#19 – Lessons from 2024 and key issues for 2025

Since we are reaching the end of the year, it is time to reflect.

We have taken a look back on the topics covered since the newsletter’s inception in April – we are now on our 19th edition. This wasn’t just to remind myself of the individual sectors and topics covered in the newsletter. We also wanted to establish underlying themes that persisted across sustainability as a whole.

Lessons from 2024

Newsletter topics in 2024 fell into two broad areas. First, sustainability in practice and secondly, sustainability in financial markets.

Here are five topics that particularly caught my eye on sustainability in practice:

1. Blue economy. A subject we looked at from various perspectives: the role of incumbent businesses, investment (Figure 1), data shortfalls and exciting new technology such as eDNA. Relevance: rising temperatures increasing awareness of ocean degradation in 2024.
2. Renewable energy. We looked at why, despite continued renewables implementation, individual sectors and firms were struggling and markets were sceptical. Relevance: market disruption in many areas, notably from Chinese firms, is likely to continue in 2025.
3. Food systems. We looked at both the impact of production disruption on agricultural commodity prices and the exposure of corporate food assets to extreme weather events. Relevance: crop failures in 2024 and beyond will keep a focus on future food security.
4. AI and energy. We took an early look at the implications of AI for future global energy consumption (Figure 2) and the implications for energy production sectors such as nuclear. Relevance: bilateral energy supply deals in 2024 show growing corporate awareness.
5. EV dependencies. Assessing the multiple dependencies in the electric vehicle (EV) industry, with one focus being China’s dominant role in output of several key commodities. Relevance: tariff threats in 2024 highlight complexity and fragility of global supply chains

In regards to sustainability in financial markets, amongst other things we looked at the following:

1. Sustainability-linked bonds. Highlighting a growing market (Figure 3), and a reminder of the complex way that markets can see both risks and opportunities (higher yields if targets are not met). Relevance: companies increasingly willing to link debt costs to sustainability goals.
2. Carbon markets. Seeing them in a global context is important: we highlighted developments in China’s carbon markets (as well as plans to reform voluntary carbon markets). Relevance: policy advances in 2024 move us towards more meaningful carbon markets and pricing.
3. Portfolio decarbonisation. Based on our special report, an analysis of how best to define objectives, choose investment vehicles and manage portfolios reducing associated CO2 (Figure 4). Relevance: investors ask for more detailed options for portfolio construction.
4. ESG indices performance. We highlighted the importance of macroeconomic factors (e.g. interest-rate expectations) and other non-ESG factors to index performance (Figure 5). Relevance: mixed ESG investment performance in 2024 maintains market concerns.
5. Sustainability ratings standardisation. A reminder that standardisation is an ideal that you won’t achieve, and a call to see ratings as a signalling tool but not a complete solution. Relevance: ratings methodology staying under fire despite increased corporate reporting.

At the end of this newsletter please find my favourite charts from this year’s newsletters, illustrating our findings. But first let’s quickly digest our take on 2024 and how we see 2025.

Key issues for 2025

The range of topics highlighted above (all of which will remain relevant in 2025) makes one thing apparent: sustainability is necessary and will have an impact on all parts of our society and economy. It asks us uncomfortable questions we must answer – and which also reveal the shortcomings of how we act. As developments in 2024 have also shown, even if we accept the necessity of sustainability, we still struggle to clearly identify the options we have. Therefore, progress on sustainability will, I think, be better measured against a long-term lodestar:

what do we want to be as a society? And, if we were looking back from 2100 to 2024, what should we change now and why?

Looking forward to 2025, what do I think will be the key issues? The three key words here are: validity, credibility and balance.

If there is one thing we can be sure about, it is that reporting and disclosure requirements are set to grow in 2025 in their various forms. Bringing a new, much larger cohort of companies into EU CSRD reporting will put pressure on businesses worldwide. IFRS S1 and S2 (i.e. financial reporting) are increasingly influencing sustainability regulations worldwide, with Australia and Singapore set to start on these on January 1, and other countries considering similar rules. And we shouldn’t forget that this isn’t just a matter of new regulation: refinement of existing regulations will also be needed to make them fit for purpose.

Better reporting on its own, however, won’t fix the credibility gaps around ESG and sustainability, something that I regard as of the utmost importance. We also need a better demonstration of the credibility of the sustainability transformation overall. For me, the best way to do this is to show that the ultimate rationale for sustainability is economic (including in terms of short-term indicators, e.g. how many new jobs are generated, how prices can be reduced), rather than ideological. Fundamentally, we have to show that incorporating sustainability will be supportive of economic activity (e.g. in terms resource efficiency, reducing dependencies etc.) instead of limiting (e.g. restricting activity, increasing prices etc.).

We are dependent on policy to do this and I think 2025 will be a pivotal year to show success or failure here. We can learn from the U.S.’s Inflation Reduction Act (IRA) but also from Germany. The latter faces a difficult transformation path on decarbonisation, particularly given that the share of manufacturing in its GDP (around 20%) is double that of France or the U.S. Decarbonizing the German economy will require both market-based policies (e.g. the EU’s emissions trading scheme, ETS) and complementary, more active policy approaches (e.g. investment credits, development of new technologies). This shows to us that policy also needs to be balanced against its impact on growth: building new economic structures though replacing parts of the old economy will have costs, before they can function as a basis for new growth.

In 2025, sustainability will involve many other such questions of balance. One currently discussed issue is how to balance AI benefits (in terms of efficiency and competitive gains) with its increased demand for energy.

At root, I think, 2025 will show us that sustainability is fundamentally a question of how to deal with present or future scarcity situations.

These can be visible (water), invisible but relatively-well understood (CO2 and global warming), or invisible and not well understood (as is the case for many aspects of biodiversity and natural capital). Visible or invisible, all are important.

MERRY CHRISTMAS to all of you and looking forward to returning to the sustainability debate in 2025.

Markus H.-P. Müller

Figure 1: Total disclosed investments in the EU Blue Economy, EUR mn

Figure 2: Data centres’ share of total U.S. electricity consumption

Figure 3: Global issuance of USD ESG debt by label in USD bn

Figure 4: One possible decarbonization pathway for a portfolio

Figure 5: Performance of Clean Energy indices vs the broader market