related to ESG factors, unless that they are clearly linked to long-term value creation.
In the rest of the world, the focus will likely remain on establishing climate and sustainability information, such as the International Sustainability Standards Board. At the same time, several jurisdictions are expected to launch or develop voluntary taxonomies.
Reshaping the global ESG fund landscape
This time next year, the global ESG fund landscape will look very different.
The main transformative factor will be the guidelines on ESG fund names published by the European Securities and Markets Authority. These guidelines aim to protect investors from the risk of greenwashing by introducing minimum standards for EU funds that use ESG-related terms in their name.
We expect between 30% and 50% of EU ESG funds to change their names by mid-2025, while other funds will adjust their investment objectives and/or portfolios to retain the terms linked to ESG in their name. Some of them will move away from fossil fuels, while others will change their names to become transition strategies.
In the UK, adoption of the sustainability label will increase next year, but will likely remain limited to 150-200 funds.
At the same time, we expect fund closures to accelerate globally. In the United States, the $353 billion ESG fund market has already begun to shrink in terms of the number of offerings (but not in terms of assets, which continue to grow, supported by market appreciation). There were 595 ESG funds at the end of September, up from 647 at the start of the year.
ESG fund assets in the rest of the world, which represent 5% of global ESG fund assets, are expected to continue to grow, but at a slower pace than in the past.
Investing in the transition: From objectives to concrete actions
As in 2024, one of the main themes of 2025 will be investment in the transition. We expect investors to take a more concrete approach to the transition to a low-carbon economy, not just encouraging companies to set targets, but ensuring that they take action. tangible measures.
Investors will also increasingly look to the significant opportunities arising from the energy transition. According to the International Energy Agency, more than $6 trillion per year will be needed until 2030 to achieve a successful energy transition.
Since 2021, the green solutions sector, including wind, solar, batteries and electric vehicles, has struggled to generate good returns for investors investing in the public markets, primarily due to low rates. high interest. However, next year, as central banks are expected to cut interest rates and businesses become more efficient – and despite uncertainties introduced by the incoming Trump administration's plans to cut tax credits for projects green – the outlook for low-carbon solutions is positive. Structural factors – including technological advances, falling costs and growing demand for energy – place green solutions, in both public and private markets, in a favorable position despite near-term uncertainty.
Furthermore, we believe that companies in the electrical equipment sector will continue to benefit from the growing demand for green infrastructure and building efficiency, supported by strong fundamentals.
Sustainable bonds: The drop in ratings will make it possible to issue 1,000 billion USD
In 2025, we forecast that issuance of green, social, sustainable and sustainability-linked bonds, or GSS+, will again exceed USD 1 trillion, up from just below this mark at the end of 2024, supported by an environment more favorable interest rates and investor demand for sustainable investments. GSS+ bonds have become popular debt instruments to finance the transition.
We will also witness the birth of the European green bond market. The EU aims to boost investor confidence in the green bond market with a new voluntary standard that requires improved reporting and verification. Bonds issued under this standard will have to allocate at least 85% of their proceeds to sustainable activities consistent with the EU taxonomy.
Additionally, we expect more green bond issuance to finance environmentally friendly activities, which play a critical role in facilitating the transition. Examples include investments in companies that mine materials (such as lithium), which are essential to green technologies, and in companies that manufacture materials (such as insulation) that help reduce emissions in the building sector. projects promoting ecology.
Financing biodiversity: Time to scale up
As we approach 2025, it is widely acknowledged that nature, as an asset class, is mispriced. This erroneous price signal has led to the continued degradation of biodiversity, which is among the most serious global risks of the coming decade.
Over the past two years, initiatives such as the Nature Financial Reporting Task Force, the adoption of the Global Biodiversity Framework and the UN Biodiversity Conference (COP16) have enabled investors to engage more effectively in this area.
We expect interest in biodiversity to continue in the coming year, and there will be a need to expand funding for nature. The rise of innovative financial mechanisms demonstrates the growing appetite of investors for nature-related investments, but major challenges remain, including regulatory uncertainty and the lack of definition of transition pathways towards nature .
Rapid adoption of AI increases environmental and social risks
Finally, artificial intelligence has been a prominent investment theme in 2024, and it is likely to continue to rise in the agenda of sustainability-focused investors in 2025.
AI holds great potential to help combat climate change and achieve sustainability goals across all industries.
However, its rapid adoption in recent years has revealed significant ESG risks for investors, and these risks could increase in the likely scenario of reduced regulations in the United States under the Trump administration.
Environmentally, AI-powered data centers run by tech companies like Google and Microsoft require a huge amount of (not entirely green) energy, which not only puts these companies' commitments at risk in terms of net zero, but could also divert green electricity from other critical sectors that need it more urgently to meet their decarbonization goals.
On a social level, AI presents a series of new risks which, if they materialize, could cost businesses dearly. These risks include breaches of privacy, bias, “fake news” and copyright violations. For example, in May 2023, Meta was fined $1.3 billion by the EU for mishandling its data.
You can read the full report “Six Sustainable Investing Trends to Watch in 2025” here.
The author(s) have no ownership interest in any securities mentioned in this article. Learn more about Morningstar's editorial policies.
