Embedding AI within sustainability frameworks is now a must

Stuart Cullinan, CTO

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As financial institutions and ESG and Sustainability ratings providers navigate mounting regulatory and data requirements, artificial intelligence (AI) is emerging as both a powerful enabler and a potential risk.

From boosting efficiency in sustainability reporting to raising new ethical dilemmas and governance concerns, AI is reshaping how ESG and Sustainability are implemented, monitored, and governed.

For sustainable investors and investment companies, AI needs to be a real area of interest and intrigue over the next few years.

Efficiency: Scaling ESG Without Compromising Standards

AI is becoming increasingly instrumental in helping financial firms meet the complexity of ESG and Sustainability reporting. With regulations like the European Union’s Corporate Sustainability Reporting Directive (CSRD) set to apply to nearly 50,000 companies by 2026, firms must gather, validate, and disclose far more granular data, often across thousands of suppliers.

AI-driven tools can automate the heavy lifting, facilitating faster and more cost-effective compliance with evolving disclosure regimes.

AI is already enhancing ESG and Sustainability data collection, enabling scale without sacrificing quality. Automation supports the timely extraction, classification, and validation of information across asset classes and geographies, helping clients keep pace with an expanding regulatory perimeter.

However, these gains come with a climate cost. Training large AI models and running data centres does consume vast amounts of energy and water, adding to emissions and resource stress.

As a result, regulators are paying close attention.

The European Commission, for instance, is considering specific requirements for companies to report on the environmental footprint of their AI use.

Ethics: Aligning Intelligence with Impact

AI is opening new possibilities for ethical and impact investing. Advanced algorithms can continuously monitor portfolios for alignment with ESG preferences, adapt to new controversies, and adjust exposures dynamically—bringing greater personalisation and responsiveness to sustainable investment strategies.

Yet, AI also introduces ethical risks. Without robust governance, models can entrench systemic bias, perpetuate exclusion, or generate opaque outcomes that undermine trust.

The EU’s Artificial Intelligence Act, adopted in 2024, now classifies many financial AI applications—such as credit scoring or automated portfolio construction—as “high-risk,” requiring rigorous transparency, data governance, and human oversight.

Meanwhile, the UK’s Financial Conduct Authority (FCA) has identified algorithmic bias as a direct risk to consumer protection and market integrity.

Governance: Building Trust in AI-Driven Finance

Governance sits at the heart of Europe’s approach to AI regulation. The EU AI Act mandates that financial services tools using AI must meet strict standards around data quality, explainability, and risk management. This includes ESG-focused tools—such as AI-driven ratings and analytics platforms—that will need clear documentation of how AI is applied, verified, and supervised.

From 2026, ESG and Sustainability ratings providers in the EU will also be subject to the Regulation on the Transparency and Integrity of ESG Rating Activities (EU 2024/3005). This regulation introduces mandatory disclosure of AI-based methodologies, the traceability of data sources, and conflict-of-interest mitigation requirements—further reinforcing the link between technological integrity and sustainability credibility.

UK regulators are aligned in principle. The FCA now expects firms to implement board-level accountability for AI systems, with a clear understanding of model outputs and risks. Firms unable to explain or monitor the functioning of their AI tools may fall foul of regulatory expectations and face sanctions.

Conclusion: A Dual Transformation

The intersection of AI and ESG is driving a twin transformation—expanding what’s possible in sustainable finance while simultaneously demanding greater care in how technology is deployed. For financial institutions, the message is clear: governance of ESG and governance of AI can no longer be treated in isolation.

To succeed, firms must embed AI within sustainability frameworks—not only to enhance ESG and Sustainability reporting and investment outcomes, but to ensure that the means used to achieve these goals are as responsible as the ends.

Sustainability in Private Markets: The Pressing Spot Investors Can No Longer Afford

Simone Borsetti, Research Associate

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As private markets continue their rapid expansion, the pressure to align them with Sustainability goals is intensifying.

