2025: Sustainable and impact investing drives value creation

Over the past few years, sustainable investing has increasingly been recognized not only as a moral imperative, but a powerful driver of long-term value creation.

During 2025 we saw a changing political and regulatory landscape for sustainability themes, with a polarisation of views. Despite this, we believe sustainability factors can drive long-term value creation and growth – and, in our view, many institutional investors have remained steadfast on their principles.

We see asset-class specific indicators for this, such as private equity, where small and mid-market buyout focus on companies that are agile, innovative and under-analyzed, and where sustainability levers complemented with high levels of ownership influence can drive real impact.

Elsewhere, the green premium refers to additional required investment from shifting from brown to green activities, technologies or assets. Among our published content this year, we explored stages of brown-to-green transition and the realisation of ‘green premium’ through lettings, valuations and total returns, testing three assets within our real estate portfolio. The examples demonstrate where targeted environmental improvements can drive higher rental yields, enhance valuations and support long-term income growth.

On impact specifically, throughout 2025, we have worked to challenge the misconception that impact investing requires sacrificing returns. The initiative began with a joint study between Schroders and Oxford University’s Business School, examining more than 250 publicly listed companies. The findings indicated that impact portfolios generated strong, competitive absolute and risk-adjusted returns relative to broader, unconstrained portfolios.

Since then, we have extended our research into private asset classes, with a particular focus on private equity and infrastructure debt. This reflects our expanding impact capabilities across asset classes, including a significant infrastructure debt mandate featuring an impact allocation for a large Dutch investor.

Delivering on our decarbonisation and transition analytics

The World Resources Institute’s climate-action analysis for 2025 finds that none of the 45 key global climate-action indicators are currently on track to meet the 2030 targets aligned with the 1.5°C pathway. This stark assessment reflects the prevailing political uncertainty and ongoing divergence in national approaches to the low-carbon transition.

Despite this, companies and investment portfolios continue to face mounting regulatory risk, prospects of carbon-pricing shocks, intensifying investor expectations and untapped opportunities. Across our client base, many sustainability commitments remain climate-centric – encompassing portfolio decarbonisation, transition-focused investing and allocations to climate solutions.

As clients increasingly turn their attention to private assets, we continue to provide guidance and resources, including our decarbonisation in private assets series and our introduction to climate solutions.

Internally, we have made strong progress in advancing our decarbonisation framework and proprietary analytics. For example, we have expanded our net-zero alignment methodology into additional asset classes – and enhanced our climate solutions identification framework, applying it in bespoke portfolio analyzes for clients (link to Nest article).

Together, our climate-alignment and climate solutions analytics help to identify investment areas well positioned for the sustainable transition and highlight features that drive resilience and value through that transition. Within real estate, for example, we have spent the year updating asset and fund-level net-zero carbon analysis, laying the groundwork for setting new business-level decarbonisation commitments.

Our thought leadership has also explored how different asset classes can support client climate objectives, including how defined contribution (DC) schemes with strong sustainability ambitions can invest across the full energy transition value chain and highlighting the role of investors who acquire and actively manage operational renewable assets. These investors can still deliver meaningful ‘additionality’ by recycling capital for new projects and optimising asset performance, thereby maximising efficiency and long-term value creation across the energy transition ecosystem.

Expanding our climate physical risk assessment and explaining climate adaptation and resilience investing

Climate physical risk has moved decisively to the forefront of the sustainable investment agenda, driven by the increasing frequency and severity of extreme weather events and growing recognition of their direct financial impacts. Concurrently, advancements in climate analytics have enabled far more sophisticated modelling of location and asset-specific risk, even as meaningful differences persist across modelling providers.

In this context, 2025 marked the expansion of our climate physical risk analytics across our infrastructure and real estate pillars, furthering asset-specific future loss projections and the development of asset management plans for adaptation and resilience of infrastructure.

A key component to climate adaptation is not just the resilience of physical infrastructure but also financial resilience; the ability of communities, businesses, governments etc. to withstand and recover from climate-driven shocks.

An example of this is insurance-linked securities (ILS), which provide critically important supplemental risk-absorbing capacity to that provided by insurance and reinsurance companies. Across 2025, our ILS team produced a range of white papers, discussing how changing climate risk impacts the ILS market, navigating non-financial risks and why taking a house view on risk analysis matters. These papers explore further the relationship between the ILS market, long-term climatic risk and our in-house expertise.

Climate adaptation and resilience investing also emerged as a prominent theme at both New York and London Climate Weeks in 2025. A key theme was how improving the quantification of vulnerabilities and potential impacts has sharpened investor focus on a broad and compelling opportunity set, including resilient infrastructure, insurance, water and resource management, climate-smart agriculture and nature-based solutions. As a result, adaptation and resilience is becoming an established pillar of sustainable investment.

Given the significant underinvestment in this area, we are committed to sharing our expertise through targeted thought leadership, including articles on topics such as the insurance protection gap and newsletters profiling pioneering companies delivering climate-related insurance solutions in emerging markets.

Exploring our impacts and dependencies on nature

Schroders joined the Taskforce on Nature-related Financial Disclosures (TNFD) Early Adopters in 2024 and subsequently published its first TNFD-aligned Nature Report in 2025, covering both public and private assets. The report provides an initial view on the firm’s nature-related impacts and dependencies, including a specific assessment across private markets.

Deforestation emerged as a key focus area. Building on Schroders 2021 commitment to address forest-risk agricultural commodity-driven deforestation activities, we have developed and implemented a process to identify private asset investments with potential exposure to forest-risk commodities, ensuring enhanced due diligence is undertaken wherever risks are identified.

Our practical work on nature has been particularly concentrated within our Schroders Greencoat portfolios. This has progressed along two complementary strands: establishing biodiversity baselines across solar assets using GIS mapping and advancing asset-level initiatives through pilot testing and academic collaborations. These initiatives encompass material recyclability, feedstock sustainability, bird and bat curtailment and avifauna acoustic monitoring.

Delving into social impact and solving for three challenges

With rising geopolitical tensions, cost-of-living pressures and demographic shifts, sustainable investment is increasingly integrating social resilience into both risk management and investment vehicles targeting social outcomes. We see this through our own strategies focused on aspects such as financial inclusion and affordability in emerging markets, and access issues in both the UK housing and social infrastructure markets.

In 2025, our social research agenda focused on the most pressing issues facing the UK – most notably the housing crisis, declining and underutilised town centres and the chronic underinvestment in social infrastructure. Our work explored how investment, when aligned with social purpose, can help address some of the UK’s most pressing structural challenges. We have already translated into concrete investments, for example through our real estate social impact strategy.

Defining our approach to active ownership

Active ownership remains a foundational pillar in effective investment management, particularly in a market characterised by rapid change and heightened uncertainty.

Each year, we publish our Engagement Blueprint which sets out our philosophy and approach to active ownership across private assets. The Blueprint details the specific engagement practices within each asset class, alongside the priority stakeholders and thematic areas that guide our activity. Within private assets, active ownership varies by asset class but typically combines hands-on ‘active’ management with responsible stewardship, including targeted engagement with stakeholders and participation in industry initiatives.

Towards the end of 2025, we intensified our efforts to enhance the tracking and reporting of our engagement activity, establishing more systematic processes to record engagements consistently across private assets. Overall, our ambition is to provide clients with greater transparency and deeper insight into our active ownership activities.

We believe it is key to bring our active ownership and investments to life to drive heightened engagement with clients and further demonstrate the role of private markets allocations, here we provide examples of our own multi-private markets strategy.

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