As global climate challenges intensify, the investment industry has faced mounting pressure to reallocate assets towards sustainable initiatives. However, recent shifts in political and economic landscapes have led financial hubs like London, New York, and Toronto to reconsider their stance on climate finance. This article explores seven key predictions for the future of sustainable finance in 2025, focusing on the environmental, social, and governance (ESG) investing toolkit.

Political Headwinds in the United States

In 2025, sustainable investors in the U.S. will encounter resistance on multiple fronts. The new administration's policies are expected to roll back several Biden-era regulations, particularly those supporting shareholder rights, climate disclosure, and ESG fiduciary responsibilities. These changes may discourage investor activism but will not completely halt the momentum of sustainable finance.

Firstly, shareholder rights will be curtailed as new guidelines allow companies greater leeway to reject ESG-related proposals. Secondly, climate disclosure requirements for publicly listed companies will be revoked, although this impact will be limited by similar rules in California and Europe. Lastly, the Department of Labor is likely to reverse a rule that permits pension trustees to consider ESG factors, leading to potential legal battles over the role of ESG in financial assessments. Despite these setbacks, regulatory confusion rather than outright barriers will define the landscape.

Resilience and Adaptation in the Global Market

While the U.S. faces political headwinds, other regions and sectors continue to advance sustainable finance. Long-term ESG-focused investors remain committed, with many planning to maintain or increase their activities. Meanwhile, short-term mutual fund and ETF investors show signs of cautious re-entry into the market, driven by improving conditions for green bonds and stocks.

Long-term ESG investors, including asset managers and funds, are set to persist with their strategies despite negative trends. Many large managers have significant accounts in Democratic-led states and European clients under pressure to meet climate targets. As a result, sustainable finance assets are expected to grow, especially among pension funds weighing the risks posed by climate change. Short-term investors, initially deterred by rising interest rates and stringent anti-greenwash rules, now exhibit renewed interest as they become more comfortable with the evolving regulatory environment. Additionally, Europe aims to simplify its ESG disclosure rules without dismantling the framework, ensuring continued focus on sustainability outcomes. Canada, too, is poised to lead in transition investing through a new green and transition taxonomy, potentially excluding projects with significant carbon lock-in.