10 expectations for 2025 and beyond

3. Transition takes center stage in thematic investing: After two years of underperformance across numerous themes (not all linked to sustainability), investors will prioritize diversification and find pockets of near- and long-term opportunity, with the transition to a low-carbon economy a key theme.

Related investments: Investing in the transition, Renewable energy infrastructure, Investing in climate technology ventures, Power and resources

Investment performance of thematic equity strategies ranging from health care to education and renewables lagged benchmarks in 2024, largely due to lesser exposure to the Magnificent 7 and a challenging macro environment for growth companies. We continue to see opportunities over the long term for these themes but expect investor attention to increasingly concentrate on investments tied to the low carbon transition across various asset classes and subtopics.

With the 1.5 degree warming goal increasingly less likely and the impact of climate change increasingly visible, we expect additional focus on investing in adaptation and resilience. Further, agriculture and biodiversity are likely to remain top of mind as sustainability-focused investors continue to find ways to drive investment toward a more sustainable food system. Many of these opportunities are likely to be accessible via venture capital, private equity, and infrastructure investments, in addition to aligned exposure via equity and bond strategies. Artificial intelligence (AI) will remain a topic of focus for sustainability-focused investors as well as the broader market, both as a driver of the renewable energy thesis and as a source of sustainability risks.

What’s next: Public market transition-labeled funds have become the fastest-growing category of climate funds, according to MSCI ESG Research. In private markets, venture capital deals in clean tech nearly doubled between 2020 and 2023. And in fixed income, 2024 saw transition bond issuance jump 7x year-over-year, thanks to Japan’s landmark GX bond issue. As countries, companies, and investors recognize the risks and see the attendant opportunities in addressing them, we expect all these trends to continue in 2025 and beyond.

Takeaway: Growing scale in transition strategies offer asset owners and investors opportunities to allocate more of their portfolios to this theme. We recommend looking to incorporate transition-focused exposures across equity, fixed income, hedge fund, and private market allocations and balancing such theme-specific exposures with core sustainability-focused strategies to manage near-term volatility.

4. Resurgence of social themes: Social themes will regain prominence, driven by policy attention and investor interest, with renewed focus on affordability, inclusion, and health outcomes.

Related investments: Diversity and equality, Obesity, Aging in comfort

The first half of the 2020s saw a renewed focus by investors on advancing diversity, equity, and inclusion (DEI) through gender- and ethnicity-lens investments, driven by public, corporate, and regulatory support of the topics. The focus was primarily led by the United States. But last year, DEI faced a backlash in the country, cooling momentum and bringing social issues to the back burner in favor of environmental topics.

Share of final household expenditure for housing, water, electricity, and gas; latest data available

As affordability grows as a focus of policymaking across the world, we expect social issues to return as a source of investment opportunities in the second half of the decade, this time with investors looking to affordability as a way to advance equity and inclusion. Affordability—from housing to energy and health care—will be a cornerstone of public and stakeholder focus moving forward across both developed and emerging markets, in our view. If unaddressed, it could limit the pace of growth of the transition to a low-carbon economy as well.

What’s next: Less than half of the population of wealthy countries (OECD) were satisfied with the affordability of housing in 2023, according to Gallup Analytics data and the Financial Times. Only about 60% were satisfied with the affordability of health care and education. We expect affordability to play a greater role in policy developments as inflation, although down from peak levels, continues to persist and weigh on consumer spending. Meanwhile, multiple US-based companies have rolled back DEI policies, which is likely to continue.

Takeaway: Investment solutions strictly focused on affordability have been more limited in availability to date, but we expect attention to the topic to create more investment opportunities in the coming years. As affordability increases in attention, investors can look at how their investment capital can expand access to critical services to underserved communities in developed and emerging markets. Investment opportunities can be found across real estate (e.g., affordable housing), access to energy and electricity, education, and health care services.

