The sustainable investing market grew to $6.5 trillion in in the U.S. in 2024 despite facing headwinds from corporate DEI pullbacks and political ESG backlash. While most forecasts predict continued growth in sustainable investing over the next several years, the landscape is changing and investors need to keep an eye on the latest trends.
Here are seven areas which are expected to be the major focus of sustainable investors in 2025:
1. The physical risks of climate change
The No. 1 issue for investors heading into 2025 is the climate and the risks it poses. Climate change is no longer a concern for the future; its impacts are immediate and hard-hitting and investors are waking up quickly to those realities.
“These risks are increasingly more evident globally, in the form of extreme weather disasters. The effect of these events on infrastructure, real estate and public health is more quantifiable, and can often be priced based on insurance risk,” wrote Marina Severinovsky, North America head of sustainability, and Jasleen Rana, sustainability product associate, at Schroders, a leading provider of active asset management, advisory and wealth management services.
The authors in an outlook on the company website point to the increasing number of floods, drought, wildfires and storms, with new records being set each year, and the effect on housing from insurers leaving certain markets.
“We expect to see an increasingly prominent role for the insurance industry in climate transition, both as risk takers and as investors. After several years of punitive headlines regarding insurers pulling out of home and commercial coverage in some markets, the industry appears ready to take back its own narrative and publicly recommit to the critical role they have to play in addressing the impact of climate transition,” they said.
Although the summer of 2024 was the hottest on record globally, changing the narrative on climate investing will not be easy.
“Despite ongoing political divisions, we expect 2025 to be the next stage of the journey from climate impact to climate transition,” said Matt Christensen, global head of sustainable and impact investing and a managing director with Allianz Global Investors.
That journey, though, is complex, Christensen says. The concept requires a coordinated framework to credibly direct and incentivize all stakeholders in the transition towards a decarbonized global economy. Many remain focused on energy transition, but the opportunity in energy efficiency remains the “first fuel” when it comes to climate transition.
“To achieve a clear and credible transition plan in the coming year, developments are needed in scenario analysis, climate risk frameworks, and finance and regulatory frameworks, in addition to clarity on who ultimately finances an equitable transition, and how,” he wrote in an outlook on the company’s website.
2. Regulation and policy
Europe will be at the forefront of regulatory change in 2025, particularly with the forthcoming results of the Sustainable Finance Disclosure Regulation review and the first wave of Corporate Sustainability Reporting Directive reporting, said Hortense Bioy, CFA, head of sustainable investing research for Morningstar.
“We expect 2025 to be a critical juncture for the EU’s credibility,” she wrote in an outlook on the Morningstar website. “Corporates and politicians are putting pressure on EU regulators to demonstrate the value and efficacy of ESG policies.”
These changes will place heavy burdens for companies at a time when the EU is reviewing its competitiveness, Christensen said.
“We see this as a ‘moment of truth’ in terms of whether these enhancements are an extra cost, or will motivate much-needed capital allocation towards the climate transition,” he said. “Much of this regulatory development will center on Europe, but the world is watching. Companies and investors are fatigued by the changing regulatory expectations of recent years, and regulators risk creating confusing market signals instead of promoting sustainable and transition finance.”
In the U.S., the regulatory climate is likely to head the other way. The new Trump administration is widely expected to roll back ESG initiatives, posing challenges for the low-carbon transition and sustainable investments,” Bioy said.
“For example, Trump is likely to exit the Paris Agreement again, Congress may reduce or eliminate some of the clean energy subsidies in the Inflation Reduction Act, while the SEC may reverse the rules requiring public companies to disclose greenhouse gas emissions and climate-related risks,” she wrote.
3. Measurement and definitions
Sustainability criteria, such as climate-risk awareness, are increasingly being integrated in investing processes, regardless of whether a fund has “sustainable” in its label or not, Severinovsky and Rana write.
“At the same time, many asset owners are moving beyond more generic ESG-labeled approaches to actually identify and target specific sustainable investment themes and outcomes. Within this, there is an ever-clearer demand for processes that will contribute to financial returns,” they said, noting that Schroders will publish work in early 2025 on how investors can generate excess returns in impact investments.
The EU regulations on sustainable finance disclosure will have a marked effect on funds, Bioy said.
