For sustainability matters, it was a more mixed year, marked by political inertia despite technological advancements and growing challenges caused by climate change. So, what can we expect in 2025?
No recession in sight
We have seen a fast-evolving macroeconomic picture over the last three years, with the market reacting aggressively to rising interest rates in 2022, second guessing where interest rates would peak in 2023, and when interest rate cuts would begin in 2024. Following this cycle through, 2025 is likely to be marked by how much further interest rates are likely to fall before central banks decide to pause.
What is remarkable about this cycle, unlike in most other periods in history where we have seen interest rate cuts, is that economic growth, apart from Europe and China, remains resilient. Economists are therefore not forecasting an imminent recession which could be a supportive baseline for asset returns in 2025.
Broader participation in the bull market
In the past two years, global equity markets have been dominated by a handful of US technology companies, styled the ’Magnificent 7’, which have driven both performance and earnings. Looking ahead, we believe there is scope for stronger earnings growth beyond these companies.
After focusing on scaling up AI capabilities via semiconductors and data centres, we expect the focus to shift towards companies that can harness the new potential created by AI, affecting themes like digital security, energy efficiency and precision farming. Beyond AI, there are many other themes with strong earnings growth potential such as insurance, water, renewable energy and healthcare.
Financial costs of climate change soar
Economic losses due to natural catastrophes are estimated to have reached $300 billion in 2024 with less than half of losses covered by insurance. Insurance is a growing opportunity if underwriters can accurately price risks.
Until now, climate financing has focused on climate mitigation measures but increasingly climate adaptation is coming to the fore. More resilient infrastructure, flood protection, landscape restoration and drought resilient crops are all examples of what is needed for adaptation.
Water is a particularly acute issue that companies can partially address through water efficiency, and water waste and treatment solutions.
Energy transition is still a key theme
We wrote previously about what a Trump presidency means for sustainable investors. Whilst there could be policy disruptions, the transition towards a cleaner economy has strong momentum. From record solar and energy storage installations to rising electric vehicle sales, the fight against climate change remains a global focus. Renewable electricity continues to be cost-competitive with 81% of additions in 2023 cheaper than fossil fuel alternatives. In the meantime, the 89% drop in battery storage costs since 2010 is helping grids across the globe better integrate surplus power.
Healthcare – cutting through the noise
After a challenging year for the sector, driven by policy uncertainty from the incoming Trump administration and the tragic murder of the CEO of a large US health insurance company, we are convinced that strong earnings growth will boost sentiment. Despite the global healthcare sector being expected to grow earnings by 15% in 2025 vs 10% for the broader market, the sector currently trades at a discount[1]. Trump’s administration will certainly bring disruption and change, but it is likely to be considerably less radical than some of the early rhetoric suggests.
Innovation also brings renewed optimism, with two new categories of treatment, for obesity and Alzheimer’s, being developed in recent years. Obesity treatments could soon become the largest ever drug by market size while the treatment for Alzheimer’s progresses from its infancy with strong potential.
ESG investing isn’t going away
There have been negative headlines around ESG (environmental, social and governance) investing along with criticism from US politicians. But it’s important to understand that the principles behind integrating ESG risks within an investment framework matter more than ever.
Growing uncertainty due to climate change, consumers increasingly prioritising sustainability in consumption practices, and constant regulatory pressures (e.g. the recent ban of clothing with PFAS in California and New York) mean companies can’t afford ignoring ESG risks. Sustainable finance has been maturing in 2024 with record issuance in green, social and sustainability-linked bonds. This now stands for 10% of the total bonds issued over the year!
Consequently, we are still convinced that companies putting sustainability at the heart of their business models and operations will thrive over the long-term. We believe they will be best placed to take advantage of the risks and opportunities that a fast-changing environment will bring.
[1] Bloomberg, January 2025