By the end of 2024, global private capital assets under management reached approximately $19 trillion, with projections from PitchBook estimating $24.1 trillion by 2029. Longer-term forecasts by Bain & Company suggest private markets could surpass $60 trillion by 2032—more than double the expected growth rate of public assets.

This exponential growth in capital has sharpened the focus of institutional investors on ESG and Sustainability integration. A recent EY survey found that 88% of institutions have either somewhat or substantially increased their use of ESG information in the past year.

However, despite the growing emphasis on sustainability, private markets remain less transparent, less standardised, and less regulated than their public counterparts.

This duality has created a paradox: private markets are viewed both as powerful engines for transformation, thanks to their influence and agility, and as potential “blind spots” where sustainability risks may go unchecked.

Sustainability Leverage in Private Markets

Private markets offer several structural advantages when it comes to sustainability implementation.

General Partners often hold board seats and wield significant influence over portfolio companies, allowing them to shape strategy, governance, and operations in ways public investors rarely can.

Furthermore, the long investment horizons typical of private equity and infrastructure funds align naturally with sustainability objectives, from climate resilience to inclusive growth. Asset owners such as pension funds and insurers are increasingly using their leverage to demand greater transparency, stronger frameworks, and demonstrable ESG progress from General Partners.

The Blind Spots

Despite these advantages, major obstacles remain. ESG and Sustainability data from private markets is still patchy, inconsistent, and largely reliant on voluntary disclosure. Without the mandatory disclosure requirements that apply to listed companies, investors can rely on voluntary reporting, self-assessments, or fragmented third-party data. This makes it difficult to compare funds, evaluate sustainability risks, or identify instances of greenwashing—an especially acute risk in a lightly regulated environment, which can erode investor trust and mask long-term vulnerabilities.

Another growing concern is the risk of “ESG arbitrage.” Companies with poor ESG credentials may increasingly seek capital from private sources to avoid the scrutiny they would face in public markets. This trend threatens to undermine broader sustainability efforts and casts doubt on the credibility of ESG strategies in the private space.

Emerging Solutions

Despite these challenges, efforts to bridge the gap are gaining momentum.

New ESG assessment tools tailored to alternative assets are emerging, alongside standardisation initiatives from bodies such as the Institutional Limited Partners Association (ILPA), GRESB (formerly known as the Global Real Estate Sustainability Benchmark), and the European Union’s SFDR framework.

At the same time, asset owners are playing a more active role, pressing General Partners for clearer disclosures, impact measurement, and integration of sustainability into core investment processes.

Laboratory or Liability?

Private markets are uniquely positioned to become a proving ground, acting as a laboratory for sustainability innovation, where investor influence, capital flexibility, and longer horizons converge to deliver measurable impact.

But this potential will remain untapped unless asset managers seize this opportunity to go beyond declarations and embed sustainability into every layer of the investment decision-making process.

Aligning private markets with ESG principles presents both tremendous opportunity and meaningful challenges. But it is not enough to simply adopt new reporting tools or frameworks. What’s required is a fundamental shift in governance, incentive structures, and investment culture – one that prioritises long-term value creation over short-term gains.

Whether private markets evolve into ESG and Sustainability leaders or remain regulatory blind spots will depend on the choices made today. For General Partners or Limited Partners, and their advisers, the question is no longer whether sustainability matters in private markets, but: Are we setting the bar high enough?

Europe’s Good Intentions and Poor Execution: An Unbearable Burden in a New Post-Tariff World

Daniele Cat Berro, Managing Director

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The European Union continue to show admirable ambition: positioning itself as a global leader  in the green transition and pushing for a sustainable, competitive economic model.

Two of its flagship initiatives—the transition to electric vehicles (EVs) and the development of Sustainable Investment regulations—are emblematic of this new direction.

