Sustainability H1 2025 Sector Review

Macro Summary: H1 2025

UK Performance

• UK economy grew 0.7% in Q1 2025, led by services, manufacturing and strong household spending; exports surged ahead of tariff changes
• Momentum slowed in Q2, with April GDP contracting 0.3% amid fiscal headwinds, labour market softness & global trade uncertainty

Global Growth Outlook

• Revised downward: The World Bank and Morgan Stanley both project global GDP growth at 2.3–2.5% in 2025, down from 3.5% in 2024
• Drivers of Slowdown:
  • Trade shocks from U.S. tariffs (10-25% baseline, with reciprocal rates up to 54% on Chinese goods) are disrupting global supply chains
  • Investment flows are weakening, particularly in developing economies reliant on export-led growth

Inflation & Monetary Policy

• Tariff-driven cost pressures remain a near-term risk, especially in sectors like electronics, automotive, and pharmaceuticals
• Policy divergence: While the BoE and ECB are cautiously easing, the Fed remains hawkish amid U.S. fiscal uncertainty and tariff-induced inflation
• Globally, inflation is predicted to ease to ~4.2% in 2025, with advanced economies returning to target faster than emerging markets – will be interesting to see how this pans out once the US’s ‘reciprocal’ tariffs take effect in August

Sustainable Development & Inequality

• SDG progress off track: According to the UN’s 2025 SDG Progress Report, none of the 17 goals are on course to be met by 2030
  • East and South Asia show the fastest progress, while conflict-affected and fiscally constrained nations are falling further behind

• Fiscal space is a key constraint: Over half the world’s population lives in countries unable to invest adequately in SDG-aligned infrastructure

Data & AI Policy Changes

• Data reform: New UK Data (Use and Access) Act 2025 (DUAA) law updates UK GDPR – requires revised privacy policies & Data Subject Access Request (DSAR) processes
• AI & automation expands opportunities across businesses but increases compliance requirements & risks
• Stricter cookie & direct marketing rules expected – prepare for consent changes
• Cross-border data provides easier international transfers, but safeguards needed. Businesses need to monitor legislation in all jurisdictions in which they operate

Strategic Implications

• For UK-based investors and advisors: The UK’s relative macro-stability, combined with its separation from EU trade policy, may position it as a safe harbour for international capital, particularly in ESG-aligned sectors
• For legal and financial professionals: Expect heightened demand for cross-border structuring that navigates tariff regimes, and for due diligence on ESG compliance as sustainability reporting becomes a differentiator

UK M&A Overview

• Modest increase in deal activity in the UK: PE and M&A volumes saw a slight year-on-year rise overall

• Activity increased from Q1 to Q2, with momentum expected to accelerate through H2 2025
  • Boosted by rate cuts, dry powder pressure, strategic expansion, and valuation clarity
• Manufacturing & Industrial led growth: driven by tech investment, rising demand, and pro-growth policies
• Corporate buyers dominate: 62% of UK deals in H1, in line with the 2-year average of 63%
• Private Equity rebalances: Strong performance in Q1 2024 initially signalled a change in the balance across M&A landscape
  • Activity is now tracking historic norms – buyout accounts for 31% of deals in H1 with remaining 7% being follow on Growth Capital deals

UK Deal Activity Year on Year

Sectors: Sustainability; Business Services; Software, Media & Technology; Manufacturing & Industrial; Healthcare & Education

Number of Transactions axis labels: 0, 100, 200, 300, 400, 500, 600, 700, 800, 900

Series: Q3 2023 – Q2 2024; Q3 2024 – Q2 2025

Source: Pitchbook

Key Trends Industry Shifts

Regulation & Policy

• UK SRS Exposure Drafts (June ’25): Mandatory sustainability disclosures aligned with ISSB; heightened demand for audit, legal, and advisory services
• GBIS Momentum Builds: 80k+ home upgrades fuel supply chain growth in insulation, smart heating tech, and retrofit planning
• DEFRA Biodegradable Waste Plan: Ban by 2028 under consultation; businesses face mounting stakeholder pressure to pivot early

Talent & Innovation

• ESG Hiring Peaks: ~1M UK roles across CSO, ESG analytics, and net-zero compliance; embedded in finance, manufacturing & real estate
• Hybrid Skill Premiums: Cross-trained professionals (e.g., legal/finance + ESG) highly sought in advisory and investment roles
• Tech Innovation Hub: Growth in UK-based ESG analytics, climate risk modelling & B-Corp reporting platforms amid global policy volatility

