As extreme weather events such as heatwaves, storms, and flooding intensify across the globe, the financial industry has increasingly been called upon to adapt its strategies to tackle the climate crisis. In the past decade, investment practices have shifted to account for environmental, social, and governance (ESG) risks and opportunities. However, recent political changes, including a more hostile environment in the United States, are forcing financial centers like London, New York, and Toronto to reevaluate their commitment to sustainable finance.
In particular, energy security has surged as a primary concern following sharp increases in oil and gas prices, while climate finance faces rising opposition in the U.S. A notable shift occurred on New Year’s Eve when Bank of America and Citigroup—two global financial giants—pulled out of the Net-Zero Banking Alliance, a UN-backed initiative promoting sustainable finance.
What will 2025 hold for sustainable investing and the future of ESG practices? Here are seven key predictions:
1. Attacks on ESG Regulations in the U.S.
With Paul Atkins appointed by Donald Trump to head the Securities and Exchange Commission (SEC), sustainable investing will face challenges. Atkins, an ESG skeptic, is expected to reverse many of the Biden administration’s ESG-friendly regulations. This includes efforts to curtail shareholder rights by rolling back SEC guidance that made it easier for activists to propose environmental and social issues at corporate annual meetings. Furthermore, the SEC is expected to revoke regulations requiring U.S. companies to disclose Scope 1 and 2 emissions (operational and energy-related carbon emissions).
While these shifts may dampen shareholder activism and complicate climate disclosure in the U.S., they will be offset by evolving rules in California and Europe, where companies will still face stricter ESG disclosure regulations. Legal battles around ESG fiduciary duties and investment strategies will further complicate the landscape, adding layers of regulatory uncertainty.
Takeaway: In 2025, expect fewer ESG proposals with broader corporate opposition in the U.S., but these changes will primarily generate confusion rather than completely stalling sustainable investment.
2. Decline in ESG Shareholder Proposals
The number of shareholder proposals focused on ESG issues is expected to decrease, with collaborations like the Climate Action 100+ network losing influence. In the past few years, a growing number of asset managers—such as Franklin Templeton and Goldman Sachs—have distanced themselves from collective shareholder action on climate, diminishing the pressure on corporations to adopt environmentally friendly practices.
Support for ESG proposals also waned in 2024, with a sharp drop in approval rates among the “Big Three” asset managers—BlackRock, Vanguard, and State Street. However, smaller, more focused ESG proposals are likely to see increased support from certain institutional investors.
Takeaway: Expect a reduced number of shareholder proposals in 2025, with a greater emphasis on more strategic and impactful resolutions that attract substantial backing.
3. Long-Term ESG Investors Will Hold Steady
Despite political and regulatory pushback, long-term ESG investors are poised to maintain their commitment to sustainable strategies. A significant portion of asset owners and managers, including pension funds and large institutional investors, will continue integrating ESG considerations into their investment decisions. As of late 2023, sustainable assets in the U.S. amounted to $6.5 trillion, comprising 12% of total investment assets.
Though Republican-led states may restrict ESG investments in pension funds, many large investment firms have substantial ties to European and Democratic state clients that demand sustainable finance. The growth of ESG investment is expected to persist, driven by the evolving recognition of climate risks and economic transformations linked to climate change.
Takeaway: Sustainable investing will remain a core strategy for long-term investors, with continued growth, particularly in pension funds, who are increasingly factoring in climate-related risks.
4. Cautious Return of Short-Term Investors to Sustainable Funds
Short-term investors, including mutual funds and ETFs, saw substantial outflows from sustainable investments in 2022 and 2023 due to rising interest rates, the Ukraine war, and new greenwashing rules in Europe. However, signs are emerging that flows into sustainable funds are stabilizing, with net inflows of $10.4 billion in the third quarter of 2024.
The shift can be attributed to investors’ growing confidence in the European regulatory environment and a more favorable outlook for green bonds and climate-friendly equities. While the U.S. remains a more difficult market for green funds due to political uncertainty, European investors are increasingly adopting ESG guidelines and regulations.
Takeaway: Expect a gradual recovery in sustainable fund investments in 2025, as market conditions improve and investors regain confidence in the long-term prospects for green and ESG-focused funds.
5. European Commission Will Simplify, Not Eliminate, ESG Disclosure Rules
Despite political shifts in Europe—particularly the rise of conservative parties—there is little appetite for a full-scale rollback of ESG disclosure rules. The European Commission, led by Ursula von der Leyen, is likely to propose a simplification of existing ESG reporting requirements rather than a wholesale deregulation.
With thousands of companies already invested in compliance with stringent ESG rules, any drastic changes to the framework would risk significant market confusion. Instead, the focus will likely be on streamlining data collection and reporting to focus on the core outcomes of sustainability.
Takeaway: Expect a major overhaul of European ESG disclosure requirements in 2025, aimed at simplifying the process while still maintaining robust reporting on sustainability outcomes.
6. Canada to Lead on Transition Investing
Canada is poised to establish itself as a leader in transition investing with the formation of a council overseeing green and transition taxonomies. These new standards will help guide investments in sectors like green steel and cement, and the phase-out of fossil fuels in favor of cleaner energy. One of the key questions remains whether natural gas projects—such as liquefied natural gas (LNG) infrastructure—will qualify for the transition label, but the government is committed to keeping emissions from these projects within the 1.5°C global temperature rise limit.
Takeaway: With the establishment of clear green and transition investment guidelines, Canada will become a key player in supporting the transition to a sustainable economy, setting the standard for other countries to follow.
7. Canada’s Carbon Emissions Reporting Delayed, But Still Coming
Canada is moving toward mandatory full-scope carbon emission reporting, including Scope 3 emissions (from end uses), set to be rolled out over the next few years. While Alberta’s oil and gas sector is expected to resist full disclosure, the rest of the provinces are likely to support comprehensive reporting, aligning with international accounting standards.
Takeaway: Full carbon emission reporting will take effect in Canada by 2027-2028, helping the country align with global sustainability standards while increasing transparency in corporate emissions.
The Big Picture
While the future of sustainable finance faces significant challenges in the U.S. and Europe, the momentum built over the past decade suggests that sustainable investment is far from dead. Despite growing conservative pushback, ESG principles have become embedded in the long-term investment strategy of key players in global finance, and their continued growth seems likely, especially with regulatory clarity emerging in places like Europe and Canada.
Expect 2025 to be a year of transition, with sustainable finance adapting to both political changes and market conditions, as global financial markets continue to navigate the complexities of climate risk and the demand for responsible investing.
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