Just a few years ago, Environmental, Social and Governance (ESG) had a spike in hype and many investors and firms started to explore opportunities in the space. However, sentiment might be changing, particularly as new governments show scepticism towards the space. How will this impact the future of the sector in 2025?
Despite all regions potentially benefiting from a strong ESG space, the next few years might see just a selection of countries becoming bastions of the sector. Tamara Kostova, CEO at Velexa, explained, “The future of ESG investing is becoming increasingly region-specific.
“In the U.S., political resistance and regulatory pushback are leading to a slowdown, with some states actively discouraging ESG integration. Meanwhile, the EU remains a stronghold for ESG, reinforcing compliance-driven frameworks like the Corporate Sustainability Reporting Directive (CSRD), despite concerns over regulatory complexity. In Asia, the approach varies—markets like Japan and Singapore are advancing ESG efforts, while others remain hesitant due to differing regulatory priorities.”
Despite this, Kostova believes ESG is evolving from a voluntary, marketing-driven trend to a regulatory requirement. “Even in regions where enthusiasm wanes, companies and investors must comply with evolving disclosure standards, ensuring ESG remains a central part of investment strategies worldwide.”
The change in governments is impacting how financial institutions in the US are approaching ESG. Since December, six US banks have withdrawn from the UN-sponsored net zero banking alliance (NZBA). These are JP Morgan, Citigroup, Bank of America, Morgan Stanley, Wells Fargo and Goldman Sachs. According to a Guardian report, analysts believe this is an attempt to ward off ‘anti-woke’ attacks from officials.
While over in Europe, the EU looks set on continuing its emphasis on ESG. For instance, The European Commission recently greenlit a new regulation aimed at making rating activities in the EU more consistent, transparent and comparable. The goal of this is to boost investors’ confidence in sustainable financial products by improving the reliability and comparability of ESG Ratings.
ESG being pioneered by certain countries over the coming year was an opinion also shared by Suzy Davis, partner in the private equity group at law firm Taylor Wessing. Focusing on the environment segment of ESG, Davis explained that some governmental priorities have shifted away from the journey towards net zero.
She stated, “With the significant shift in sentiment stemming from the White House regarding the importance (or rather lack thereof) of environmental concerns, we can expect that this will have a knock-on impact globally as other leaders reflect on what this means for implementing ESG regulation and competitiveness.”
“That said, there is also some evidence of leaders (including within Europe) taking an opposing standpoint, so perhaps we will end up with an increasing polarisation between territories. Whilst it is inevitable that governmental policies have some consequential impact on investment opportunities and strategies, government policy is not the only dictating factor. We’re also seeing a divergence of views between asset owners and asset managers, with the former pushing asset managers to redouble their efforts on climate action or risk being deselected. And then there’s public opinion, which remains an important consideration. “
Taking a slightly different stance on current sentiments towards the ESG investment landscape was Fredrik Davéus, CEO and co-founder of Kidbrooke. He sees a current dip in the sector caused by its stabilisation. Having gone through its boom a few years ago, the space is becoming more established, and consolidation is reducing the platforms in the market, but this doesn’t mean the ESG investing space is in trouble.
He said, “ESG has gone through an initial hype cycle and we are now seeing what works and what doesn’t. It is only normal with an over establishment of products during this phase, and now we will see a period of no or lower growth as the industry comes to terms with what is the best way to provide these products. Political developments aside, the underlying problem is there for humanity to deal with so I foresee the interest for investment products supporting the solution to the climate problem to still be there.”
A shift in investor sentiment?
While sentiment within governments might change, the growth of the ESG investment sector also relies on the opinions of the investors.
Velexa’s Kostova was optimistic about investors and sees them continuing to move towards ESG investing and consider the positive outcomes they can support with their money.
