The ESG Outlook for Europe in 2025
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As 2024 comes to an end, we wanted to highlight the important questions we are asking ourselves and monitoring for what the new year might have in store. Below we detail seven critical questions which we believe will shape both the investment and sustainability landscape.
- Will Germany’s budget challenges hinder its energy transition?
Germany’s fiscal struggles are likely to create headwinds for its energy transition in 2025. The anticipated delays in agreeing on the national budget could result in spending freezes, slowing progress on renewable energy initiatives. However, potential reforms to the debt brake by the incoming government could unlock expansionary spending by late 2025. - Will Ukraine’s reconstruction drive a low-carbon ‘peace dividend’?
With the increased likelihood of a peace agreement in Ukraine, post-war reconstruction could favour European suppliers of low-carbon technologies. Key investment needs in housing, transport, and energy align with EU climate goals, such as compliance with the Energy Performance of Buildings Directive (EPBD) and Ukraine’s National Renewable Energy Action Plan. - Can the EU respond effectively to the US Inflation Reduction Act?
The EU’s Clean Industrial Deal, expected in early 2025, aims to address past shortcomings by easing state aid rules to bolster industrial decarbonization. Meanwhile, the UK has introduced ambitious policy support for technologies like carbon capture and storage (CCS) and heat pumps, reflecting a competitive push for leadership in clean energy. - Will capital flow to Europe’s low-carbon innovators?
With policymakers prioritizing protection for Europe’s green technology leaders, investors should identify key players by analysing innovation data such as patent activity. Prominent areas include carbon capture, heat pumps, and wind power, with CCS emerging as particularly ripe for investor attention. - Will ESG funds see renewed inflows?
Sustainability funds in Europe have shown strong performance in 2024, with a record percentage of Article 8 funds outperforming benchmarks. If this trend continues, it could reignite investor confidence and drive capital back into ESG funds. - How will Europe approach M&A in the energy transition?
Policymakers are expected to tighten oversight of foreign investments in strategic sectors while encouraging mergers within Europe to create regional champions in clean technology. This reflects a broader push to safeguard Europe’s competitiveness in the global energy transition. - Will new CSRD disclosures reshape investor strategies?
The EU’s Corporate Sustainability Reporting Directive (CSRD) will require new corporate disclosures starting in March 2025, providing investors with critical data on factors like governance, workforce impacts, and resource dependencies. These disclosures could redefine benchmarks for assessing corporate sustainability performance.
These questions will be pivotal in determining how policy, innovation, and capital converge to shape Europe’s sustainability and investment landscape in 2025 and beyond.
Aidan Graver, Co-Manager for Paris Aligned Fund