Material E, S and G factors in 2025

Please note: This article is designed to be thought leadership content, to offer big picture views and analysis of interesting issues and trends that matter to our clients and the world in which we live. It is not designed to be taken as expert advice, investment advice or a recommendation, and any reference to specific companies is therefore not an opinion as to their present or future value or broader ESG credentials.

Reliance upon any of the information in this article is at the sole discretion of the reader. Some of the views and issues discussed in this article may derive from third-party research or data which is relied upon by Barclays Private Bank and may not have been validated. Such research and data are made available as additional information for the reader where appropriate.

Key points

• ESG factors can help investors to make better-informed investment decisions.
• These factors vary by industry, company, and at different times.
• For 2025, six ESG factors were identified that may influence companies’ performance.
• Factors were selected for definitive momentum, or as they’re under-appreciated.

Facing a tentative outlook for the global economy in 2025, investors may want to hold high-quality companies that show their defensive qualities in slowdowns while still having long-term growth potential. When selecting these assets, investors should consider which environmental, social and governance (ESG) factors can affect companies the most in 2025, and therefore their portfolio returns. 

The table below of ESG factors, while not exhaustive, highlights common factors that all companies face and that investors can use to inform their investment decisions.

Investors consider many issues when deciding whether to hold an investment. Importantly, ESG factors are fundamentally about an organisation’s internal practices. They provide data about how well a company operates and manages material risks, and its effect on financial performance. It does not include the outcomes of its goods or services on the world. Including ESG factors can enhance existing investment processes by including non-financial information – hopefully to make more informed investment decisions. (For more explanation, see  Why ESG factors matter in investing).

Therefore, through discussion with our investment teams and industry peers, we’ve identified six key E, S and G factors that are likely to be material for 2025, and what each means for investors. 

As a caveat, these factors are neither static nor exhaustive. Rather, we sought to highlight those that possess definitive momentum and those that are underappreciated and are emerging for the year ahead.

Material “E”nvironmental factors

Companies' operations and countries are increasingly hit by the physical impact and the transition efforts around climate change. 

To slow, halt, and reverse warmer average global temperatures requires faster global action. In 2025, countries and companies will need to move from their past pledges and plans to taking concrete action. 

Reporting and regulation will propel activity around familiar environmental factors, such as carbon emissions. We consider emerging factors, notably in areas of nature and biodiversity and corporate energy usage and sourcing, with their implications for companies in 2025. 

Nature and biodiversity factors

How well a company manages and mitigates their ecological impact to ensure sustainable use of natural resources and ecosystem services as well as compliance with environmental standards.

Over half of the world’s gross domestic product is dependent on nature and biodiversity¹. 

However, companies have not had to account fully for the financial value of these resources. Nor do many investors recognise how much the value of their portfolio relies on nature. 

Unfortunately, current levels of global spending (see chart) don’t support the preservation, or regeneration, of these natural resources. While roughly $154 billion is spent each year for positive biodiversity outcomes², an estimated annual funding gap of $700 billion remains³.

The biodiversity funding gap

Targets for closing an estimated $700 billion funding gap in biodiversity, involving governments and companies 

If these ecosystem services, such as healthy soils, clean water or pollination, and the direct use of resources, such as forests or oceans disappear, companies reliant on them face significant financial risks. This ranges from sectors as agricultural and food & beverage to construction and utilities. (For more on biodiversity and its financial risks, see Is your portfolio ready for biodiversity loss?).

Generally, a lack of data about companies’ reliance on, and impact towards, nature has challenged investors to assess and value the risks. To address this gap, the Taskforce for Nature-related Financial Disclosures (TNFD) published recommendations in 2023 for a standardised framework for firms to assess and disclose their exposure to nature-related financial risks. 

The next twelve months will mark the first time that 320 corporates, across 58 sectors, are expected to report data on their 2024 fiscal year⁴.

While reporting is not mandatory, this may change, as it did for similar climate-related financial disclosures in some jurisdictions. Early adopters have faced upfront costs to implement new practises and may disclose previously unknown risks or harms to nature and biodiversity from such behaviours. However, it’s more likely these will be leading rather than laggard organisations. 

For investors, watching both who discloses (and who doesn’t) and incorporates relevant data into their assessment, may provide an information advantage when making selections.

Energy usage & supply

A company’s energy usage directly corresponds to their emissions footprint and operating costs. Those conscious of their emissions footprint might pursue renewable sources or alternative processes that are less energy intensive. 

Companies likely will continue to face high variability of energy input costs as well as uncertainty of supply given geopolitical tensions. As well, those with Net-Zero commitments will start, or continue, to search for alternatives to decrease their carbon emissions from their energy purchase and usage⁵. 

At the same time, delivering economic growth in 2025 will require additional energy. Moreover, new technologies, such as artificial intelligence (AI) or blockchain, are spurring greater energy demand. While the net effect is unknown, energy usage is expected to grow rapidly.