She explained, “Investor priorities within ESG are increasingly shifting toward impact investing, where measurable, positive environmental and social outcomes are prioritised alongside financial returns. Rather than relying on broad ESG ratings, investors are now focusing on tangible impact metrics, such as carbon reduction, biodiversity preservation, or financial inclusion. This shift is particularly strong in Europe and parts of Asia, where regulatory frameworks and investor demand push companies to demonstrate real-world ESG contributions beyond compliance.”
However, not everyone is as confident in the continued appetite of investors for ESG. Based on in-house data, Fincite founder and co-CEO Ralf Heim believes ESG appetite is notably low. He said, “The shift in sentiment toward ESG is real – and concerning. In our data, only 7% of clients actively opt for sustainable investing when given the choice. We can confirm the trend (unfortunately). We see only 7% of our customers clients pressing “Yes”, when it comes to being asked, if they want to be investing sustainably.
“Three things come together: The current sentiment, the fear of complexity and the lack of incentives by advisors and customers alike. While the overall trend towards ESG is there, we face a current setback. The industry has to step up its responsibilities, but this will not be easy.”
It is not just Fincite’s data that points to a decline in ESG sentiment from investors. A report from the Financial Times, claimed that the Association of Investment Companies (AIC)’s annual ESG tracker noted a 48% decline in ESG consideration for investment decisions. This represents the third consecutive year ESG considerations has declined.
Taylor Wessing’s Davis believes investor sentiment has dropped, simply due to the space already having its peak hype. Davis said, “There was a wave of populism around ESG as a concept, likely triggered by the pandemic and people having the opportunity to internalise and self-reflect on the way they have been living their lives. The reductionist lifestyle we were enforced into allowed us to speculate (perhaps ideologically) about the adjustments we would make when things ‘returned to normal’. Inevitably, some businesses and investors will have benefitted from this surge in interest in terms of investment opportunities. Therefore, there will have been a peak of interest from that perspective.
As for Kidbrooke’s Davéus, he believes ESG investing sentiment is declining simply because investors are not provided with enough transparency. When it comes to ESG, he believes there is a lot of box-ticking and few solutions are available to help investors understand the actual impact of their investment decisions and whether the solutions are making real change.
“It doesn’t matter how good the copy is, how glossy the cover or even how good the local solution is (e.g. collecting used clothes for reselling/recycling), if the total/global impact is still net negative (collected/returned clothes ending up on beaches in Africa or deserts in South America where they are burnt without any regard for the environmental impact). Hence, I think the appetite for solutions in this space without clear and net positive effect is going away, but we will still see interest and priority of solutions that is provable to have a net positive effect.”
A decline in sustainable funds
Moving away from the retail investment side, sustainable investment funds also seem to be struggling. A recent research report from Morningstar, claimed that the number of funds, in the US, that closed or dropped their ESG mandates in 2024 exceeded the number of new fund launches. It stated that only 10 new sustainable funds came to market last year, while 71 funds merged or were liquidated and 24 dropped their ESG-focused mandate.
An example of an investor moving away from ESG is BlackRock. At the end of last year, a report from City Wire claimed the firm is planning to change the name of its $1.7bn BlackRock Sustainable Balanced fund to the BlackRock Balanced fund. Not only is the firm dropping the sustainability tag but is allegedly removing ESG considerations from the fund’s prospectus’s investment strategy section.
One cause of this decline could be a lack of innovation over the past couple of years.
Rahul Ramabhadran, ESG Data Analyst at IntellectAI, explained, “The introduction of new products in the sustainable investment space has also declined. In recent years, the market saw a surge in new ESG products as interest peaked. However, as hype around ESG has cooled, the number of new products has decreased.
“This decline is not solely due to market reactions to ESG; it is also a result of market saturation and stricter regulations around greenwashing, which have made corporations hesitant to release new ESG products. Many existing products have either merged with other ESG products or have shut down in light of these regulations. The increased regulation around ESG market instruments may, in the short term, lead to lower inflows; however, in the long run, this would be beneficial for those companies that can meet the regulatory burden.”
