Opinion – UKSIF

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

This website should not be taken as financial or investment advice or seen as an endorsement or recommendation of any particular company, investment or individual. While we have sought to ensure information on this site is correct, we do not accept liability for any errors.

ESG outlook: How are responsible investing trends converging with broader economic realities?

Michelle Dunstan, Chief Responsibility Officer, Janus Henderson Investors

Responsible investing is shifting from aspirational ESG ideals to financially material considerations, aligning with broader economic realities. Chief Responsibility Officer Michelle Dunstan’s 2026 outlook highlights the evolving definitions of “responsible” investments, and why companies need to adapt to “conscious consumer” demands.

The shift from moral imperatives to financial materiality marks a move from aspirational ideals to practical ESG integration. In 2026, responsible investing will balance short- and long-term outcomes, balancing financial priorities with social and environmental goals. We see three macro drivers shaping markets: geopolitical realignment, demographic shifts, and higher capital costs—signalling convergence between ESG trends and economic realities.

The impact of geopolitics: Rethinking what is “responsible”
Headline events in 2025 have driven renewed focus on certain sectors. Military escalation and increased defence spending – especially in Europe – have prompted a re-examination of historical aversions to this sector. Similarly, energy security concerns and increased demand driven by the acceleration of AI and datacentres have led to renewed interest in nuclear energy and natural gas. Tariffs have sharpened the focus on efficiency, competitiveness, and national security.

Many asset managers have responded by rescinding broad exclusions in defence and energy, causing some consternation among clients and asset owners. This raises a philosophical question: If what’s considered “responsible” can change so dramatically, where does that leave ESG-focused portfolios?

Financial materiality aligns with sustainable growth
In this context, asset managers are adopting thoughtful analysis and engagement to ensure adherence to humanitarian standards and effective risk management – indeed, companies in these sectors can contribute to social and economic resilience for sustainable growth. This is particularly true in defence, which historically has faced issues of bribery, corruption and human rights abuses, and energy, which presents its own set of ESG risks. Defence companies continue to face corruption and human rights concerns, while energy companies grapple with obvious environmental challenges.

A more case by case approach is emerging—one that emphasises direct engagement, scrutiny of practices, and a sober assessment of long term risks. The argument is less about moral positioning and more about recognising how geopolitical instability and energy dynamics affect financial resilience.

The impact of demographic and lifestyle shifts: health and wealth disrupt consumer preferences
Demographic and lifestyle changes are profoundly reshaping the healthcare and consumer sectors. Generational shifts, reinforced by regulation, technology and social media, are driving new behaviours around food, diet, and health management. The rapid adoption of weight loss drugs and heightened awareness of ultra-processed foods are redefining the fight against obesity. Governments are responding with legislation to address the economic strain of chronic diseases.

Technology has elevated access to information, and the social media visibility of “ideal” lifestyles is influencing both aspirations and actions. Consumers are increasingly seeking healthier, cleaner, and more sustainable choices, upending historical patterns in food & beverage, and wellness. Forward-thinking companies are adapting to meet the demands of the “conscious consumer,” creating winners and losers in the marketplace. This has typically led to significant underperformance for companies most exposed to the downside of these trends (image below). Asset managers are analysing these trends and engaging with companies to understand the long-term impacts.

The impact of costs: Pivot to real action in regulation, climate, and biodiversity
Geopolitics, tariffs, and the higher cost of capital have renewed focus on competitiveness and resilience, prompting a more practical approach to ESG. Ignoring these factors risks mispricing securities, so climate and biodiversity are now assessed for their measurable impact on financial performance. Investors are taking a more systematic approach to evaluating companies’ transition plans, exposure to regulatory change, and vulnerability to stranded assets.

The focus is less on whether companies make broad climate commitments and more on whether those commitments translate into credible actions that materially affect risk and return. Sustainability is no longer treated as a parallel layer of analysis but as a factor embedded directly in cash flow modelling and valuations.

A more grounded era for ESG
Rather than treating ESG as a separate framework, integration will continue to be critical amid disruptive megatrends like climate change and AI, which pose significant risks and opportunities for investors. As we look ahead through 2026, responsible investing trends are converging with broader economic realities. Instead of relying on sweeping principles or exclusion lists, investors are being pushed toward deeper analysis, more active engagement, and an acceptance that the definition of “responsible” will continue to evolve—often in response to forces outside the industry’s control.

