While the market has had a love-hate relationship with sustainable investing - an approach that integrates environmental, social, and governance (ESG) factors - a new report published during COP30 in Belém, Brazil, earlier this week reveals that a sustainable economic transition is currently underway.
According to the Global Sustainable Investment Alliance (GSIA), sustainable investments have jumped 49% over the last two years to US$16.7 trillion, with the GSIA attributing the increase to a tectonic shift in underlying thinking towards the sector.
No longer seen as a niche practice, the GSIA is witnessing greater market appreciation of the role renewables and all-things-ESG related will play in supporting technological growth needed to advance the world’s climate change goals.
The GSIA’s biennial Global Sustainable Investment Review report reveals a steep rise in investment allocated to the clean energy sector.
Second fastest-growing industry
Despite the highly volatile and fragmented global economic, political, and sustainability landscape since 2023, the report’s data suggests the green economy is now the second fastest growing industry globally.
“This report demonstrates that the sustainable investment industry is on a rapid evolutionary trajectory, from a highly specialised field to market-wide consideration,” said James Alexander, Chair of the GSIA.
“The record growth of the green economy highlights how quickly the sustainable transition is progressing.”
The GSIA report also points to a reset in how expectations of sustainable investment are defined and reported, which began in the EU and has now been adopted across many GSIA regions.
What this has done is move the industry toward a more consistent and transparent standard of practice aligned to what the GSIA describes as “real-world change”.
The AI-energy nexus
At first glance, AI and renewables make for strange bedfellows.
However, according to Bruce Kahn, portfolio manager at Shelton Capital Management, renewable energy and innovative investment strategies are now seen as crucial to powering AI’s growth while moving the world’s climate objectives forward.
But while AI’s rapid expansion is driving substantial new energy requirements that existing infrastructure must be ready to accommodate, Kahn also concedes that this convergence creates both risks and opportunities for sustainable investors.
Despite a lot of talk around nuclear, Kahn reminds the market that renewable energy is emerging as the fastest and most economically viable option to meet AI’s surging electricity demand.
“The quickest way to get power up and running is going to be renewables, and that includes wind. Wind is economical. These projects finance themselves with or without tax credits,” notes Khan, who also cited solar, biofuels and geothermal as cornerstones in this transitioning energy mix.
As the AI boom continues to gather momentum, it’s evident to Kahn that investors are also beginning to assess how it intersects with ESG themes such as energy transition and water, which present both emerging risks and opportunities.
Industrial and materials
Kahn also reminds the market that the transition to a sustainable world is also underpinned by a strong demand for the industrial and materials sectors supplying the essential components for renewable infrastructure.
But when investing in the AI-energy nexus and renewable energy, Kahn stressed the importance of thematics - what a company does - over ESG – how a company operates - for evaluating companies and weighing a portfolio.
“From a portfolio management and factor management perspective, I have to consider how overweight I am to a factor such as industry, and then an overweight sector, such as industrials and materials," Khan said.
"So that becomes a challenge, because that's where there are a lot of great opportunities, but you know, you have to be very choosy.”
While there’s clearly a greater role for infrastructure funds and alternative investment vehicles - beyond traditional equities - for capturing these themes, Khan says smaller growth companies represent a critical frontier for investors seeking exposure to early-stage innovations within the broader energy transition.
Managing portfolio challenges
One key risk Kahn highlights is the potential for slower-than-expected adoption of AI technologies to transform the industrial economy.
In this uncertainty, there is also caution against overexposure to assets that might become stranded if technology shifts deviate from expectations.
Meantime, while short-term market volatility and policy shifts create noise, all the data suggest companies are investing balance sheet capital for 10, 15, 20 years and not just four-year-based or even two-year political wins.
“We’re talking to the CEOs of these companies and asking them what their capital plans are. They are not pausing their sustainability initiatives because they've proven to themselves that this is a driver of profitability.”
While it may be hamstrung over the short term in the U.S. due to Trump administration policies, Kahn reminds investors that renewable energy is being deployed all over the rest of the world at huge scales.
Government intervention
Interestingly, while the U.S. government remains an outlier in the climate change stakes, GSIA warns that without government interventions to reshape the global economy onto a sustainable trajectory, capital will remain incentivised to exacerbate climate change rather than address it.
The Responsible Investment Association Australasia (RIAA) co-chief executive Estelle Parker said investors are increasingly taking their responsibility to understand investee companies seriously and considering a wide range of risks to investments.
While economic transition is happening, Parker says it’s just not fast enough to mitigate the worst impacts of climate change.
“To do that, we need government intervention to make sure the policy settings are right," she said.
Together with RIAA, GSIA members also include the UK Sustainable Investment and Finance Association (UKSIF), US Sustainable Investment Forum (US SIF), Japan Sustainable Investment Forum (JSIF) and European Sustainable Investment Forum (Eurosif).
Eurosif executive director Aleksandra Palinska said that despite evolving regulatory frameworks and challenging market conditions, Europe has continued to demonstrate leadership in sustainable finance, maintaining its position as a major hub for sustainability-related investment.
"The EU's Sustainable Finance Disclosure Regulation (SFDR) has substantially contributed to the rapid growth in assets applying responsible and sustainable investment approaches,” she said.
“What we are witnessing is not just an increase in assets under management, but a structural shift in how investors assess value, risk and impacts.”
ESG study
Meanwhile, the evolutionary trajectory towards sustainable investments witnessed by GSIA and others is also being reflected in global ESG adoption, which, while having edged lower from the record-high level in 2023 and 2024, remains robust.
According to Capital Group’s latest edition of its ESG Global Study, ESG adoption stands at or above 90% in Europe, the Middle East and Africa (EMEA) and Asia-Pacific (APAC), and at 71% in North America.
The report reveals that six in 10 investors have strong conviction in the investment opportunities related to the energy transition, while over half have strong conviction in water and health as durable investment themes.
Within the energy transition theme, energy efficiency and energy infrastructure are preferred over renewable power generation, possibly reflecting concerns over decreasing expected return and uncertain policy in renewables.
“This year, investors are more concerned about the environmental risks associated with AI compared to last year,” the report notes.
“… nearly three-quarters of the respondents consider energy consumption or increased greenhouse gas emissions to be the most material ESG risk for their investments over the next 2 to 3 years, though more than half of them also see potential for AI to accelerate the innovation necessary for energy transition.”
While the share of investors implementing an ESG approach in fixed income has risen from 64% in 2024 to 70%, the highest level since the study launched in 2021, corporate bonds are the most popular sub-asset class within fixed income (61%).
Respondents are also increasingly implementing ESG approaches in private markets, with just under half (48%) doing so this year — the highest level since our study launched in 2021.
Interestingly, the rapid development of AI is likely helping to drive investor interest in water, with respondents ranking water as the top-conviction nature-related investment theme, followed by biodiversity.