5. Green bonds dominate sustainable bond universe: Global green bond issuance will continue to be primarily led by euro-denominated issuance from sovereigns and multilateral institutions.

Related investments: Thematic sustainable fixed income

With 2024 issuance volumes recovering close to peak 2021 levels, we expect the more favorable interest rate environment will further support issuance of additional green, social, and sustainable bonds. Despite the rebound in corporate sustainable bond issuance, this continues to be dwarfed by sovereign, quasi-sovereign, and supranational organizations, which we expect to persist in the year ahead. Euro-denominated exposure also makes up the majority of the issuance, with USD-issuance continuing to constitute a smaller portion so far.

What’s next: The EU Green Bond Standards, the first regulatory label for green bonds, came into effect at the end of 2024. We will watch whether additional European bond issuers will choose to take up the new standard, which, while broadly aligned to current voluntary standards, introduces some new requirements. The adoption of a regulatory label might increase investor confidence in the green bond market.

Takeaway: Diversified portfolios of green, social, and sustainable bonds can provide sustainability-focused exposures with comparable performance to traditional high- and investment-grade bond portfolios. As the market issuance grows, we expect the investment opportunity to continue expanding, allowing investors to position for lower rates.

6. Retreat of ESG and "SI light" in public markets: We'll continue to see renaming activity, outflows and closings for funds with ESG integration as regulators adopt varied approaches at defining the term and investors focus on outcomes and the fundamentals of investment opportunities, rather than labels.

Ongoing regulatory pressure on sustainable product governance and disclosures from around the world are raising the cost of running SI strategies as fund flows slow. In the US, this is exacerbated by ongoing politicization of ESG, putting pressure on marketing of strategies where sustainability is not a core driver of the investment thesis. Sustainable finance industry initiatives are also under pressure. In Europe, fatigue from shifting requirements and definitions on SI has slowed down innovation as asset managers wait for regulatory clarity. As the environment shifts and investor expectations evolve, we expect to see additional closures of funds which do not demonstrate clarity about how they incorporate sustainability and those that fail to attract investor attention. This could result in a decline in overall assets with a sustainability label, refocusing the industry around a more credible set of investment solutions at the intersection of sustainable outcomes and investment performance.

What’s next: Morningstar expects 30-50% of all EU sustainable funds will change names by mid-2025, driven by EU regulatory expectations on fund-naming and a narrower definition of the term "sustainable." At the same time, we expect that these funds' approach to sustainability will likely remain consistent.

Takeaway: Investors should look beyond headlines and fund names and labels, focusing on strategies that robustly incorporate sustainability.ESG leaders strategies, while not inherently impactful, can add core exposure to a multi-asset, sustainability-focused portfolio, offering near-term outperformance opportunities. Following a "sustainable" label approach might lead to concentration in ESG thematic strategies, particularly around environmental themes.

7. Government support for climate and sustainability to continue: Major governments will continue fiscal and/or regulatory support for the transition to a low-carbon economy despite recent headlines, but we do expect bumps along the way.

We don’t expect the regulatory and fiscal support for infrastructure and the growth in renewable energy to significantly diminish in the aftermath of the 2024 elections. We also do not expect a wholesale repeal of the US Inflation Reduction Act owing largely to the widespread economic benefits it provides to a diverse range of stakeholders. Similarly, we expect the EU Green Deal to retain its core components, although we will watch how the upcoming German election will impact future regulatory efforts across the EU. Japan's Green Transformation (GX) USD 1tr plan, a mix of fiscal and regulatory support for the energy transition, is another example of government support of sustainability.

However, marginal shifts and delays are possible: from a loosening of environmental regulations in the US, to implementation of zero-emission targets for vehicles in the US and EU, and the EU’s sustainable agricultural policy rollout.

What’s next: China is due to announce its 15th Five-Year Plan, which will indicate how the world's largest emitter and second largest economy will continue to support the transition. With emissions showing signs of peaking, renewed or fresh policy commitments for further action would have significant implications on global decarbonization.

