Key Takeaways
- Private markets are experiencing growing exposure to themes such as artificial intelligence, defense, and energy transition, and responsible investment practices are having to adapt
- Harnessing the benefits of AI while managing the risks largely hinges on strong governance, responsible deployment, and alignment with emerging regulatory frameworks
- In defense, what it means to invest responsibly is being reassessed in light of recent geopolitical shifts, requiring more nuanced frameworks that distinguish between non-lethal, lethal, and prohibited activities, with human rights and export controls among the central considerations
- Energy transition remains a core sustainability theme, demanding a careful balance between decarbonization goals, energy security, system reliability, and cost of supply, while strategically calibrating exposure to legacy industries
- Across these three themes, effective responsible investment relies on disciplined, risk-based due diligence, attention to geographic context, clear articulation of risk tolerance, and explicit acceptance of trade-offs
Three interconnected themes are helping to reshape responsible investment frameworks in private markets: artificial intelligence (AI), defense investing, and energy transition. Each represents a structural shift in how capital is deployed. Each also introduces distinct risks and opportunities that demand a nuanced approach to responsible investing.
AI has the potential to transform productivity, decision making, and business models across sectors. But it also has the capability to introduce novel risks related to data protection, bias amplification, and transparency and explainability. Defense investing plays a critical role in national security and geopolitical stability, yet carries inherent ethical and human rights risks that are difficult to mitigate fully. Energy transition is essential to addressing climate change, but the impact of transition and the harms from climate change unfold unevenly across regions and technologies, creating both opportunities and material transition risks for investors.
As a result, we think responsible investment frameworks that rely solely on broad, sector-based risk classifications, or even broad, sector-based exclusions, may not be effective in addressing the potential risks. In our view, investors must therefore adopt nuanced approaches that account for risk severity, use cases, governance quality, and geographic context.
Responsible Investing in AI Applications
AI GOVERNANCE, REGULATION
AI continues to drive venture capital (VC) dealmaking, with vertical applications underscoring recent volume.
Figure 1: AI VC Deal Activity1
A growing emphasis on governance is a defining feature of responsible investing in AI. Regulatory initiatives, such as the European Union’s AI Act, signal a broader global shift toward risk-based supervision, with stricter requirements for transparency, human oversight, and accountability as potential harm to individuals or society increases.2 For private market investors, these developments have practical implications. Regulatory exposure is no longer limited to more mature companies; it is increasingly relevant at early stages. The quality of internal governance—covering data use, model development, testing, and monitoring—has become a material indicator of risk and long-term viability.
DIFFERENTIATING AI RISK BY APPLICATION TYPE
In our view, a tiered, use-case-specific approach can effectively distinguish between varying risk levels in AI. Lower-risk applications include operational and diagnostic tools, such as predictive maintenance, supply chain optimization, energy efficiency tools, and climate modeling. These systems typically rely on non-sensitive data, augment human decision making, and often support efficiency or sustainability goals.
Moderate-risk applications include generative AI and systems used in sensitive contexts, such as financial screening, fraud detection, human resources, or healthcare decision support. These use cases raise concerns around bias, transparency and explainability, data protection, and reputational risk, particularly if governance is weak or misuse occurs. Higher-risk applications include biometric identification, safety critical systems, and AI deployed in essential services, law enforcement, or democratic processes. Given their potential impact on fundamental rights and public trust, these applications require robust risk management, strong governance, and a clear understanding of regulatory and reputational exposure.
IMPLICATIONS FOR PRIVATE MARKET INVESTORS
For limited partners (LPs) allocating to AI-focused strategies, or general partners (GPs) backing AI-enabled businesses, assessing AI-related risks is increasingly necessary. Given the wide range of potential use cases an AI system may ultimately pursue, the governance approach of managers and portfolio companies is likely to be a deciding factor in environmental, social and governance (ESG) risk assessments.
