Morningstar sees investment theme: AI technology still strong in 2025, warns of social and environmental risks
Morningstar looks to 2025 investment theme: AI technology is still strong, but environmental and social risks are increasing due to the energy demand that cannot lead to a low-carbon society. As for social risks, AI may cause companies to lose a lot of money, such as privacy violations, fake news, and copyright infringement.
Morning Star Released an analysis of 6 sustainable investment trends in 2025: environmental, social, and governance issues, investment for low-carbon societies, investment in debt instruments to promote sustainability, the landscape of ESG funds, biodiversity finance, and the ethics of artificial intelligence (AI) technology.
Morningstar has an interesting perspective on how the expansion of AI could lead to greater environmental and social risks.
Morningstar sees AI as a prominent investment theme in 2024 and is likely to continue to move towards sustainability in 2025 as it believes AI technologies have great potential to help address climate change and achieve sustainability goals across industries.
However, recent years have shown a growing trend of significant ESG risks, such as environmental ones, where the use of AI data by tech companies such as Google and Microsoft has led to a significant increase in energy demand that is unlikely to lead to a low-carbon society.
“On the social front, AI poses a number of new risks that could cost companies dearly, such as privacy violations, fake news, and copyright infringement. For example, in May 2023, Meta was fined $1.3 billion by the European Union for mishandling data.”
A year of testing for ESG regulations
2025 marks a key turning point for the EU in terms of the review of financial disclosure rules on sustainability reporting and the first time that businesses will be reporting on sustainability information, with both the private sector and politics pressuring relevant regulators to highlight the importance and value of ESG.
Meanwhile, in the US, the new administration under Donald Trump is likely to roll back ESG-related initiatives, posing challenges to the transition to a low-carbon society and sustainable investing practices. For example, Trump is likely to re-exit the Paris Agreement, Congress could reduce or eliminate clean energy subsidies, and the SEC could repeal rules requiring public companies to disclose greenhouse gas emissions and climate-related risks.
Other countries continue to focus on climate and sustainability disclosure, such as under the International Sustainability Standards Board.
ESG Fund Landscape
A key driver of change is the European Securities and Markets Authority’s ESG Fund Naming Guidelines, which aim to protect investors from the risk of greenwashing by setting minimum standards for EU funds to use ESG-related names. It is estimated that 30-50% of EU ESG funds will change their name by mid-2025, with the remainder expected to adjust their investment guidelines to retain their ESG names.
Meanwhile, global fund closures are expected to accelerate, with the US ESG fund market worth US$3.53 billion, with the number of open funds decreasing from 647 at the start of 2024 to 595 at the end of September 2024 (in terms of asset value, it continues to increase in line with the US stock market). ESG funds in other countries, which currently account for about 5% of global ESG funds, are still on the rise, but at a slower rate.
Investing moves from goals to tangibles
Morningstar expects the investment landscape to continue to focus on decarbonization, moving from simply encouraging businesses to set targets to tangible actions. Investors will also look for investment opportunities arising from the energy transition. According to data from the International Energy Agency specify that More than $6 trillion per year will be invested through 2030 to enable a successful energy transition.
Since 2021, high interest rates have made investing in green businesses such as wind, solar, batteries and electric vehicles less profitable for investors. However, next year is expected to improve as the Federal Reserve is likely to cut interest rates and these businesses will perform better, although Trump is likely to roll back tax rebates for green businesses.
In addition, the structure of the industry also promotes growth, such as technological developments, lower costs and increased energy demand.
Low interest rates encourage increased issuance of sustainable debt instruments
By 2025, Morningstar expects sustainability-related debt issuance to exceed $1 trillion, driven by falling interest rates and strong investor demand for these instruments.
The EU aims to strengthen investor trust in the EU green-bond market by introducing new reporting and increased monitoring standards, requiring bonds issued under the EU GBS to allocate at least 85% of their proceeds to sustainable activities in line with green targets.
“More green bonds are expected to be issued to finance environmentally friendly activities and drive the transition to a green society, such as investing in companies that produce lithium, a key component of green technology, or companies that produce materials that reduce greenhouse gas emissions in buildings.”
Biodiversity Finance
Ongoing biodiversity degradation is identified as one of the most serious global risks in the coming decades, and the past two years have seen initiatives such as the Nature-related Financial Disclosures, the adoption of the Global Biodiversity Framework, as well as the UN Biodiversity Conference (COP16), help investors to engage more effectively on issues related to biodiversity finance.
Morningstar expects interest in biodiversity to continue as investment increases, with rising financial innovation signaling growing investor appetite for nature-related investments amid significant regulatory challenges and uncertainty.
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