What Could Shape Sustainability and Climate Investing in 2025?

Blog post
7 min read
Laura Nishikawa, Liz Houston
January 15, 2025
Key findings
  • Private market solutions: Investors looking to capitalize on the energy transition may look to private markets, where low-carbon-solutions companies have delivered 123% cumulative returns over five years.
  • Climate adaptation opportunities: The risks from extreme weather are escalating. Companies offering climate adaptation and resilience solutions have not been trading at a valuation premium, suggesting underappreciated growth opportunities.
  • Social risks rise: The growth of tech has increased investor exposure to social risks, both old and new. But almost half of the largest consumer-facing companies are not disclosing their approach to AI-related risks.
In our flagship report, Sustainability and Climate Trends to Watch for 2025, MSCI Research has identified six pivotal trends that could shape the strategies and decisions of investors this year. In this blog post, we touch upon some of these trends and explore their implications for investors looking to align their portfolios with a sustainable future.
Private markets' role in the energy transition
Net-zero portfolio targets may be slipping out of reach without accelerated real-world progress. Many investors are shifting their focus to the energy transition to mitigate risk and capitalize on emerging investment opportunities. There is, however, a stark contrast between public and private markets in low-carbon solutions. Public markets boast higher valuations, with a market cap of USD 4.4 trillion as of mid-2024, but private markets have demonstrated faster growth, achieving a 17% five-year compound annual growth rate compared to 11.9% for public markets.[1] Private-market investments in low-carbon solutions have also outperformed in returns, achieving cumulative five-year growth of 123%, far surpassing the 57% seen in public markets. These investments were concentrated in renewable electricity, green mobility and energy storage, offering unique diversification opportunities across asset classes.
Cumulative return for low-carbon-solutions peer sets vs. benchmarks in private and public markets
Data as of October 2024. For full details on the criteria used to identify the peer sets, refer to footnote 1. Cumulative returns and market-cap time series for the public low-carbon-solutions peer set were produced by MSCI Barra Portfolio Manager. Source: MSCI ESG Research, MSCI Private Capital
While private markets do face challenges regarding valuation opacity, liquidity issues and smoothing effects, which can obscure true volatility, there is a notable trend of growing transparency and data availability. Improved visibility should enable investors to better evaluate opportunities, with this type of information getting a closer look in 2025 as climate change intensifies and investors zero in on the search for solutions.
Facing the reality of a changing climate

The climate has already changed: the summer of 2024 again marked a new record for global temperatures,[2] and we are seeing extreme-weather events — such as heatwaves in India and hurricanes and wildfires in North America — continue to cause widespread damage. We see a shift in investors' approaches toward climate adaptation in 2025. 84% of financial market participants now believe that extreme-weather events will negatively impact the economy, according to a survey by the MSCI Institute.[3] Beyond risk management, investors have opportunities to capitalize on adaptation spending, something that is likely to gain traction across several sectors in the coming years. We looked at a universe of over 800 public companies offering climate resilience and adaptation solutions, such as air cooling, water harvesting, drone transport for search and rescue or temporary flood barriers. Despite their potential, on average these companies were not yet trading at a premium to their sub-industry peers, suggesting underappreciated growth opportunities. As extreme-weather risks grow, integrating precise risk data and identifying firms investing in adaptation will be key for investors seeking long-term resilience and returns.

