By: Lorenzo Saa, Chief Sustainability Officer, Clarity AI
Something shifted in the first half of 2025.
The era of vague optimism and feel-good ESG slogans is over. What comes next demands harder questions, sharper tools, and a deeper tolerance for uncomfortable answers and trade-offs.
We’re not watching a collapse; we’re witnessing a necessary reset. Regulation is fragmenting, political winds are shifting, and markets are sobering up. But if we lean in, armed with materiality, smarter data, and clearer intent, 2025 could mark not a retreat, but a reinvention.
The Policy Environment: Fragmenting, Localizing and Creating a Void
In our outlook for 2025, we anticipated continued fragmentation in global governance, but the extent of regional divergence, particularly in climate finance, has surpassed expectations.
In the U.S., the regulatory pendulum swings wildly. Executive action one week, lawsuits the next. Confusion reigns. In Europe, policymakers are trimming and tweaking CSRD, CSDDD, and the EU Taxonomy, promising simplicity, but also raising questions. Are we moving toward “decision-useful” disclosures or just less disclosure?
Globally, multilateral coordination is faltering. According to Climate Watch, with less than six months to go until COP30, only 22 countries have met the February deadline to update the Nationally Determined Contribution (NDCs). Brazil, host of COP30, is under pressure. The U.S. is stepping back. The void in global climate leadership is widening.
But this is not the moment to wait it out. Regulatory uncertainty should push investors to reconnect with the core reason we invest sustainably: to manage risk, capture long-term opportunity, and finance the future we want, not just the one we’re handed.
Back to the Core: Re-Centering Materiality
The signs are clear: investors aren’t licking their wounds, they’re going back to basics.
Gone is the era of blanket claims that ESG always enhances returns. In its place: a renewed focus on financial materiality. The question now is: “Does this matter to performance?”
A 2024 Harvard survey of institutional investors found 77% are prioritising ESG issues with clear financial relevance. Thirty-five percent said they would reduce support for shareholder proposals lacking financial materiality. In fact, stewardship is evolving too—frameworks like the UK’s revised code are prioritizing long-term value over ESG labels.
That shift is healthy. Investors are asking harder questions and demanding real evidence. Human capital, supply chain resilience, cognitive diversity, these are themes with measurable impact, not just good intentions.
Shifting Key Themes
Climate: From Targets to Tactics
Climate remains central, but the narrative is shifting. Net zero is still key, but faith in distant targets is giving way to a focus on delivery today. The 1.5C narrative is giving way to more realistic scenarios. Hence, we should not be surprised if the Net Zero Asset Management Alliance comes back in the last quarter of the calendar year with a new approach more pragmatic in climate.
Adaptation is moving up the agenda, but it is still underfunded. As physical risks escalate, the case for resilience is obvious. But 98% of adaptation finance is public. Private capital remains concentrated in infrastructure and insurance. Key sectors like ecosystem restoration and climate-resilient livelihoods see little private flow.
The second part of the year, including COP30, should deliver better frameworks, stronger incentives, and more capable intermediaries to structure investable adaptation strategies.
Nature: Momentum, but Still on the Margins
Nature continues to be described as “the next climate.” In fact, nearly 70% of investors have a nature policy. But so far, the action and the money hasn’t followed.
Investors are experimenting with nature-related risk mapping, especially ahead of COP30 in Brazil. But direct investment in nature remains rare, and most remain hesitant. Oceans and water are starting to draw more attention, but for now, the investment case still feels too fuzzy, too hard to quantify. Despite growing awareness, the majority of investors still lack formal biodiversity targets.
We see exceptions: pioneers like Robeco, Federated Hermes, and a few others leaning in especially for water and deforestation in sectors like food and beverage or metals and mining. But for most, nature remains a risk to monitor, not a financial opportunity to seize. That needs to change, but likely won’t before 2026.
Defense: No Longer Avoided
One of the new developments in 2025 is the return of defense as an investable theme.
Once screened out on ethical grounds, defense is now being reconsidered as a contributor to democratic stability. Flows are following. For example, defense ETFs have pulled in USD 6.2 billion so far in 2025, up from just over USD 1.1 billion a year earlier. Meanwhile, firms like AllianzGI and UBS have revised their exclusion policies, allowing defense exposure in Article 8 funds.
It’s a reminder that sustainability is dynamic. Geopolitics reshapes what matters, and investors are responding in different ways. We didn’t predict this rise in 2024, but it’s unmistakable now.
AI: The Cheetah and the Owl
As sustainable finance resets, AI is emerging as a critical enabler, especially in data processing, research, and compliance.
A recent Mercer survey found that 54% of asset managers already use AI in investment strategy or research. As adoption deepens in the second half of 2025, sustainable investing will be a core implementation area.
AI plays two roles. As the cheetah, it accelerates routine tasks including scanning disclosures, estimating emissions, flagging inconsistencies. As the owl, it finds patterns and connections humans alone might miss. Together, these roles help investors refocus on materiality and uncover new paths to alpha.
But the opportunity comes with responsibility. AI brings ESG risks of its own—bias, opacity, environmental impact. And as regulators pull back, investors will need to step in to ensure governance, transparency, and ethical use.
A maturing market, not a fading one
The ESG backlash has been loud but beneath it, demand remains steady. Especially in Europe, asset managers are adapting, not retreating.
This is not decline but a maturation. We’re moving beyond grand narratives. What matters now is focus, evidence, and adaptability. The second half of 2025 offers a chance to shed excess, sharpen tools, and return sustainable finance to what it was always meant to be: a way to connect capital to long-term value.
Let’s not waste it.