Defense Investing: Navigating National Security Needs and Human Rights Risks
DEFENSE—LEGITIMATE BUT COMPLEX
Defense-related industries help states to protect citizens, maintain sovereignty, and uphold democratic institutions. Rising defense spending and modernization—particularly among NATO countries—have expanded opportunities for private investment as governments increasingly rely on private-sector innovation in areas such as advanced manufacturing, cybersecurity, space systems, and data-driven technologies. In the first half of 2025, defense technology startups raised $28.4 billion across 361 deals. That exceeded the 2023 total and put the sector on pace to surpass the $37.9 billion deployed across 804 deals in 2024.3
Figure 2: Defense Tech VC Deal Activity3
At the same time, defense investing presents unique challenges for responsible investors. The consequences of misuse can be severe, including civilian harm, human rights violations, and heightened regional instability. These risks distinguish defense from most other sectors and require a tailored responsible investment approach.
HUMAN RIGHTS AS A CORE ESG CONSIDERATION
Human rights considerations sit at the center of responsible investing in defense.4 Defense products and services may be used in ways that directly or indirectly contribute to violations of international humanitarian law, repression, or civilian harm. These risks are not limited to prohibited weapons and can include conventional arms, surveillance technologies, and dual-use systems, depending on context and end use.
Regulatory compliance alone does not eliminate these risks. Governments may authorize exports that serve strategic or economic objectives despite foreseeable risks of misuse. For investors—particularly minority or non-control investors—this creates systemic exposure that cannot be fully mitigated through contractual or governance mechanisms.
A RISK-BASED FRAMEWORK FOR DEFENSE INVESTING
A risk-based approach may provide a practical way to differentiate exposure across the defense sector. Lower-risk products and services include protective equipment and technical or operational services, such as body armor, safety systems, training, cybersecurity, and data management. These are generally viewed as essential to personnel protection and operational readiness.
For responsible investors in private markets, navigating AI, defense, and energy transition investing requires disciplined, risk-based due diligence, clear articulation of risk tolerance, and explicit acceptance of trade-offs
Moderate-risk categories may include non-lethal military equipment and dual-use technologies such as communications systems, radar, surveillance, and certain AI-enabled tools. While often integral to modern defense operations, their possible deployment in sensitive geographies, or by actors with weak human rights records, may result in exposure to human rights violations. Lethal military equipment presents a materially higher risk due to its direct role in combat and potential association with civilian harm. Weapons prohibited under international conventions are widely excluded from responsible investment strategies.5
GEOGRAPHIC JURISDICTION, INVESTOR SUITABILITY
Geographic jurisdiction is also a key determinant of ESG risk in defense investing. Investments domiciled in countries with robust regulatory oversight and alignment with international norms can reduce, though not eliminate, exposure to human rights and compliance risks. Conversely, significant revenue exposure to countries lacking comparable oversight or alignment with international norms, including through exports, may be an indicator of heightened risk. Responsible defense investing therefore requires a clear articulation of risk tolerance with respect to geographies as well as activities.
It also requires acknowledgement that even strong governance frameworks and robust due diligence cannot fully eliminate risk in this sector, with possible implications in terms of the suitability of such investments for investors or investment portfolios that seek to avoid such risks.
Energy Transition: Investing Across a Complex Ecosystem
THE SCALE OF THE ENERGY TRANSITION
Driven by climate targets and energy security concerns, energy transition broadly refers to the global shift toward lower-carbon sources and away from fossil-based systems. The International Energy Agency estimates that around $2.2 trillion a year is invested in renewables, nuclear, power grids, storage, low-emissions fuels, efficiency, and electrification—twice the amount being spent on oil, natural gas, and coal—with further growth expected.6
Despite this momentum, global greenhouse gas emissions remain elevated, and energy demand continues to rise. Electricity demand, in particular, is growing faster than overall energy consumption, driven by industrial expansion and advanced manufacturing, the growing digital economy, transport electrification, and increased use of electricity for space heating and cooling.7 Data centers and AI-related infrastructure—largely concentrated in the US, China and Europe—are contributing meaningfully to this trend, reinforcing the need for sustained investment in distributed power generation, upgraded grid infrastructure, resilient supply chains and flexible demand-side applications.8
Figure 3: Global Investment in Fossil Fuels and Clean Energy6,9
SEIZING OPPORTUNITY, MITIGATING RISK
As the scale and pace of energy transition and electrification increases, there will be growing opportunities for private capital to invest across the energy ecosystem. Responsible investors seeking to minimize their exposure to ESG risks while increasing their exposure to low-carbon solutions, may seek out opportunities in areas such as energy services or digital solutions that support demand-side energy efficiency, decentralized and renewable power generation, grid optimization and automation, as well as adjacent industries such as critical minerals.