Percentage of companies in each industry group offering adaptation solutions

Data as of October 2024. Analysis shows the percentage of companies in each industry group that were identified as offering climate resilience and adaptation solutions, according to the methodology developed by the MSCI Institute and GARI. Sub-industries with fewer than five solutions providers were excluded. Analysis covers constituents of the MSCI ACWI Investable Markets Index (IMI). Source MSCI ESG Research

Don't sleep on social risks
Climate change remains humanity's greatest challenge. But for global equity investors, it's the social risks that have been rising, largely driven by the growing dominance of the information-technology and communication-services sectors.[4] Since 2014, these sectors have doubled their weight in the MSCI ACWI Index, displacing traditional industries like energy, materials and utilities. This structural change has altered the risk profile for investors, with risks such as human-capital management and data privacy becoming more prominent. Social risks, often overlooked, now carry significant financial implications. Companies' performance in managing these risks has become a critical factor influencing their outcomes, as evidenced by a decade-long trend where firms with strong social-risk management outperformed their peers.
Performance of highest- vs. lowest-rated MSCI ESG Rating social-pillar quintiles by region, equally weighted
Data from Dec. 31, 2012, to March 29, 2024. Quintiles are created every month based on a social score. We first regressed scores on market capitalization to eliminate any size bias. We then obtained the regression residuals and standardized them by region (North America, Europe and Asia-Pacific sub-indexes of the MSCI ACWI Index) and sector. Finally, we formed quintiles within each region and sector, based on these standardized z-scores. The chart shows the cumulative difference between the top and bottom quintiles' performance. Not an indication of causality. Past performance — whether actual, backtested or simulated — is no indication or guarantee of future performance. Source: MSCI ESG Research
Attention, GenAI models: The data buffet is closing
Alongside the familiar social topics — such as human capital — the era of tech giants and AI brings new risks. While we are seeing bullish corporate spending on AI, there are growing challenges and implications for generative AI. Access to quality data is shrinking and regulations are tightening. The stakes are high: not having access to the right data can mean the failure of a project, wasted capital expenditure, expense and lost growth opportunities. The immediate challenge for investors is that even when companies are investing heavily in AI, there's often a lack of transparency from corporations on how they're managing the associated risks. Almost half of major consumer-facing companies have failed to disclose their responsible AI policy with respect to topics such as privacy, discrimination or copyright.
Company adoption of policies on responsible use of AI across consumer-facing sectors
Data as of Oct. 12, 2024. Analysis covers the 50 largest companies by market cap in those sectors where the MSCI Impact Materiality Assessment (client-access only) identified the potential for material-information-related impacts on consumers and end users. These companies fell into the following sectors: communication services, consumer discretionary, consumer staples, financials, health care and information technology. Source: MSCI ESG Research, company disclosures
The lack of transparency on AI use may be due to a lack of understanding from boards — prior research from MSCI suggests only a tiny minority of directors have AI expertise. The potential rewards from successful investment in AI, as well as the potential risks, mean investors may start demanding more from companies in 2025. We have already seen evidence from the 2024 proxy season suggesting investors are hungry for more say over who sits on boards.
The bottom line
The sustainability and climate trends shaping 2025 are not just about mitigating risks but also unlocking opportunities. From renewable energy and resilient infrastructure to emergent technologies, the investment landscape is rich with possibilities. By staying informed and proactive, investors can focus on the potential for long-term returns.
Laura Nishikawa
Laura Nishikawa
Managing Director, Sustainability Research
Liz Houston
Liz Houston
Vice President, MSCI Research & Development

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1 Data as of October 2024. The peer set of low-carbon-solutions providers in public markets included constituents of the MSCI ACWI IMI as of Oct. 10, 2024, with 5% percent or greater estimated revenues from categories within the MSCI Sustainable Impact Metrics methodology associated with three themes: renewable and low-carbon power, green mobility and energy storage. The peer set of low-carbon-solutions assets in private markets includes companies within the MSCI Private Capital data universe as of June 30, 2024, that may have some connection with renewable energy, green mobility or energy storage.

2 “Copernicus: Summer 2024 – Hottest on record globally and for Europe,” Copernicus, Sept. 6, 2024.

3 Data as of October 2024. The 350 participants were professionals including asset owners, asset managers, banks and insurers and reflected regional differences, sectoral expectations and institutional priorities. Source: MSCI Institute Climate Risk Survey 2024.

4 Sectors refer to the Global Industry Classification Standard (GICS®) sectors. GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.

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