Yet, as Mario Draghi’s recent report on European competitiveness warns, good intentions alone are not enough. Europe’s chronic slowness, bureaucratic complexity, and lack of long-term industrial vision are undermining these efforts, risking both economic strength and public support.

EV Transition: Strategic Necessity, Industrial Weakness 

The move towards electric vehicles is essential to achieving Europe’s 2050 climate goals. The targets are bold: a 55% cut in emissions from new cars by 2030 and a complete phase-out of internal combustion engines by 2035​.

Yet Europe has fallen behind. China had become the dominant player, accounting for over than 50% of global EV sales and producing more than 20% of all EVs purchased in Europe in 2023​. Chinese brands like BYD and SAIC are growing rapidly, and China is exporting EVs that are, on average, 20% cheaper than  their European counterparts​.

The EV value chain—especially battery production—is increasingly controlled by Asian players. Meanwhile, European battery projects are delayed, underfunded, or at risk of failure, as seen with Northvolt’s troubles and the fragile gigafactory pipeline across Europe​.

Without decisive support for internal manufacturers and supply chains, Europe’s auto industry risks deindustrialisation, with strong social costs, especially in car-dependent regions like Central and Eastern Europe​.

Sustainable Investment Regulation: Complexity at the Expense of Impact

The EU’s push on sustainable finance—through the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD), and the Corporate Sustainability Due Diligence Directive (CSDDD)—was born from a correct strategic intention: to bring transparency, accountability, and clarity to the sustainable transition.

Initially, these regulations aimed to steer capital towards sustainable activities, improve disclosure by corporates, and embed environmental and social risk management into business models.

However, the execution has been far from smooth. Rather than clarity, market participants  face layers of overlapping, sometimes contradictory requirements. Reporting obligations under CSRD have proven to be cumbersome and costly, and the application to smaller enterprises could result challenging, similarly the CSDDD’s extensive due diligence requirements have added layers of legal uncertainty and administrative burden.

The situation became so difficult that the European Commission itself had to propose the “Omnibus Directive” in early 2025 to freeze, postpone, and simplify several elements of CSRD and CSDDD, recognising that the system risks suffocating businesses rather than empowering them.

Visible consequences

In the first quarter of 2025, Europe registered its first net outflows from investment products classified as ESG or Sustainable, according to Morningstar.

Investors, overwhelmed by regulatory uncertainty, and operational complexity, and excessive bureaucracy are losing confidence in a market that was supposed to be the backbone of the green transition.

Instead of creating a competitive advantage for European finance and corporates, the current regulatory framework risks turning sustainability into an administrative burden.

The same bureaucratic inertia and excessive complexity that Mario Draghi criticises in his competitiveness report is clearly at play in the field of sustainable finance as well. A similar, if not even more clear example, is the case of the ESG Rating Providers Regulation.

Once again, the original objective—to bring greater transparency to methodologies and data flows, both for the market and the rated issuers—is entirely legitimate and necessary. It is equally sensible to aim at ensuring that only serious, credible players with robust data models operate in this critical segment.

However, when examining the detailed requirements of the regulation, it becomes evident that its structure disproportionately favours large, established firms, in a market that is already experiencing rapid consolidation.

And guess what – The dominant players are not European—they are primarily based in the United States. Thus, yet again, a regulation built on good intentions risks penalising European competition and empowering external actors, undermining Europe’s strategic autonomy in a key emerging industry.

Rethinking the How, Not the Why

Draghi’s report does not challenge the EU’s green agenda—it reinforces it. However, the report is also a warning: if Europe does not radically simplify and accelerate implementation, it will lag behind. A new approach is urgently needed: one that favours speed, simplification, and industrial resilience over bureaucratic layering. This is especially crucial in a geopolitical context defined by rising protectionism and industrial consolidation. The US and China are reinforcing their manufacturing bases; Europe must do the same or risk irrelevance.

History will not judge intentions. It will judge outcomes.

Sustainable Investing’s Midlife Crisis: What Comes After the ESG Boom?

