ESG in 2025: A Turning Point or a Steady Force?
Mark Lumsdon-Taylor · Posted on: February 4th 2025 · read
As we step into 2025, the concept of Environmental, Social, and Governance (ESG) investing faces a critical inflection point.
Once heralded as the future of ethical finance, ESG is now risks being dismissed as a marketing ploy, with declining investor confidence as the percentage of investors prioritising ESG dropped from 53% (2023) to 48% in 2024. The decline stems from growing scepticism about its tangible impact, accusations of greenwashing, and political opposition. High-profile moves, like BlackRock closing its ESG funds, signal a retreat from the ESG label, with fund sponsors increasingly rebranding their approaches under terms like "sustainable" or "responsible investment”.
The shift also reflects a broader push against centralised, prescriptive frameworks, especially given the current Republican administration's vocal criticism of ESG mandates. Instead, many fund sponsors and institutional investors are turning away from having ESG branded departments and policies. They now appear to be favouring a more flexible, bottom-up approach to sustainability.
For business leaders, this means embracing transparency and innovation to stay ahead. They must align themselves with clear sustainability outcomes and demonstrate real-world impact, rather than simply checking off an ESG box, in this evolving investment landscape.
However, despite the shifting sentiment toward ESG, several critical factors suggest that the core principles of ESG are far from fading.
- Continued Support from the EU and Global Markets: Economic regions like the EU have invested heavily in supporting ESG through legislation, regulations, and subsidies. This commitment is unlikely to change fundamentally, even if the quantum of support fluctuates. The EU has enshrined sustainability into its core strategy, and this will continue to influence global markets, making ESG principles integral to investment and business decisions in the region.
- Emerging Economies Continue to Seize Opportunity: Many countries, for example India and China, are positioning themselves to fill the void left by the USA’s withdrawal from climate change and environmental policies. These nations are embracing stricter regulatory frameworks, recognising that sustainable practices can present economic growth opportunities and a boost in global reputations. For instance, Australia’s climate policies show how non-Western economies are actively engaging in the global push for sustainability, further cementing the importance of ESG in global markets.
- State-Level Action in the U.S.: While federal-level support for ESG may be waning, Democratic-led states in the USA are still pushing for aggressive climate change and environmental policies. States like California, for example, are committed to both environmental goals and the economic benefits that come with a green transition. As these states lead the charge on sustainability, the influence of ESG remains strong at the state level, impacting businesses that operate across state lines.
- Advanced Market Forces: The momentum around ESG is too advanced to regress significantly. ESG principles are deeply embedded in financial markets, with growing demand for sustainable investments. Even if political landscapes change, bond markets and institutional investors have already integrated ESG factors into their portfolios. Moody's forecast suggests global issuance of sustainable bonds, including green, social, and sustainability-linked bonds, will reach $1 trillion in 2025, reflecting the ongoing commitment to sustainable investing. Despite market fluctuations, the trend toward ESG investing is set to remain strong.
- Consumer Demand Remains High: Consumer interest in sustainability and ethical business practices is still high. A retreat from ESG would create a trust vacuum in both the business and governmental sectors. Consumers are demanding more transparency and accountability from businesses, and governments are under pressure to align with public sentiment. Given these high levels of consumer demand, businesses that stray from ESG principles risk losing their reputation and customer loyalty.
- Net-Zero Commitments Are Legally Enshrined: For many countries, territorial net-zero deadlines are now enshrined in law, with serious financial penalties for non-compliance. For instance, the UK was the first major economy to set a legally binding net-zero target for 2050. Similarly, Switzerland has enacted legislation requiring all companies to achieve net-zero emissions by 2050, with provisions for companies to produce transition plans to meet this target. The impact of failing to meet these goals will be severe, both in terms of regulatory penalties and business planning challenges. Companies operating in these regions must continue to focus on ESG practices to avoid significant financial consequences and stay competitive in the global market.
While the retreat from the "ESG" label may signal a shift in how sustainability is framed, the core principles of ESG - sustainable, responsible investing - remain entrenched in global markets, governments, and consumer demand. The broader push for environmental responsibility and transparency, along with legal and economic frameworks, ensures that ESG will remain a driving force in business and investment strategies well into 2025 and beyond. Ultimately, the rhetoric around ESG may change, but the fundamental need for sustainability and accountability will not.
