Time to Face our Challenges Head-on
Dr Rory Sullivan, CEO of Chronos Sustainability, considers what a reshaped world means for sustainable finance in 2025.
The world will look very different in 2025. We are likely to see the US take a sharp turn away from climate-positive policies. We are also likely to see more trade disputes, more conflict over natural resources and critical minerals, and more visible disruptions and dislocations as artificial intelligence is more widely deployed in sectors from arms to agriculture. The sustainable finance industry will, almost inevitably, be challenged about whether and how it adds value and about the business risks associated with taking a proactive approach to sustainability. The answers to these questions will be shaped by the regulatory requirements faced by investors, including their fiduciary duties, their disclosure requirements, and the need to avoid greenwashing.
While the challenges of 2025 may look dispiriting at first glance, thoughtful and careful responses should help establish the foundations for a stronger and more robust direction of travel for sustainability.
The sustainability shake out is good news
In the last decade, many companies and financial institutions have piled into the sustainability space with big and loud ambitions from ‘net zero’ to ‘living wage throughout the supply chain’, although these ambitions have not always been underpinned by detailed plans that would make those ambitions a reality.
With greater pushback from all sides – on one hand we have the ‘ESG backlash’, on the other we have much more stringent regulation in the UK and Europe on greenwashing – organisations are having to be much clearer about whether sustainability is central to their business strategy or whether it was just the latest marketing fad.
This has led to a serious shake out in the sustainability space. Organisations who simply jumped on the bandwagon – or made commitments without thinking through the practicalities of implementation – are either stepping back or being much more explicit about what exactly they have committed to.
What this brings is clarity: it is clearer who is committed to action, it is clearer on what basis that commitment is made (e.g. is it driven by risk, to what extent are the commitments dependent on other factors), it is clearer why organisations cannot make and/or deliver on their commitments, and it is clear which organisations do not see sustainability as a strategic priority for them. Ultimately, it means more honesty and less obfuscation.
Sustainable finance community must roll up its sleeves
Those asset owners and asset managers who are genuinely committed to sustainability will need to be able to respond to hard challenges about their sustainability interventions.
Specifically, they need to show that the actions they are taking are in the short- and the long-term interests of their beneficiaries and their clients. They will need to be able to demonstrate how their approach aligns with their fiduciary duties and creates short- and long-term financial value, as well as a clear set of investment beliefs. They will also need to show that they have received and acted on advice from their investment consultants and legal advisers. Finally, they will need to show that they have processes in place to track the financial implications of their efforts and to act or respond if performance is materially affected.
There are significant resource implications. Asset owners and asset managers also need to ensure they have the right skills to implement their responsible investment commitments. Over the recent years we have seen a significant change in the skills profile of responsible investment professionals at all levels from entry-level analyst roles through to the heads of responsible investment.
Knowledge of ESG issues remains important but the demand, at all levels, is for professionals with quantitative skills in areas such as data analysis and interpretation, in investment analysis, and in portfolio construction. These skills are essential to ensure that sustainability is hardwired into investment systems and processes.
The economics support sustainability
One of the reasons for optimism in 2025 is because many of the actions we want to encourage are already supported by the economics. Way back in 2011, I worked on a report for the Institutional Investors Group on Climate Change (IIGCC) looking at the design of investment grade policy. The reason for this focus on policy was because the economies of renewable energy technologies didn’t work without significant policy support (e.g. subsidies, minimum tariffs). A decade on and world has changed: renewable energy technologies such as wind and solar have been successfully deployed at scale and are cost-competitive with conventional fossil fuel power generation.
We are seeing a similar picture with electric vehicles, with the concerns about infrastructure, reliability and costs starting to recede. In China, for example, one in two cars sold are now electric (battery or hybrid), while in Europe renewables now provide almost a quarter of energy use.
The alignment of economic and sustainability arguments is not just confined to the energy and transport sectors. Across many of the issues we work on – mental health, animal welfare, air pollution, biodiversity and nature – there is a compelling business and investment case (be that cost reduction, risk avoidance, new market opportunities) for action. Put another way, investors that ignore or fail to act on these issues could well be accused of breaching the duties that they owe to their clients and beneficiaries.
This is no time for the faint-hearted
This is not an easy period for sustainable finance. But it is perhaps the most critical period that we have faced in my 30+ years working in sustainability. For those of us working in this area, it is now time for us to step up, to face challenges head-on, and to be determined, courageous and resolute in doing so.
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