Neill Blanks, CEO

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As southern Europe swelters under a record-breaking summer heatwave, the signs of climate risk are no longer theoretical – they are blisteringly real.

From scorched vineyards in France to shrinking reservoirs in Spain, the environmental urgency that once fuelled the ESG boom is now playing out in real time. Yet, just as the need for sustainable finance intensifies, the narrative around it is entering a period of growing ambiguity and fatigue.

The past 18 months have tested the resilience of ESG and Sustainable Investing. Once the darling of capital flows and policy frameworks, the sector has recently faced intense scrutiny over performance, transparency, and political pushback. Still, the long-term trajectory remains intact. The real question now is how the market evolves in a world where visibility is no longer a guarantee of credibility.

A Bipolar Regulatory World

The divergence in regulatory approaches between the US and Europe is sharpening.

Across the Atlantic, the re-emergence of Trump-era narratives has led to a chilling effect on ESG adoption – The US exit from the Paris Agreement, for the second time, – is symbolically and practically significant.

Meanwhile, Europe is scaling back some of its ambitions through the Omnibus Package, which could limit mandatory reporting under  Corporate Sustainability Reporting Directive (CSRD) and serve to increase data fragmentation.

However, despite slower progress in some areas, product-level regulations in the EU continue to move forward. The ESMA guidelines on fund names incorporating ESG or sustainability-related terms came fully into effect on 21 May 2025. These require that at least 80% of a fund’s assets promote ESG characteristics – and even stricter thresholds apply when sustainability terms are used.

Greenhushing

Faced with reputational risk and high compliance costs, asset managers are increasingly opting for discretion.

Greenhushing – the deliberate under-reporting of sustainability practices – has quietly replaced greenwashing as the industry’s dominant defensive tactic; a trend that only reflects the growing complexity of navigating global rules and the risk of regulatory misalignment, particularly for firms with a transatlantic footprint.

UK vs EU: Diverging but Complementary Paths

In the UK, Sustainability Disclosure Requirements (SDR) are widely seen as more functional and investor-focused than the EU’s Article 6/8/9 SFDR framework.

With the FCA introducing sustainability labels such as “Sustainability Focus” and “Sustainability Improvers,” many hope the EU’s upcoming Q4 SFDR review will align more closely with the UK model. Indeed, the Platform on Sustainable Finance has already proposed a new categorisation system mirroring SDR’s logic – grouping funds into “Sustainable,” “Transition,” and “ESG Collection” categories.

A more unified framework would undoubtedly be welcomed by asset managers. As of now, discrepancies between SFDR and CSRD risk distorting data quality and investor comparability – especially as the Omnibus Package excludes over 80% of previously covered firms from mandatory disclosure.

Overall, fund names are seen to strongly influence, particularly retail, investor decisions and this has been a positive step in combatting greenwashing with the previous 6-9 months seeing widespread changes across the market.

Sustainable Bonds: A Market Reinventing Itself

Despite the ESG backlash, Green, Social, and Sustainability Linked (GSS) bonds are set for another record year, with over $1 trillion in issuance projected for 2025.

Key themes include the refinancing of maturing debt, the critical moment for sustainability-linked bonds, and the implementation of the EU Green Bond Standard (EuGBS).

With new fund naming guidelines applying to GSS funds as well, ESMA now requires these products to meet Paris-Aligned Benchmark criteria – a move that has elevated standards but also narrowed the investable universe.

Future

If last year was about damage control, the next phase is about recalibration. Regulatory frameworks are maturing, investor scrutiny is intensifying, and the political context remains volatile.

Yet structural drivers – from climate change to biodiversity loss – remain as urgent as ever.

In a world where silence can be as misleading as exaggeration, sustainable finance must now prove it can speak with clarity, evidence and impact.

Investors should remain vigilant, as determining the true ESG and sustainability credentials of a fund requires thorough due diligence—there are no shortcuts.