Specialist equipment manufacturers—such as those producing batteries, carbon capture systems, or low-emissions fuels—may face higher but generally manageable ESG risks and benefit from structural tailwinds. Renewable power producers are key to the transition, but often encounter material ESG challenges related to land use, permitting, and community engagement. Investments with high exposure to fossil-fuel power generation and conventional oil and gas assets are more likely to face heightened transition and potentially stranded-asset risk, even where credible transition strategies exist.
FRAGMENTED POLICY, LONG TIME HORIZONS
ESG risks within energy transition investing can vary significantly by geography and across different investment time horizons, reflecting differences in national and regional policies and the multi-decadal nature of their decarbonization goals. This requires pragmatism. Elements of the existing fossil fuel system will persist for some time, and abrupt withdrawal of capital without viable alternatives could undermine energy security and affordability. For private market investors, an approach that accounts for differentiated risk exposure at the subindustry level, geographic context, and investment time horizon can help manage ESG risk while supporting an orderly transition.
Cross-Cutting Implications for Responsible Investment
Taken together, the considerations across AI, defense, and energy transition investing, in our view, point to several common themes for responsible investment in private markets:
- Governance quality may prove more decisive than sector classification in shaping overall ESG risk exposure;
- Differentiating risk within sectors based on business model, product or service type, or end use can allow investors to move beyond blunt sector-based screening while maintaining clear boundaries within their investment guidelines; and
- Geographic context should always be considered as a potential factor in assessing overall risk, and some ESG risks are systemic—capable of being managed and disclosed but not fully mitigated
Subject to our reasonable determination based on the attendant facts and circumstances, Adams Street’s approach generally seeks to integrate consideration of material ESG factors both pre-investment, at the operational due diligence and investment decision-making stage, as well as post-investment, where a proactive approach to ESG monitoring and evaluation can help ensure material ESG factors are managed effectively over the life of an investment. Our process typically incorporates a mixture of deal-specific controversy screening, a consideration of governance practices, and an evaluation of sector- and geo-specific risks, including transition risk. This may then be overlayed with a consideration of the suitability of different deal types for specific investment portfolios.
For responsible investors in private markets, navigating AI, defense, and energy transition investing requires disciplined, risk-based due diligence, clear articulation of risk tolerance, and explicit acceptance of trade-offs. Together, these elements can promote innovation, sustainable long-term outcomes, and transparency around the limits of risk mitigation.
1. PitchBook Q3 2025 AI VC Trends: https://pitchbook.com/news/reports/q3-2025-ai-vc-trends
2. European Union, Artificial Intelligence Act (EU AI Act), adopted 2024–2025
3. Pitchbook 2025 Vertical Snapshot, Defense Tech (as of 2025 H1): https://pitchbook.com/news/reports/2025-vertical-snapshot-defense-tech
4. In this context, human rights refer to the fundamental rights and freedoms outlined in international frameworks such as the United Nations Guiding Principles on Business and Human Rights (2011), and OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, as amended (2023).
5. International conventions restricting controversial weapons include the Ottawa Convention (or the Anti-Personnel Mine Ban Convention) (1997), the Convention on Cluster Munitions (2008), the Biological Weapons Convention (1972), the Chemical Weapons Convention (1993), and the Treaty on the Non-Proliferation of Nuclear Weapons (1968)
6. IEA (2025), World Energy Investment 2025, IEA, Paris https://www.iea.org/reports/world-energy-investment-2025, Licence: CC BY 4.0
7. IEA (2025), World Energy Outlook 2025, IEA, Paris https://www.iea.org/reports/world-energy-outlook-2025, License: CC BY 4.0 (report); CC BY NC SA 4.0 (Annex A)
8. IEA (2026), Electricity 2026, IEA, Paris https://www.iea.org/reports/electricity-2026, Licence: CC BY 4.0
9. Note: 2025 values are estimated
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