5 key Responsible Investment trends to watch in 2025

As we step into 2025, the landscape of responsible investing is undergoing a significant transformation, shaped by global events, technological breakthroughs and evolving societal values.

The past year has witnessed unprecedented shifts in how environmental, social and governance (ESG) factors are integrated into investment strategies and corporate decision-making processes. Responsible investing has been compelled to respond to tightening regulatory frameworks and diverging stakeholder expectations. This article delves into the five most prominent responsible investing trends that we believe are going to be in the spotlight in 2025.

1. The rise of ESG disclosure regulation

Governments are introducing or expanding regulation requiring companies to report their performance on ESG factors. In the EU and UK, the level of disclosure required has increased as has the number of companies required to report ESG performance. The EU’s Corporate Sustainability Reporting Directive (CSRD), for instance, has increased the number of entities required to report sustainability data to nearly 50,000, a substantial rise from previous thresholds¹.

From January 2025, large Australian businesses and financial institutions will be required to report on climate-related risks and opportunities. Similar to measures already implemented in Aotearoa New Zealand, this initiative is part of Australia’s broader Sustainable Finance Roadmap, which aims to integrate sustainability into the financial system. While the new requirements are expected to enhance transparency and accountability, as well as improve the identification of climate-related risks and opportunities, it will also impose notable compliance costs on businesses.

2. What’s in a name? A new era in ESG fund labelling

The significance of naming cannot be overstated. The labels assigned to financial products – such as “sustainable”, “green” or “impact” – carry specific connotations and set clear expectations regarding the product’s inclusions and exclusions. However, there are numerous documented instances of mislabelling: green bonds financing fossil fuel projects, sustainable funds investing in deforestation, and impact funds with no demonstrable impact. Such practices illustrate how a name itself can constitute greenwashing.

Regulatory bodies have increasingly turned their attention to this issue. The growing reliance on private sector investment to meet net-zero emission targets has spurred a global effort to establish more stringent labelling requirements for sustainable financial products.

The EU and UK have implemented regulatory frameworks to address these concerns, while Australia has announced plans to introduce its own regime in 2027. In the US, SEC plans to introduce climate-related financial disclosure regulation are tied up in court and unlikely to survive the Trump presidency.²

The advancement of sustainable financial product labelling regulations is essential to combat greenwashing and enhance transparency within global financial markets. Nonetheless, challenges persist – existing frameworks in the EU and UK have revealed difficulties in achieving consistency, clarity and broad applicability. The imposition of additional compliance costs and disclosure complexity has seen many managers remove sustainability terms from product names.³ And while for many products this is undoubtedly appropriate, for some genuinely innovative sustainability solutions, it is a poor outcome. Smaller firms in particular have struggled with the resources needed to meet the significant challenge of aligning with detailed and evolving standards that vary between jurisdictions.

Australia’s forthcoming labelling regime presents an opportunity to incorporate lessons from overseas. The development of precise definitions, well-defined categories and objective criteria will be critical to establishing a regulatory framework that ensures alignment with sustainability goals while safeguarding investor trust.

For further insights into the impending ESG labelling regulations, refer to our comprehensive analysis.

3. Increasing AI adoption could undo climate progress – or not…

An internet search using generative artificial intelligence (GenAI) consumes nearly ten times more energy than a single Google search⁴. The exponential growth of GenAI is drawing attention to its environmental impact. This attention is unsurprising, given that the training and development of GenAI models are inherently energy-intensive processes. The widespread adoption of GenAI technologies has been accompanied by a large and growing demand for electricity to sustain their operation. Morgan Stanley estimates that GenAI’s power demands will skyrocket 70% annually through to 2027, at which point the technology could use as much energy as the entire country of Spain⁵.

The environmental impact of AI’s energy usage could be significant, with increased energy consumption potentially driving up emissions in the short-term. Additionally, data centres require substantial water resources for cooling, exacerbating water scarcity issues in certain regions. The extraction and manufacturing processes involved in building data centres, including mining rare earth elements, add to environmental concerns.

The enormous energy requirements of developing GenAI solutions have led to a big increase in the emissions footprint for technology companies. Google has seen its carbon emissions increase by 48% vs 2019 while Microsoft has seen a near-30% increase in 2023 alone^6,7.