Green Investment & Finance

• Climate Tech Surge: UK climate investments up 24%, topping £4.5bn — AI-led carbon monitoring, resilient grids, and energy storage key themes
• Sector Strategy Support: New cleantech roadmap targets £30bn annual investment; nuclear, hydrogen, and CCS prioritised
• Financial Sector ESG Push: FCA’s SDR reforms reinforce integration; institutional investors demand transition-aligned portfolios

Public Market

Key Trends:

• Sector-wide Q2 rebound highlights sustained investor confidence following earlier disruption from U.S. policy shifts (“drill baby drill”)
• Fluctuations in Green Energy:
  • AFC Energy – AIM-listed hydrogen fuel cell player – experienced a valuation correction in March once it released its weaker financial performance and confirmed a £2.8m inventory write-off
    • Its near total collapse of top-line performance initially inflated its revenue multiple
    • This steadily climbed in Q2 after the company announced its new strategic direction
  • Meanwhile, Nasdaq-listed solar battery company, NeoVolta Inc, reported strong revenue growth in Q2
    • Its US-based assembly has proved to be an asset during tariff uncertainty
    • Revenue forecast to grow 200% YoY
• Clean Tech & Green Energy multiples are strong compared to other verticals, although future valuation growth will be tied to profitability
  • Shareholders will begin to expect a return on their investments and multiples may face pressure without margin expansion
• HCM multiples remained steady across H1:
  • Players provide essential functions like payroll and benefits administration and generally benefit from stable recurring revenue models
  • Relatively mature space which leads to fewer disruptive entrants and predictable growth trajectories
  • Strategic acquisitions instead drive growth, as larger players target customers and complementary tools to broaden product-offerings

H1 2025 Revenue Multiples

Dates: Jan-02-2025; Jan-14-2025; Jan-24-2025; Feb-05-2025; Feb-17-2025; Feb-27-2025; Feb-11-2025; Feb-21-2025; Apr-02-2025; Apr-14-2025; Apr-25-2025; May-07-2025; May-19-2025; May-29-2025; Jun-10-2025; Jun-20-2025

EV / Revenue axis labels: 0.00x, 0.50x, 1.00x, 1.50x, 2.00x, 2.50x, 3.00x

Series: AgTech; HCM; ESG & Sustainable Services; Green Energy; Clean Tech

Source: S&P 500 – CapIQ

Private Transactions – UK

Sustainability UK Deals by Subsector

Quarters: Q3 2024; Q4 2024; Q1 2025; Q2 2025

Number of Transactions axis labels: 0, 20, 40, 60, 80, 100

Series: AgTech; Clean Tech; HCM; ESG & Sustainable Services; Green Energy

Sustainability UK Deals by Type

Quarters: Q3 2024; Q4 2024; Q1 2025; Q2 2025

Number of Transactions axis labels: 0, 20, 40, 60, 80, 100

Series: Buyout/LBO; Merger/Acqusition; PE Growth/Expansion

Source: Pitchbook

• Drop in deals in Sustainability in H1 2025 highlights that attitudes towards the space were tested by changing governments – US has strong influence on UK landscape
• Players in ESG & Sustainability Services, Clean Tech and Green Energy will benefit from strong policy incentives
  • Helps de-risk investments and attract capital
• In contrast, AgTech shows slower growth, likely due to less direct policy support, longer commercialisation timelines and friction from farmers slower to adopt new tools
• Uptick in HCM deals reflects the increased market interest Polestar has seen over the last year
  • Highlights growing market recognition of social sustainability as a material driver of long-term value
  • Reinforced by evolving employee expectations around reward, recognition, and workplace culture

PE attitudes to Sustainability:

• Firms continue to embed ESG deep into portfolio companies
• Many have launched dedicated sustainable funds (e.g. Palatine & Bridges) and treat ESG as a core value driver, not just a compliance requirement
• Growth equity incubates emerging innovations to capture future upside as rapid organic growth is possible
  • Driven by regulatory and end-consumer demand for sustainable practice

Active Investors & Acquirors

Consolidation across the Sector acquirors target fragmented early-stage markets to gain scale and streamline operations.

Active M&A scene in sustainable waste management as acquirors rely on inorganic growth.

Source: Pitchbook

UK Deals in Sustainability