2025 Look Ahead
Alexander Vidler
Senior ESG Consultant Périclès Group | Sustainable Investment & Finance Professional
Writing this going into 2025 leaves a lot of questions, given the choppiness of 2024 in terms of markets, the recessionary call, and bears upping their volume. The context of the previous year, whilst noting several large waves, has ultimately led to the need for clarity regarding many political, economic and overall trajectory pathways. To say the least, 2025 will shift towards an upward or downward swing compared to the relative sedentariness we've seen through 2024. That is a given.
Several areas for the sustainable investment space are coming up in 2025 that are worthy of highlighting and exploring, which I'll go through below.
AI Bringing The Good & Bad
With the Artificial Intelligence boom that we're currently going through and the slow but quickening pace at which companies are adopting this new technology, we have seen a large number of Environmental and Social concerns creeping up as a direct correlation.
The energy cost surrounding AI data centres and the amount of energy they require to process data and fulfil their usage is projected to reach between 85 and 134 terawatt hours annually by 2027. For context, that is the same annual energy demand as the Netherlands.
Although these figures are admittedly difficult to calculate for a variety of factors, specifically the lack of transparency being released by AI companies on how much energy they require, the figure above is the widely accepted benchmark
Regardless, the IEA has stated that the energy demand growth for AI will be notable but not overwhelming, given the continued investment technology firms are making in reliable low-carbon energy - such as the Three Mile Island facility Microsoft has made a deal to reopen.
Additionally, there are ever more serious and prevalent concerns regarding privacy breaches and abuses, biases, fake news, and copyright infringement.
For more information, please see below:
The Regulatory Divide
2025 sets the start date for two highly anticipated E.U.-focused regulations. The results coming from SFDR and the first companies to comply with CSRD are due in the first 6 months of the year. What comes out of this will speak volumes to the credibility of the E.U. as setting the standards for Sustainable Investment and reporting.
Additionally, with the anticipated reporting requirements increasing and the stringent environment in the E.U., the central authority itself is facing large amounts of pressure on the regulators to demonstrate the value and efficacy of these ESG policies.
Already, we've seen the EU approved delaying the implementation of the EU Deforestation Regulation (EUDR) from the initially planned date of December 30, 2024, by one year to December 30, 2025, for large companies and June 30, 2026, for smaller businesses.
With President Trump winning the U.S. presidency for a second time already, investors are anticipating what we saw from his first outing in the role, with even more additions as the broad expectation of the rolling back of ESG initiatives runs rampant. The U.S. will likely exit the Paris Agreement again. Congress, too, is expected to reduce or flatly eliminate some if not all of the clean energy subsidies from President Bidens' Inflation Reduction Act, whilst the SEC is rumoured to be considering removing the requirements for companies to disclose Greenhouse gas emissions and climate-related risks.
Evidentially, we can anticipate, and I would strongly predict, a divergence from the rest of the world, particularly between the U.S. and the E.U., with regard to the amount of data available or mandatory to be reported upon and, further still, the nature of Sustainable Investment.
For more information, please see below:
ESG Funds Shifting
I posted about this earlier this year: The new guidance from ESMA will redefine the ESG fund landscape and simply the way in which funds are labelled in their entirety. Aiming to protect investors from greenwashing risk, it introduces a minimum standard for E.U.-listed funds that use ESG-related terms.
Predictions from Morningstar, Bloomberg, Reuters, and others suggest that the total number of ESG funds changing their names and designations will range between 30% and 50%; I believe this could be even higher. This doesn't even take into account the funds that will now be required to change their investment objectives and portfolio makeup to keep their ESG-related terminology applicable.
Further, an acceleration of fund closures globally has been observed over the past 3 years. Currently, in the U.S., the $353 billion ESG funds market has already started to shrink in terms of the number of offerings. During 2024, approximately 52 funds were closed.
Globally, ESG funds represent around 5% of the total size; however, this is expected to continue growing at a significantly slower pace than previous years.
For more information, please see below:
领英推荐
https://www.morningstar.co.uk/uk/news/257247/global-esg-funds-attract-%24104-billion-in-q3-2024.aspx
Bonds Bonds Bonds
With Western interest rates beginning to pull back from the inflation management mandate, these lower rates will boost sustainable, sustainability-linked and green bonds. This will inevitably push the overall level back above the $1 trillion mark again.
Based on the investor, board level, and generally shifting attitudes, bonds of this nature have been the most popular method to fund this transition.
Building from this first, we will also see the inevitability of the E.U. green-bond market; Bonds issued under the E.U. GBS will be required to allocate at least 85% of their proceeds towards E.U. Taxonomy-aligned sustainable activities. Additionally, the European Commission is set to issue 90 billion Euros in long-term E.U. bonds during the first half of 2025, with a portion set to meet the ESG criteria.
However, even as we see this as the most popular type of vehicle to fund and provide a catalyst for the green transition as banks struggle to form coherent portfolios, firms like ING are cautious that this will have a more significant impact on the negative side of issuances for the year.
For more information, please see below:
Natural Emergence
Nature-based solutions and, more broadly, areas related to biodiversity will rise to the foreground. Businesses globally are beginning to increase their investments in ecosystem restoration and preservation.
Annual investments will reach over $300 bn before the end of the year - an aggressive prediction since this will be close to double what was invested in 2024. This will be driven primarily by the more prevalent need to address climate change, coupled with biodiversity and land degradation.
The private sector will inevitably provide a decent increase, primarily in funding and reforming how this is done.
We've already seen significant evidence of this with Nescafe, Carlsberg, and Toyota's substantial investments in regenerative agriculture. Additionally, this includes a more sustainable water usage and waste management method.
For more information, please see below:
General Outlook
Within the next 6 months, we will have a clearer picture of what markets will look like for the next 36. Coming out of 2024, we've stagnated with the bears nor bulls, painting a more convincing picture - the threat of tariffs hampering down Western markets, a generalised slowdown in consumption from China and the other APAC regions suffering from this. Alongside a generalised, more isolationist attitude globally, if I were leaning either way, I would say that a global contraction and swing towards a bearish attitude is the more compelling.
The isolationist mindset and jobless claims across the U.S. and U.K. markets may be the forewarning needed to pre-empt a slowdown. However, the continuous need for the U.S. markets to remain strong and the reserve nature of the U.S. dollar will keep the American economy at the forefront for the longest, and a Trump presidency will facilitate the echo chamber of U.S. strength.