Mid-year sustainability outlook

If for investors, long-term investments mean maximum three years, which is quite short term in fact, the meaning is quite different for companies: they invest for the long-term as they want to remain sustainable in the coming ten years, minimum. Therefore, whatever is happening, the final direction must be maintained, that is, more efficient use of energy and limited resources; keeping the workforce motivated in an ageing demographic environment and ensuring they can act with proper governance in a highly charged geopolitical context. Therefore, sustainability resonates quite differently for companies than for investors, which it probably should not.

In today's environment, long-term investing is more relevant than ever, especially as the world faces repeated energy crises and heightened uncertainty. The need for decarbonisation, the energy transition and a circular economy is underscored by recent developments. However, despite the temptation to shift portfolios radically in response to short-term events, it is crucial to remain focused and 'garder le cap' - stay the course.

One of the main challenges is the volatility of policy signals and regulatory frameworks. For example, abrupt changes like the US government's decision to halt subsidies for the electric vehicle (EV) industry can result in significant losses for automakers, while missing out on the EV trend a few years ago was equally costly for others. This demonstrates the risks inherent in transition financing: moving too late or too early can both be problematic.

Another challenge comes from the structure of ESG strategies themselves. Some strategies, particularly those subject to Paris-Aligned Benchmark (PAB) exclusions, have suffered because they exclude high-performing sectors such as energy and defence. However, it is important not to conflate ESG with a blanket exclusion of these sectors. Energy, for example, includes not only oil and gas but also renewables, storage, batteries and electrification.

With the European Commission's recent 'Accelerate EU' plan as a crisis response to the Iran war, the signals remain positive for batteries, grids and selected industrial decarbonisation segments in the short, medium and long term. While this plan does not have the same impact and scale as RePower EU, it contributes to the already strong electricity decarbonisation trend.

A recent review from the think tank Ember, surveyed electricity data from 215 countries, including the most recently available 2025 data for 91 countries, representing 93% of global electricity demand, as well as 13 geographic and economic groupings and the seven countries and regions with the highest electricity demand, which together account for 72% of demand. The conclusions from an investment perspective are clear: the most material environmental signal is the flattening of fossil generation despite continued demand growth, which points to a rising transition risk for pure-play coal exposure and, over time, for gas assets that rely on high load factors rather than flexibility value.

Companies with strong pipelines in solar, wind, and storage, and those able to secure long-term power purchase agreements with technology firms, are likely to see continued growth. Grid and infrastructure providers investing in transmission, distribution and smart grid technologies are also well positioned, especially as global clean energy investment has reached approximately USD 2.5 trillion per year, with solar and storage deployment accelerating rapidly in markets like China and the US.

On the subject of China and the US, questions relating to the social (S) and governance (G) dimensions of ESG arise. On S and G, affordability, energy security, permitting and market design are becoming more financially relevant, because the bottleneck is shifting from adding megawatts to integrating them.

ESG remains central to investment strategy, but its implementation is evolving. There has been criticism of ESG because the best-performing sectors over the past year have been defence and energy. However, ESG does not mean excluding all energy or defence companies. Instead, the focus is on resilience and long-term value creation. It is about integrating sustainability, digitalisation, and resilience in investment strategies and risk management.

AI and digitalisation are also reshaping ESG risks and opportunities. AI and big data have attracted the largest thematic inflows among funds, reflecting their perceived growth potential and expanding role across sectors. For instance, AI-driven analytics and automation are enhancing operational efficiency in areas like smart grid management, precision agriculture, and optimised logistics. In healthcare, AI is improving diagnostics and expanding access to medical services, aligning with the 'S' pillar of ESG.

However, the rapid expansion of AI infrastructure, particularly large data centers, is driving up energy and water consumption, raising environmental concerns. Additionally, AI models are increasingly implicated in the spread of misinformation and employment disruption, highlighting the need for responsible workforce transitions and reskilling.

Climate adaptation is becoming a major investment theme as the financial impact of physical climate risks continues to rise - currently estimated at around USD 200 billion per year in damages globally. This is prompting both companies and investors to capture new growth opportunities in sectors that enable adaptation and prioritise resilience.

The next six months will likely remain volatile, but the structural integration of sustainability, digitalisation and resilience into investment strategies is clear. Opportunities abound in private markets, clean energy and adaptation related sectors, however careful attention to sector deviations, tracking error, and evolving ESG risks is essential. Transparent communication and rigorous selection will remain key when navigating this complex landscape.