Sustainability and climate trends in 2025

I attended an #Insightful discussion this morning at A&O Shearman and the launch of the MSCI Inc.'s paper on #sustainability and #climate #trends to watch in 2025.

Victoria Lee (Née Skilbeck) thank you for the invite! Looking forward to reading the full report in due course!

Having bumped into a few animals and landmarks on my way, here are 6 things I took away in the meantime.

My six takeaways

1. The urgent need for climate mitigation creates opportunities for investors

The reality of a changing climate damage to infrastructure from extreme weather will more than likely impact global economies in terms of both physical and transitional risks. And this is not just a long term concern - extreme flooding is already happening!

Significant investment in climate adaptation (not just climate mitigation) is required, and this creates opportunities for investors such as green bonds, energy transition infrastructure and private financing.

2. The role of private markets

Private investment in companies providing carbon solutions has significantly grown in the last few years and cumulative returns are higher compared to companies raising financing through public markets. Also interestingly, compared to other sectors there are many more utilities companies who raise private (compared public) financing, who have a need to invest in climate adaptation.

3. Social factors matter, and from a financial perspective too!

Companies with strong “S” characteristics have outperform the weakest “S” companies in the last few years. Human capital, product liability, stakeholder adaptation and social opportunities are all key considerations for any organisation. And from an investment perspective this is even more crucial in the IT sector, to where there has been a shift in sectoral allocation in equity portfolios - partly as part of the ongoing momentum in artificial intelligence (AI) - where companies on the face of it look to be making strides in how they integrate social factors in their business operations.

4. In fact, the rise of AI creates a (financial) social risk for companies in itself.

There are many companies who are not clear / do not disclose how they use AI and collect consumer data, and with new regulation on this coming next year, those companies that do not have robust policies on this will be exposed and surely damaged through litigation.

Also what does the rise of AI mean for climate risk? Increased computing power requires data centres which needs more electricity, which surely lead to an increase in GHG emissions and dependency on nature.

5. Shift in US (and other global) corporate governance policies

There has been a shift away from majority voting policies in company decision making in many countries including the US, with voting rights on this issue significantly increasing. And this is linked to other risks associated with shareholder rights. This also matters financially; in the US, those companies with strong governance policies have outperformed their peers.

6. Could 2025 be a turning point for carbon markets?

There is a a lack of credible, higher integrity/lower risk carbon markets projects (such as carbon removals based projects), but there has been a shift towards more high integrity recently. And companies who materially use carbon credits tend to also decarbonise more quickly compared to their peers who don’t use carbon credits less materially, as part of their overall sustainability strategy.

Will 2025 be a turning point? My own view is that a stronger consistent global regulatory framework is required to drive real momentum.