1. Increased divergence on sustainable investing commitments 

We expect the global shift to the political right to persist. This, in turn, will continue the divergence of sustainable investing issues worldwide. Some players will roll back sustainability commitments, while others will double down. Global entities, in particular, will need to manage the regulatory and litigation risks this will bring.

Financial institutions are having to navigate this divergence. Many US asset managers are pulling out of climate initiatives, while UK and European asset managers are re-doubling their efforts. For example, Dutch pension fund PME said it may move away from a manager, given the investment company’s exit from the Net Zero Asset Managers Initiative (NZAM) and Climate Action 100+ (CA100+). This view has been repeated by other clients and consultants during our research.  

At aberdeen, we remain a committed member of a number of sustainable investing initiatives, where we see value for our clients. These include climate initiatives such as CA100+ and NZAM.

2. Carbon target reset year

The 2030 deadline set by most companies to reduce their emissions is fast approaching. For many corporates, 2025 is a halfway point in their emissions target setting, and a time to review progress. We expect many to realise that the targets set were overly ambitious. Indeed, many were 'aspirational' targets and much of the expected policy support never materialised.

We expect to see a lot of resetting of ambitions, leading to increased engagements, shareholder resolutions, and potentially even litigation over misleading claims. This is something that we predicted in our 2022 paper, 'Mind the Gap', where we said that the gap in credibility and policy support would lead to many targets being reviewed.

A rolling back of targets could negatively affect holding these companies in sustainability funds, especially for funds where there is a transition focus. An example is the technology sector, where the growth of power-hungry artificial intelligence (AI) means that emissions targets are increasingly difficult to achieve. Given AI-linked company dominance in the stock market, this will need to be addressed by investors. Meanwhile, companies in the electrification market – such as ABB, Schneider Electric, Quanta Services, and Emerson Electric – have all benefited from AI growth, the energy transition, and longer-term improvements in grid regulations. This highlights the electrification market as an area of opportunity for investors.

The roll back of the US Securities and Exchange Commission's climate disclosure rule will mean there are fewer disclosure pressures on US-based companies. Elsewhere, more detailed disclosure in the form of climate-transition plans is required, for instance, in the current and upcoming regulations in the EU and UK. These regulations will provide further clarity on if and how companies will achieve targets. This increased focus and scrutiny is likely to provide further impetus for companies to review and reset existing targets. This will help investors who are looking for energy-transition holdings for their sustainability funds.

We expect technology and financial institutions to face the biggest gap between stated emissions targets and their realistic ability to achieve them. They will be the most likely to reset targets. The flip side is that some intensity targets set by financial institutions have been surprisingly easy to achieve, despite no demonstrable or real-world decarbonisation. Is this the year the elephant in the room of real-world decarbonisation is tackled? Early signals are that a more pragmatic approach will come. 

3. Defence

Many NATO countries, particularly in Europe, have recognised the need to increase defence spending. This is because of conflicts in Ukraine and the Middle East, as well as previous underinvestment in defence in certain countries. Spending on defence will rise but given stretched budgets, governments will be looking to investors for support.

Last year, some governments and investors raised concerns that the limitations on holding certain defence stocks in some sustainability funds were impairing investment in the industry. In their view, it could present a risk to national security. This could put pressure on regulators to provide guidance and alignment on how the defence sector should be considered in investments. A regulatory tilt towards allowing certain defence stocks to be held in sustainability-focused funds could change the investor view on this theme. But with regulation moving slowly, this could take time to emerge, and managers also need to be cognisant of clients’ expectations on holdings in these types of funds. 

4. Diversity, equity and inclusion (DEI)

We are seeing companies, fund managers and other organisations, mainly in the US, rolling back on corporate DEI programmes and targets. Meta, Amazon, Google and McDonalds, for example, have all altered their DEI policies, seemingly in response to the new US administration’s anti-DEI actions. We expect to see more companies react this way in the US and Canada.

From a bottom-up perspective, we expect more US-based companies to face more challenges on their environmental, social and governance (ESG) practices. This includes via what some are calling 'anti-ESG votes'. This reflects the changing regulatory landscape on the issue of DEI in the US. These types of votes made up over 25% of votes issued in the last year, according to Institutional Shareholder Services. As with climate target roll backs, we expect similar reactions from investors and greater division linked to politics. It’s likely that this trend and the pressure on companies will increase. Investors will need to understand the challenges companies are facing.  

5. Physical risks come home to roost 

As the global economic costs of increasingly extreme weather rise, investors will no longer be able to ignore physical risks – whether they attribute the cause to climate change or not. We are already seeing, for example, that some areas will find it increasingly difficult to obtain insurance because of rising wildfire and flood risks.

We are currently looking at solutions to further enable us, and therefore our clients, to understand how physical risk could affect assets. There is also a growing understanding that adaptation investments will be needed to mitigate these physical impacts.

We expect to see an increase in the use of geospatial tools that include climate scenario analysis to help investors understand these risks. We also expect clearer disclosure from corporates to show how they are adapting to these risks.

Final thoughts…

Sustainable investors will need to navigate a shifting landscape in 2025, as politics drives rapid change - particularly in the US.

Despite this, opportunities remain plentiful. These potentially include upstream energy transition players, climate adaptation investments, and companies that approach sustainability through the lens of financial materiality.