Source: https://swisscognitive.ch/2023/10/24/ai-is-huge-and-so-is-its-energy-consumption/

Research suggests that a large portion of the incremental power demand of GenAI could be sourced from zero or low-carbon technologies⁸. AI-driven power demand could serve as an underappreciated driver for manufacturers of large-scale and distributed clean energy technology and developers of wind, solar and energy storage. For a detailed look at whether AI could transform or derail the climate transition, read our note on GenAI and its impact on climate progress.

4. The growing importance of responsible investing in Fixed Income

The landscape of fixed income investing is undergoing a significant transformation as responsible investing principles gain traction. By 2025, this trend is expected to become even more pronounced, reshaping the way investors approach fixed income securities.

This momentum has been driven by a growing recognition that ESG factors can significantly impact an issuer’s creditworthiness. As we look towards 2025, this trend is set to accelerate, with investors increasingly integrating ESG considerations into their fixed income portfolios.

The fixed income market, encompassing trillions of dollars in global securities, presents a compelling avenue for responsible investing. Bonds, favoured for their inherent long-term income stream, align neatly with responsible investing’s similarly long-term perspective. This alignment is particularly relevant as investors seek to address critical societal and environmental concerns and influence corporate behaviour towards more sustainable practices.

Issuance of ESG bonds has grown over the years, with total cumulative issuance passing the US$5 trillion mark in 2024⁹. In Australia, the Australian Office of Financial Management (AOFM) successfully launched its inaugural green bond in June 2024, making it the largest green bond issuance in Australia. The bond raised A$7 billion and was substantially oversubscribed¹⁰.

Cumulative Green and Sustainability Linked Bond Issuances reached U$5.4 trillion at the end of Q3 2024

Source: Climate Bonds Initiative

5. Impact Investing coming of age

The impact investing market has experienced significant growth in recent years, demonstrating its resilience and maturity as a sector. Globally, the market has grown from U$502 billion in 2019 to roughly U$1.6 trillion in assets under management (AUM) in 2024¹¹.

Source: Global Impact Investing Network

While the market is poised to continue growing, this will not be without its challenges. The current regulatory landscape lacks clear definitions for “impact” within existing frameworks, making it difficult to distinguish between ESG investing and true impact investing¹². Insufficient guidance on measuring and quantifying impact hinders transparency and the ability to demonstrate effectiveness.

The absence of standardised frameworks for measuring impact makes it challenging to compare different investment opportunities and assess their true impact value. The lack of a common impact yardstick across diverse projects complicates decision-making for investors. Industry participants frequently cite the complexity of impact measurement and reporting as a top challenge, highlighting the need for more streamlined and universally accepted methodologies¹³. Addressing these multifaceted challenges will be crucial for unlocking the full potential of impact investing and scaling its growth in the coming years.

The road ahead

These trends collectively reflect the growing recognition of the interconnectedness of financial performance and positive societal impact. As we move forward in 2025, while we expect challenges driven by global events and geopolitics, we also expect to see the emergence of a more robust, transparent and impactful responsible investing ecosystem.

Sources:

1. https://carbontrail.net/blog/corporate-sustainability-reporting-directive-csrd/ ↑

2. https://fortune.com/2024/12/09/sec-climate-disclosure-rules-cfo-trump-firms-likely-report-risks/ ↑

3. https://www.ipe.com/news/esg-terms-dropped-from-30-fund-names-says-morningstar/10074881.article ↑

4. https://www.lexology.com/library/detail.aspx?g=e1051021-0206-4440-84e9-3b19362084e7 ↑

5. https://www.morganstanley.com/ideas/ai-energy-demand-infrastructure ↑

6. https://www.theverge.com/2024/7/2/24190874/google-ai-climate-change-carbon-emissions-rise ↑

7. https://www.theverge.com/2024/5/15/24157496/microsoft-ai-carbon-footprint-greenhouse-gas-emissions-grow-climate-pledge ↑

8. https://www.morganstanley.com/ideas/ai-energy-demand-infrastructure ↑

9. https://www.climatebonds.net/files/reports/cbi_mr_q3_2024_01c.pdf ↑

10. https://www.brokernews.com.au/news/breaking-news/aofms-debut-green-bond-success-285223.aspx ↑

11. https://s3.amazonaws.com/giin-web-assets/giin/assets/publication/giin-sizingtheimpactinvestingmarket-2024.pdf ↑

12. https://idrn.eu/the-challenges-and-solutions-to-impact-investing-in-europe/ ↑

13. https://impact-investor.com/blue-earth-survey-identifies-challenges-for-impact-investors/ ↑