Takeaway: Even as we expect governments to (mostly) stay the course, investors should continue to focus on fundamentals and look for industries tied to sustainability solutions with longer-term growth prospects that do not depend on volatile regulatory environments.

8. Transition progress amidst mired multilateral talks: Renewable energy capacity additions will continue, driven by private investment and country-level policies, while geopolitical tensions make coordinated climate action unlikely.

Despite political and geopolitical challenges, 2024 saw record installations of new renewable energy capacity, according to IEA projections. This trend is expected to persist, driven by private investment. However, ongoing geopolitical tensions and deteriorating multilateral talks may hinder progress, affecting emerging markets most acutely.

What’s next: UN Paris Agreement signatories are required to update their decarbonization commitments (Nationally Determined Contributions, NDCs) in February. Expectations are muted, and any incremental progress may unlock value.

Takeaway: Investors should focus on companies and projects that are well positioned to navigate trade challenges and contribute to the energy transition. Opportunities exist in sectors innovating to increase the efficiency and scalability of renewable energy solutions. Despite the challenges posed by trade tensions, the commitment to energy transition remains strong, driven by technological advancements.

9. Rising energy demand will drive renewables expansion: While emissions continue to rise, their growth rate has slowed. Technologies like AI will increase overall energy demand, creating additional need and opportunity for financing and investment in renewable energy and efficiency technologies. This will influence the pace of future emissions growth.

According to the Global Carbon Budget, fossil fuel carbon dioxide emissions are projected to have reached 37.4bn tons in 2024, up 0.8% from 2023. This rate of increase is lower than the 1.3% y/y rise in 2023. The US and EU, which comprise 20% of global emissions, are expected to have decreased their emissions growth, with China expected to show only a marginal increase of 0.2% compared to 2023. We see the growth of AI contributing to both energy demand and construction demand, which could threaten to reverse the recent slowdown in emissions growth. This underscores the importance of scaling up sustainable finance in order to help close the supply gap.

What’s next: We anticipate more upward revisions from large-cap tech on AI capex spending, where capex intensity levels could match historical peaks, particularly if fourth-quarter earnings results feature further investment plans. Additionally, as AI growth expands more broadly outside of tech, we anticipate additional spending in building AI capacity.

Takeaway: Growth in energy demand and concerns about rising emissions set the stage for continued investment in renewables. While we don’t expect renewable development and deployment to fully address all the projected increase in energy demand, we believe it will represent a sizable portion of the overall growth in energy capacity. The CIO Power and resources theme identifies opportunities for investors, including names that meet criteria for inclusion in a sustainable investing universe.

10. Corporations to refocus on action vs. talk: Expect “greenhushing” as corporations de-emphasize sustainability-related marketing while focusing on actionable, financially material sustainability issues.

With increased skepticism toward the term “ESG” in some regions and additional anti-greenwashing measures in others, we expect the public statements companies make on sustainability to be increasingly measured. As we move into the next era of sustainability, we expect less focus on marketing and companies to narrow their strategies to the sustainability issues that are most relevant for their business. Investors will have a harder time differentiating between companies that are actually backtracking and companies that are re-focusing to specific sustainability issues.

What’s next: Targeted policies around emissions and carbon pricing continue to see strong momentum at the the local level in the US (e.g., Washington States's referendum and New York’s New Climate Superfund passed in December), providing steady incentives for bottom-up action by corporations.

Takeaway: We expect to see companies reconsider previously stated climate targets and their affiliations with sustainability-focused industry organizations, and instead develop action plans for the most material goals.

Investors can look for differentiation between companies within peer sets by assessing which ones are credibly demonstrating leadership or progress on sustainability- related topics, whether in operational performance or in their products and solutions. Looking beyond headlines to relevant metrics tied to investment fundamentals will remain important for investors focused on both performance and sustainability.