Data centres accounted for 1-1.5% of global electricity use in 2022⁶ and, depending on calculations, 0.6%⁷ -2.4%⁸ of global greenhouse-gas emissions. Improvements in energy efficiency have helped to limit their energy demand⁹. However, the rapid evolution of AI technologies and wave of investment in data centres in 2024 points to more electricity demand in 2025, which may double between 2024 and 2026¹⁰. (For more about AI’s potential impact on the economy, see Is AI (b)reaching its limits?).

While increased demand and risk of energy supply for technology has been newsworthy, all companies require energy for their operations. So, being able to meet their energy demand amid growing uncertainty over satisfying demand with supply and costs, may be a critical factor to separate winners and losers in 2025.

Investors too, can assess the scale and nature of energy demand and how well a company manages this risk. This means considering if a business seeks to directly secure supply or attain self-sufficiency. As well, wondering if those investing in low-carbon energy solutions or energy efficiency upgrades could face short-term costs, but derive long-term operational and cost benefits. 

Furthermore, those shifting to renewables should find themselves more shielded from potential volatility in fossil-fuel prices, and with a lower emissions footprint, less exposure to transition risks, such as carbon pricing and policy changes.

Material “S”ocial factors in 2025

Until the inescapable effects of the pandemic demonstrated their financial materiality, social factors, such as employee safety and working conditions, hadn’t generally received the same attention as environmental and governance ones. 

While these social issues affecting individuals might be material for companies, for 2025 we wanted to highlight how companies manage their relationships with larger groups and communities, specifically around cybersecurity and community engagement. 

Cybersecurity 

A company must implement the infrastructure to protect the data that they own and produce, regarding customers and stakeholders, to ensure operational continuity and trust. 

The estimated $9 trillion-plus costs of cybercrime would be equivalent to the world’s third largest economy (see chart). On the other side of that figure are the individuals, companies and countries that have paid for those illicit gains.

Mushrooming cost of cybercrime

The estimated cost of cybercrime internationally since 2018

In 2020, 90% of the S&P500’s market value was derived from intangible assets, intellectual capital, and goodwill¹¹. Corporate valuations aren’t based on factories and machines, instead lines of code, pools of customer and internal data, computational models and algorithms. 

Cybersecurity risks threaten these core assets. For example, an outage in 2024 affecting Microsoft devices took 8.5 million of them offline globally; and caused an estimated $10 billion of economic damage¹². Similarly, the proliferation of smart devices and our increased online presence has offered up our personal data, often concentrated with a few large players in the industry. Cyberattacks, for example at UnitedHealth, which resulted in over 100 million Americans’ data being compromised¹³, can create long-term damage to company’s viability. 

With technology and data essential to running companies from micro- to multi-national size, cybersecurity is an omnipresent risk. Worldwide, in 2023, there were over six billion malware attacks alone¹⁴. Large corporates with mission-critical software or technology, or with extensive, sensitive personal data, face greater reputational, financial, operational and legal risk in the event of an attack, outage or data leak.

Similarly, investors can benefit from assessing the nature of these cybersecurity risks, their financial materiality and how they are managed. Delving into a company’s cybersecurity policies and protocols, adherence to industry standards, employee training, regular assessment of security systems and investment into cybersecurity, can provide comfort for both a firm’s stakeholders and investors.

Community Engagement

The concept of community engagement pertains to the active participation and collaboration within a community, to facilitate dialogue on material topics with the intention to create cohesive and resilient outcomes. 

Companies cannot succeed without the acceptance or approval from the communities in which they want to operate. Whether siting new factories, building or replacing infrastructure, or negotiating access rights, engaging communities and addressing stakeholder concerns and expectations, is critical to a company’s costs, timeline, or even viability. 

Faced with geopolitical tensions, risk management of supply chains and governmental incentives, companies will continue to modify their physical footprint. To near-shore, friend-shore or re-shore, companies need a welcoming berth for facilities and suppliers. To benefit from governmental industrial policies and incentives, such as the US Inflation Reduction Act or Made in China 2025, companies need to open factories. To replace or build new infrastructure, from transport to energy production, firms need space and approval to proceed.

As a result, the relative influence of communities will increase in 2025. The relationship can range from synergistic to ruinous, with associated costs or benefits along the spectrum. For example, stakeholder issues over two years, which prevented an oil company’s production to come online, caused an estimated $6.5 billion in value erosion, or a double-digit percentage of its annual operating profits¹⁵. Mining companies also provide historical examples where engagement and community support were material to their success. 

Notably, for the energy transition to be successful, more renewables projects need to be built, and at a faster rate. At present, the timeline for offshore wind projects extends to twelve years, onshore wind timelines to ten years, and utility-scale solar facilities to four years. In conjunction with regulatory reforms, firms with better skilled at acquiring local support, and therefore permitting, will be better placed to construct and operate renewables. 

Investors can consider a company's need and approach to community engagement. This can be part of a wider assessment of “social license to operate” which is the perception by stakeholders that a business or industry is acting in a way that is legitimate, credible and trustworthy¹⁶. Without effective community engagement a firm’s medium- or long-term financial or operating performance, as well as potential for acute short-term financial impacts will affect profitability and viability.

Material “G”overnance factors in 2025

How organisations are managed has been a long-standing, non-financial consideration for investors. Executives and boards are accountable for delivery of results for stakeholders and shareholders. 