“By this time next year, the global ESG fund landscape will look significantly different,” she wrote. “We anticipate that between 30% and 50% of EU ESG funds will change names by mid-2025, while other funds will adjust investment objectives and/or portfolios to keep their ESG-related terms in their names. Some of these will become fossil-fuel-free, while others will rebrand into transition strategies.”
She said Morningstar expects an acceleration of fund closures globally in 2025. In the U.S., the $353 billion ESG fund market has already started to shrink in terms of number of offerings (although not in terms of assets, which continue to rise, supported by market appreciation). There were 595 ESG funds at the end of September, compared with 647 at the beginning of the year.
ESG fund assets in the rest of the world, which account for 5% of global ESG fund assets, should continue growing, but at a slower pace than in the past, she predicted.
4. Green bonds
Morningstar predicts the issuance of green, social, sustainable and sustainability-linked bonds, or GSS+, to exceed $1 trillion, supported by a more favorable interest-rate environment and investor demand for sustainable investments. GSS+ bonds have become popular debt instruments to finance the transition.
“We will also see the birth of the EU green-bond market. The EU aims to further strengthen investors’ trust in the green-bond market with a new voluntary standard that requires enhanced reporting and verification. Bonds issued under the EU GBS will be required to allocate at least 85% of their proceeds toward EU Taxonomy-aligned sustainable activities,” Bioy said.
She said there will be more green-bond issuances to finance green-enabling activities, which play a critical role in facilitating the transition. Examples of green-enabling projects are investments in companies that extract materials (such as lithium), which are vital for green technologies, and companies that manufacture materials (such as insulation) that help reduce emissions in the building sector.
5. Biodiversity
Natural capital — air, water, soil, geology and all living things — underpins the functioning of our society. The ecosystem services that it provides facilitate our global economy, Severinovsky and Rana write.
“However, modern economic systems repeatedly underprice natural capital, as it is not officially recognized as an asset. This leads to continued underinvestment in our natural assets, ultimately leading to their systematic degradation,” they said. “Investors, however, are still at the early stages of understanding how to measure these dependencies and risks and how to assess opportunities for investment.”
Although actual investment dollars moving into this area are still quite scarce, Schroders said it sees growing client interest, based on both transition and climate adaptation efforts, to consider investments in areas like regenerative agriculture, forestry and water conservation.
Morningstar’s Bioy pointed out that over the past two years, initiatives such as the Taskforce on Nature-related Financial Disclosures, the adoption of the Global Biodiversity Framework, and the UN Biodiversity Conference (COP16), have enabled investors to engage with the issue more effectively.
“We expect to see continued interest in biodiversity in the year ahead, with a need to scale nature finance. The rise of innovative financial mechanisms signals growing investor appetite for nature-related investments, but key challenges, including regulatory uncertainty and undefined nature transition pathways, remain,” she said.
6. AI
Artificial intelligence was a prominent investment theme in 2024, driving stocks like Nvidia to record highs. And AI is likely to continue to rise on the agenda of sustainability-focused investors in 2025.
“AI holds great potential to help combat climate change and achieve sustainability goals across industries,” Morningstar’s Bioy said. “However, its rapid adoption in recent years has revealed significant ESG risks for investors, and these risks may increase in the likely scenario of fewer regulations in the U.S. under the Trump administration.”
She pointed out that on the environmental side, AI-fueled data centers run by tech firms such as Google and Microsoft require a huge amount of (not all green) energy, which not only jeopardizes these companies’ net zero commitments, but also could divert green electricity from other critical sectors that need it more urgently to achieve their decarbonization goals.
On the social side, AI poses a host of new risks, which, if they materialize, can cost companies a lot of money. These risks include privacy breaches, biases, fake news, and copyright infringement, among others. For example, in May 2023, Meta was fined $1.3 billion by the EU for mismanagement of its data.
7. The role of sustainable private investments
Clients are more focused on private assets, which are key to the growth of the economy, and as such, will inevitably need to be included in solutions toward sustainability goals,” Schroders Severinovsky and Rana write. Schroders estimates from 2023 suggest that 10 times as much money was raised in private climate funds as in public ones.
“Engaging with privates to encourage emissions reporting is a key first stage in assessing decarbonization in private markets. We expect future regulation to progress these efforts, as well. Active ownership for achieving portfolio decarbonization will vary based on where a private markets investor has the power and rights to influence. This often differs by asset class and stage of the investment lifecycle,” they said.
Read more: 5 high-yielding stocks that best represent the UN’s Sustainable Development Goals
