Stephanie Maier
Henry Morrison-Jones, CFA
- Sustainable finance remained significant in 2024, with $1.5 trillion of issuance in sustainable bonds & loans, and the sustainable fund market exceeding $3 trillion.
- AI is a double-edged sword, optimising energy efficiency while increasing power demand, impacting sustainable investment portfolios.
- Renewables will surpass coal in 2025, driven by rapid solar PV & EV growth, but uneven adoption across regions remains a challenge.
2024 looked to be a challenging year for sustainable investment (SI), with many headline writers predicting the demise of ESG strategies as the market had to navigate strong macro-economic and geopolitical crosscurrents.
However, it’s important to consider whether the data supports this narrative. In fact, the underlying trends paint a more optimistic picture.
2024 was a year in which clean energy installations continued to grow rapidly, more than $1.5trn of sustainable finance bonds and loans were issued[1], numerous sustainable indices outperformed their capitalisation-weighted reference benchmarks, and the sustainable fund market remained more than $3trn[2] in assets.
Regulation remains relevant
At the start of 2025, we expect to see a continued dynamic evolution in the SI market. The regulatory landscape is evolving, with the review and development of both sustainable investment and ‘real economy’ regulations across multiple global regions. The regulatory landscape is particularly important for sustainable investors assessing the economic outlook for the green economy. Government support for clean energy investment has risen rapidly since 2020, bringing with its billions of dollars of subsidies, as have trade policies focused on clean energy[3], which can impact prices, competition and supply/demand balances.
In the EU, in particular, funds complying with Sustainable Finance Disclosure Regulation (SFDR) Articles 8 and 9 make up around 60 percent of the whole regional fund market[4]. Undoubtedly, the ongoing reviews of existing regulations add an element of uncertainty for the sustainable investor. However, they also offer the potential to streamline and enhance current regulations’ useability, further enabling the energy transition[5].
Biodiversity and climate adaptation stand out
Amongst the numerous themes within sustainable investment, biodiversity and climate adaption stand out as they gain traction and become more pressing.
With the evolution of disclosure frameworks and the growing investor view of the importance of biodiversity and changes in land use for both economies and the climate, 2025 could be the year in which biodiversity moves from being a topic for disclosure and engagement to one generating direct investment and mobilising capital[6].
Similarly, climate adaptation has been a core topic for many years. However, it has always tended to play a secondary role to climate mitigation in terms of climate finance and investor focus. However, the latest data from the EU Copernicus programme show that 2024 was the first year in which the global average temperature rose to nearly 1.6 degrees above the temperature in pre-industrial times (1850-1900)[7]. We have also seen many physical impacts of climate, from air pollution in Pakistan, floods in Spain and wildfires in Los Angeles. It is estimated that US weather and natural disasters cost $182bn in 2024[8].
Global temperature anomaly vs pre-industrial (1850-1900) (oC)
Source: ERA5 EU Copernicus Climate Pulse. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Estimated cost of US weather and natural disasters ($bn per year, average, inflation-adjusted)
Source: NOAA Billion-Dollar Weather and Climate Disasters | National Centers for Environmental Information (NCEI). Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Renewable energy production should surpass coal in 2025
Despite the headlines, the evidence suggests that energy transition continues apace. Solar photovoltaic (PV) installations grew 36% between H1 2023 and H1 2024, while electric vehicle (EV) unit sales grew 25% over the same period[9].
The share of renewable energy in global electricity production has seen dramatic growth, with renewables expected to surpass coal as the largest source of electricity production in 2025. This has led to falling carbon emissions related to electricity production in Europe, an approximately flat trend in emissions in US and China (although emissions coming from India have risen)[10].
Renewable energy now covers the majority of new electricity demand. However, a more dramatic reduction in fossil fuel generation would be needed to achieve longer-term Paris Agreement emission goals. Despite the continued growth of clean energy technologies, this trend has been uneven across technologies or regions. For example, solar PV and EVs have grown faster than wind or heat pumps and in EVs China has grown faster than Europe or North America.
Electricity production by technology (TWh)
Source: Electricity Mid-Year Update - July 2024 – Analysis - IEA. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Falling prices for clean energy equipment
One key reason for the continued robust growth rate of the energy transition is the dramatic fall in the prices of key green energy equipment, such as solar panels and EV batteries. These falls renewed in 2023 and 2024 after prices saw a brief rise in 2022.
Clean energy equipment price index
Source: Clean Energy Market Monitor – November 2024 – Analysis – IEA. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Part of the reason for these falls (in addition to increased manufacturing efficiency and economies of scale) is the imbalance between supply and demand as manufacturing capacity has dramatically increased, particularly in China[11].
This can negatively impact manufacturers’ profitability and has led to the alternative energy equipment manufacturers sub-sector of the FTSE All World Index, falling 4% in 2024. However, the broader green thematic FTSE Environmental Opportunities All Share index, which is more exposed to energy efficiency than renewable energy, was up 15.9% during the year.
New technologies and AI trade-offs
As well as the growth in “traditional” clean energy technologies, new technologies are entering the market and merit the attention of sustainable investors. In particular, artificial intelligence (AI), whilst also influencing the broader economy and markets, will have a major impact on sustainability.
AI’s promise of optimising processes across the economy and enhancing productivity could produce significant reductions in greenhouse gas (GHG) emissions – Google and BCG estimate that AI could mitigate 5-10% of global GHG emissions by 2030[12].
In addition, it can be used to improve sustainability data or improve physical risk response through natural disaster modelling.
However, there are also sustainability trade-offs from AI. The significant computing power required by this new technology is leading to growing power demand and carbon emissions from the companies[13] that make up a significant portion of sustainable investment portfolios.
Whilst data on the exact size of AI and its impact on data centre power demand are still uncertain, most analysts expect this component of overall electrical grid demand to grow significantly over the coming years and it is increasingly cited as a driver in new energy policies.
The recent impact on the equity market of the release of Chinese AI model DeepSeek, with both energy companies’ and tech companies’ share prices falling following the announcement, illustrates how important efficiency is likely to be for the evolving AI market. Cost efficiency will go hand-in-hand with energy efficiency and as AI grows, demonstrating both will key for tech companies. Energy efficiency related to the tech industry will also be a key element of the green economy (and the data models used to measure it).
2025 is therefore set to see a continued dynamic evolution of the sustainable investment market. Sustainable investors therefore need access to a wide range of data on multiple topics, helping them invest across a diversified portfolio of sustainability strategies and asset classes.
[1] LSEG Deals Intelligence Sustainable Finance Review Full Year 2024
[2] Global Responsible Investments Fund Market Statistics for December–Lipper Analysis | Lipper Alpha Insight | LSEG
[3] State of Energy Policy 2024 – Analysis – IEA
[4] SFDR Article 8 and Article 9 Funds: Q4 2024 in Review | Morningstar
[5] Sustainability Policy Recommendations | LSEG
[6] Mapping the Unseen: Unveiling nature and biodiversity data for sovereigns | LSEG
[7] ERA5 EU Copernicus Climate Pulse
[8] NOAA Billion-Dollar Weather and Climate Disasters | National Centers for Environmental Information (NCEI)
[9] Clean Energy Market Monitor – November 2024 – Analysis – IEA
[10] Electricity Mid-Year Update - July 2024 – Analysis - IEA
[11] Advancing Clean Technology Manufacturing – Analysis - IEA
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