In 2025, they will have to navigate firms in a world with uncertainty in terms of economic growth and geopolitical tension and increased complexity, with deglobalisation, return of industrial strategy and rise of sustainability regulation. Investors should watch how they manage around two particular challenges - tax and tariffs and sustainability. 

Taxes & tariffs

Responsibly managing tax and tariffs risks for companies involves transparent reporting in line with operations, demonstrating a commitment to societal obligations. 

Next year, increased tariffs could severely disrupt global supply chains and international business operations. As well, tax changes also risk eroding profits as governments seek to recapitalise their balance sheets. Given the increased reference of tariffs on earnings calls, executives already are expressing a clear concern (see chart). 

As part of a year that saw elections in more than 100 countries in 2024¹⁷, political debate has focused on public finances. The International Monetary Fund estimated that global public debt may exceed $100 trillion for the first time ever in 2024, reaching 93% of global economic growth¹⁸.

Trade tariffs on executives lips’ more

The amount of time ‘tariffs’ are mentioned during company earnings calls, either by members of the S&P 500 or the STOXX 600

To reduce their budget deficits, governments may use tools to increase revenues, such as increasing corporate tax rates or tightening tax gaps. For example, the French government announced a temporary corporate income tax hike for those with revenue greater than €1 billion, and a tax on share buybacks¹⁹. 
 
In the UK, October’s budget included rises in capital gains tax, to 18% from 10% at the lower rate, and to 24% from 20% at the higher rate²⁰.

Also, governments may implement new tariffs to boost tax revenue and support domestic businesses, to address escalating geopolitical tensions and campaign promises. The EU decided in October 2024 to implement tariffs of up to 45% on Chinese-imported electric vehicles, both to support domestic European manufacturers and to retaliate against alleged excessive subsidies, which allowed the Chinese electric vehicle manufacturers to undercut European peers on price²¹.   

For investors, change in tax legislation or tariffs could have a significant impact on company earnings and shareholder returns. To identify specific industries and companies at risk of tax changes, investors can seek data on a company’s effective tax rate, and compare that with relevant statutory tax rates. In addition, businesses with aggressive tax mitigation strategies will likely face the greatest risk and impact. 

The threat of tariffs is challenging to screen or quantify. To understand the risk, necessitates detailed assessment of sector and company exposure in relation to relevant industries and national importance. However, based on their frequency of their mentions in briefing calls, executives have become increasingly worried about the potential risks.  

Executive & Board competency on sustainability 

Evaluates the knowledge, skills and experience of executive leadership and directors on sustainability, and their ability to exercise effective oversight of firm’s sustainability practices and regulatory requirements.  

Companies face growing pressure from governments and society to operate more sustainably. Without a deep understanding of what this means – its nuances and geographic variations as well as the risks and opportunities it presents – executive leadership and boards will struggle to steer their companies effectively.Boards have the critical role of guiding a company’s strategy and managing risks, making their expertise foundational to a company’s resilience and growth. With growth of recognition and expectations around sustainability issues, executive competence in these areas is indispensable. Yet, research from NYU Stern School of Business found that 57% of Fortune 100 boards in 2023 still did not have board members with relevant ESG credentials²². 

Similarly, Ceres found that only 31% of 600 large, publicly traded US companies had board oversight of sustainability matters²³. Lacking knowledge in sustainability issues and how to oversee and manage them, means companies may miss opportunities, create potential liabilities or, worse, affect the company’s license to operate.   

In 2025, these executives face continued increase in sustainability regulations. Often these require greater disclosure and transparency. For example, the EU’s Regulation on Deforestation-free products, requires any company importing or exporting cattle, cocoa, coffee, palm oil, soya, wood and rubber from the EU to prove they were not produced in deforested land (see The growing importance of accountability in the supply chain). 

The first corporate disclosures for the EU’s Corporate Sustainability Reporting Directive (CSRD) are due in 2025, on a range of sustainability issues, including greenhouse-gas emissions, water use, waste generation, employee diversity, working conditions and human rights. Already, executives need to be planning for the now-adopted EU Corporate Sustainability Due Diligence Directive (CSDDD), so that they can report on how their firms are conducting effective human rights and environmental due diligence in their supply chains. 

For investors, assessing board and executive expertise on sustainability may provide insight into which firms are likely to fulfil regulatory requirements and stay competitive in a rapidly evolving market. This can come from reviewing executives’ and board members’ credentials, relevant experience in sustainability, and the firm’s governance processes and practices to identify and manage sustainability risks. Through this, investors can gain a clearer picture of how capable leadership is in addressing sustainability risks or to seize new opportunities, which can drive long-term performance.

Looking at ESG in 2025 and beyond 

With sustainability becoming more mainstream, investors are increasingly having to consider ESG factors in how companies operate to make better-informed investment decisions. 

This begins by identifying key ESG factors for 2025, like the six highlighted above, and assessing their associated risks and opportunities for holdings.   

In what looks like being a low-return era for investors, this integration provides additional tools for investors to select companies and build portfolios with the aim of generating long-term returns for 2025 and beyond.