Responsible investment outlook 2025: Nature, AI and regulatory change

As we start the new year, there are many environmental, social and governance (ESG)-related topics that we see as being increasingly relevant to investors in 2025. Climate and the energy transition have been important topics of consideration for a few years, and they continue to be prominent, particularly as investors consider transition in the hard-to-abate industries. However, there are several other emerging themes that we anticipate will gain more attention this year.

Nature

Nature is among the most frequently discussed sustainability topics, and in recent years it has steadily grown in importance for investors, particularly as high-profile events, such as the Conference of the Parties (COP), have highlighted the significance of this topic. The introduction of various regulations, such as those related to plastic packaging and waste regulation, as well as the European Union’s (EU) deforestation regulation, have further heightened the materiality of nature for investors.

This year, the expected evolution and emergence of standards and targets in this area should start to put some structure around nature-related topics. The International Sustainability Standards Board (ISSB) is developing standards that will result in a global baseline of sustainability disclosures. The Science-Based Targets Network (SBTN) is currently developing science-based targets for nature both for companies and cities, so that they can comprehensively address their environmental impacts across biodiversity, land and water through the Science Based Targets initiative. Further guidance is expected to be released this year. Additionally, the Taskforce on Nature-related Financial Disclosures (TNFD) has set out recommendations for voluntary nature-related disclosures under the four headings of governance, strategy, risk and impact management, and metrics and targets.

What do these developments mean for us as investors? They do raise the possibility of regular nature-related disclosures by investee companies, meaning we are likely to see more information on this topic. However, this is a complex area, and with little standardisation of measures to report or evaluate this information, we expect that assessing a company’s nature footprint or the financial impact of its nature-related policies will not be straightforward.

In our view, it is likely this year that nature moves from being a topic that investors seek to better understand, to one for which there is a recognition that investment conversations need to go deeper towards determining the optimal standards for different business models. Investors will need to develop an understanding of how to consider these disclosures and standards in relation to a company’s business and what should be deemed as good practice.

It is likely this year that nature moves from being a topic that investors seek to better understand, to one for which there is a recognition that investment conversations need to go deeper towards determining the optimal standards for different business models.

At Newton, we recognise that a one-size-fits-all approach is not likely to be helpful when considering the impact of nature-related factors on a company’s financials. Therefore, we are building a nature assessment framework to connect the materiality of nature-related factors to a company’s business model.¹ The aim of this framework is to help us to identify and analyse companies with material impacts and dependencies, and to understand how robustly they are managing and reducing risks. To determine materiality, we use revenue data, which allows us to have a more granular focus than if we were to use sector or industry mappings. We expect this approach to evolve as our understanding does over the course of this year and beyond.

Artificial intelligence (AI)

AI is set to expand to new areas and enable significant advancements by creating user-friendly connections between people and advanced tech, with productivity and value creation expected to skyrocket across industries. AI is also spreading beyond the technology sector as the second-order impacts are beginning to be felt in areas such as infrastructure, health care, utilities, industrials and nuclear power. There has been significant government support both in the US and in Europe in the form of grants, subsidies and tax incentives offered to boost domestic AI capabilities. As investors weigh the merits of AI, there have also been conversations about its social impacts.

We expect there to be further conversations around the risks and opportunities associated with AI this year, particularly from an environmental standpoint. Data centres are known to have vast water and energy requirements, and we expect that as more information on this becomes available, there will be greater focus on how data centres can be run efficiently and where they are installed. These factors may well play a part in the investment thesis of a security. This may also spark innovation and create further investment opportunities, such as companies exploring how AI can be powered in a clean, green and speedy way.

We expect there to be further conversations around the risks and opportunities associated with AI this year, particularly from an environmental standpoint.

Regulatory changes against a shifting geopolitical backdrop

Significant changes in terms of regulation as well as geopolitics are expected to start to take shape this year. In the UK, investors will see what impact the Sustainability Disclosure Requirements (SDR) have had on the investment landscape, and the EU is anticipated to streamline its sustainability regulations through an Omnibus Simplification Package to be published early this year. All these developments will have potential implications on the investment landscape from an ESG perspective.

In terms of geopolitics, more voters than ever before participated in elections in 2024 on a global basis. Approximately 49% of the world’s combined population held national elections. The wider implications of these election results are expected to be felt this year.

As countries find their place in the new geopolitical order and as international relationships are reset, there will no doubt be implications for global trade and consequently for the business environment in which companies operate. We must also consider the impact on international treaties, such as the Paris Agreement or those ratified at COP.

Unlocking opportunity

As we consider these topics, it is clear to us that 2025 is going to be a year of change, and as history has taught us, such change presents both opportunities and risks. We are confident in our approach of combining data-driven insights with qualitative analysis while navigating this environment and providing useful ESG insights to fuel our multidimensional research.

¹ Note: Scores are only produced where sufficient data is available and may not be available for all equity investments. Where this is the case, the nature analysis will rely predominantly on qualitative research completed by Newton’s responsible investment team.

Authors

Newton responsible investment team

Insights from the Newton responsible investment team