Davis also sees a drop in opportunities as a cause for the lack of new sustainable funds. Like many sectors, ESG has seen a drop in funding and growth, meaning there are fewer opportunities available than just a few years ago.
“Therefore, the ability for investors to have a dedicated fund under the ‘ESG’ umbrella is more challenging as ultimately their job is to make investments and deliver returns to investors,” she explained. “If there are not enough opportunities in the market to do this, then they are going to struggle to raise a subsequent new fund to continue their investment strategy.
“However, as markets improve and there are more M&A/investment opportunities that emerge, we can expect those that are having or will create a more positive impact environmentally and socially (and with good overall governance) to be favoured, and this will likely be reflected in valuation metrics.”
Kostova and Davis shared similar opinions on the drop in sustainable funds, hinting that the cause comes from regulatory pressure, as opposed to a lack of interest.
Velexa’s Kostova explained, “In my opinion, the decline in sustainable funds is largely driven by stricter regulations, greenwashing concerns, and evolving classification standards. In the EU, the SFDR has raised the bar for ESG labelling, forcing asset managers to reclassify or close funds that no longer meet compliance requirements. Many firms are now more cautious about branding their products as “sustainable” to avoid regulatory scrutiny and accusations of greenwashing, leading to a more selective and accountable ESG market.”
Echoing this, Davis stated regulations have increased framework to prevent greenwashing, ensuring there is legitimacy in the branding used. “If funds did not satisfy the necessary criteria in the regulations, then they will have been required to redesignate themselves. This will have had an impact on the number of sustainable funds. The number of sustainable funds, of course, is only one metric. The actual value of sustainable investments is still substantial.”
The Morningstar report also suggested there is still interest in the market for sustainable investing. It pointed to a report from Morgan Stanley that outlined 54% of individual investors planned to increase their sustainable investments in 2024 and 77% were interested by sustainable investing. On top of this, a Morgan Stanley report from the end of 2024 claimed 78% of asset managers and 80% of asset owners expect sustainable AUM and allocations to rise over the next two years.
How to reenergise the space
The future of ESG investing looks like it will be split. While it is likely to grow in some regions, the lack of opportunities and current financial climate will likely result in a decline for the space from previous heights.
According to Davéus, to ensure ESG investing can rebound there needs to be more products and greater support. He explained, “It all comes down to providing value to the investor. One big aspect of this is of course the products themselves, so here there needs to be products with net positive impact. Secondly, we have decision support to investors and/or advisors making the decisions to invest in sustainable ways. Here, there is still a lot of work to do. E.g. by properly aggregating this data and allowing investors to see how different investments compare and what impact an investment decision can/will have.
Fincite’s Heim believes the industry needs to take more responsibility in pushing ESG to ensure it can regain some momentum. “At the core, perception is everything – for both investors and advisors. If ESG is to regain momentum, the industry must take responsibility for keeping it at the forefront of advisory conversations. Advisors are the gateway to clients, but they face significant challenges.”
These challenges are strict controls and bureaucracy, with complex compliance often discouraging advisors from prioritizing it, limited product and strategic availability, and inconsistent and scarce data, making advisors struggle to build trust and transparency.
“To truly reenergize ESG, wealth management firms and technology providers must close these gaps—by simplifying compliance, expanding investment options, and providing clear, standardized data. Only then can ESG investing become seamless, trusted, and scalable.”
On a concluding note, IntellectAI’s Ramabhadran is confident about ESG within wealth management. He said, “Where ESG is likely to have a lasting impact is in wealth management. Wealth management inherently involves long-term investment strategies, aligning well with ESG investing. ESG investing inherently selects for companies that do well in the long term. For example, companies that prepare for climate risks are still likely to be operational in the future and perform well financially compared to companies that do not. Investors, especially those in wealth management, are likely to watch out for such companies and invest in them. This ties back perfectly to what was discussed at the beginning: prioritizing ESG as an investment will eventually pay off.”
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