The Future of Sustainable Investing: A High-Stakes Game in 2025

Sustainable investing has been a battleground of late, caught between regulatory shake-ups, market volatility, and political headwinds. As we head into 2025, the sector faces a make-or-break moment. While some firms quietly distance themselves from ESG commitments, others double down, recognizing that sustainability isn’t just a catchphrase—it’s an economic reality. Insights from industry leaders—Nicoló Bragazza ( 晨星 ), Ben Gilbert ( Sarasin & Partners LLP ), and Henrietta Pacquement and Kofi Mbuk ( Allspring Global Investments )—unpack the trends redefining sustainable investing.

Regulation: A Moving Target Investors Can’t Ignore

Nicoló Bragazza, Associate Portfolio Manager at Morningstar, pointed to regulatory shifts as a key challenge in 2025. The UK’s Sustainable Disclosure Requirements (SDR) are advancing, while the EU revisits the Sustainable Finance Disclosure Regulation (SFDR). “A lot of funds will likely change their objectives, dropping sustainable or ESG labels. Investors must monitor these changes carefully,” Bragazza warned.

This shift mirrors a broader global trend. In the U.S., ESG has become a political lightning rod, with certain states banning ESG-based investing in public funds while others embrace it. The so-called ‘green hush’—firms avoiding sustainability discussions for fear of political backlash—is a stark contrast to Europe’s regulatory tightening. As Bragazza put it, “With revenues going down and costs rising, margins are being squeezed,” making it crucial for investors to track where firms are placing their bets.

Tactical Shifts: Making Sense of a Fractured Market

Ben Gilbert, MPS Portfolio Manager at Sarasin & Partners, noted that we are in an economic environment where old playbooks no longer apply. Higher interest rates, moderate growth, and inflationary pressures mean investors need to rethink their strategies. “We see an opportunity in rotating into dividend-paying companies,” Gilbert explained, cautioning against overexposure to the AI-driven mega-cap stocks that have dominated markets.

Geopolitical shifts also play a role. De-globalization, trade restrictions, and supply chain risks are pushing firms to rethink asset allocation. “We believe these structural tilts will benefit portfolios in the next five to ten years,” Gilbert said, suggesting that alternative assets like gold could serve as crucial hedges. The unpredictability of the 2024 U.S. elections adds another layer of complexity, making it essential for investors to stay nimble.

The Role of Climate Risks and Resource Scarcity

Sustainability leaders Henrietta Pacquement and Kofi Mbuk from Allspring Global Investments identified three key investment themes for 2025: energy demand, climate risks, and water scarcity.

1. Energy Demand and the Nuclear Renaissance: The surge in AI and data centers has drastically increased energy consumption, reviving interest in nuclear power. “Global nuclear capacity is expected to rise by 40% over the next decade,” Mbuk stated, highlighting new investment opportunities in debt and equity markets. However, he cautioned that high upfront costs remain a barrier, with government support and private investment playing critical roles.
2. Climate Risks Becoming Financial Risks: Extreme weather events are no longer just environmental concerns but financial risks. Pacquement pointed to the World Economic Forum’s risk assessment, which ranked extreme weather as the second-highest global threat over a two-year horizon and the top risk over a ten-year period. “We’re now seeing these risks directly impact corporate earnings,” she noted, citing industries like chemicals and utilities where water shortages are disrupting operations.
3. Water Scarcity—The New ‘Liquid Gold’: Freshwater demand is projected to rise by 40% by the mid-2030s, intensifying competition among industries. “Regions like California, Italy, and Spain are particularly vulnerable to water stress,” Mbuk explained. Companies that prioritize water efficiency are increasingly seen as more resilient investments, offering both sustainability and financial upside.

Timeless Lessons for Sustainable Investing

Even amid the chaos, certain investment principles remain unchanged. Bragazza advised investors to “stay diversified, avoid chasing short-term performance, and ensure that investments are priced appropriately.” His reminder that “sustainable investing is still investing” is particularly relevant as some firms struggle to balance profitability with purpose.

Looking Ahead: Adapt or Get Left Behind

Sustainable investing in 2025 isn’t for the faint of heart. The market is shifting, and those who fail to adapt risk being caught flat-footed. Political polarization, economic uncertainty, and climate realities are colliding in unprecedented ways. However, for those willing to embrace change, opportunities abound. Whether it’s capitalizing on nuclear energy, hedging against climate risks, or finding value in overlooked sectors, the path forward requires both conviction and flexibility.