You can read more on the Janus Henderson website here.

The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

Companies are confronting the rise in physical risk head-on

Umar Ashfaq, Research Director, MSCI Institute

Companies are approaching the costs of extreme weather and other hazards of a warming world with their eyes wide open.

That’s among findings that come through a survey by our Institute that captures the views of risk, operations and finance officers at 550 listed and unlisted companies in 15 countries in the most physical-risk exposed industries. Among the findings:

Conducted in September and October by the MSCI Institute, the survey examines how companies assess and manage risks from extreme weather events, and is augmented by interviews with company executives and MSCI’s physical risk analysis.

“In the last five years, we have seen a downturn in production in hurricane-exposed regions,” an operations manager with a large, listed health care company in Germany told us. “You can’t move a plant out, so you prepare as best you can and learn from every event.”

The survey arrives as extreme weather events and other physical risks intensify, with average warming since 2023 on track to exceed 1.5°C. In the final three months of 2025 alone, storms worsened by warming cost lives and livelihoods across Southeast Asia, Morocco, the Caribbean (where physical damage in Jamaica alone totaled USD 8.8 billion, about 41% of that country’s GDP) and the U.S. state of Washington.

Hurricanes and other severe storms drove an estimated USD 50 billion in global insured losses (the third-costliest year on record) last year, continuing a multiyear upward trajectory of losses from such storms and highlighting the growing challenge for companies, investors, lenders and insurers of measuring and managing physical risk.

Physical risk management becoming formalized
Companies are increasingly folding physical risk into their overall governance, our survey finds. Three-quarters of companies (76%) surveyed report having a framework for monitoring and managing risks from extreme weather, with adoption highest among companies recently impacted by such events (81%). (To help investors address physical climate risk in practice, our report maps our survey to the Physical Climate Risk Appraisal Methodology developed by the Institutional Investors Group on Climate Change.)

Resilience is becoming part of executive compensation too. A majority of companies (61%) that we surveyed link director and executive pay to physical risk management. Nearly one-fifth (19%) tie resilience to the pay of senior management. Oversight of physical risk is increasingly shared between boards and executives, highlighting that companies view resilience as a strategic priority and a core element of corporate governance and leadership.

A return on resilience investments
Investments in adaptation and resilience pay, our survey suggests. Eighty-two percent of companies surveyed say that investing in operational resilience have delivered positive financial or reputational outcomes, with more than two-thirds citing increased investor interest and more favorable terms for insurance. Companies also report that resilience measures have improved lending conditions, adding to evidence that investment in climate adaptation and resilience strengthens financial stability and investor confidence.

At the same time, business opportunities from servicing resilience are not yet a focus. Just 20% companies surveyed say they currently offer products or services that help their customers mitigate the impacts of extreme weather. Among those that do, resilience-enhancing products typically supplement existing product lines: Infrastructure and construction firms, for example, are embedding extreme-weather risk into project design and planning, while suppliers of building materials are experimenting with weather-resistant materials to meet rising demand.

Expecting a warmer (and costlier) future
Nearly all (99%) companies surveyed say that climate change poses a significant economic threat, with most already feeling its effects. Sixty-three percent report that climate-induced physical risks are currently having a significant impact on the global economy, while 36% expect such effects in the future. Similarly, in a 2024 MSCI Institute survey of global investors, 57% said physical risks are already affecting the global economy currently, while an additional 36% said they anticipate such impacts in the future.

Companies and investors surveyed also express parallel expectations for warming, with the largest share of companies (28%) and investors (34%) alike saying they expect average global temperatures to rise 2–3°C above preindustrial levels this century. Both align broadly with the views of climate scientists, more than three-quarters (77%) of whom say they expect a rise of at least 2.5°C, according to a Guardian newspaper survey in 2024.

The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

3 Myths that Hold Back Sustainable Investing

Sam Adams, CEO & Co-founder, Vert Asset Management

When financial advisors think about sustainable investing, many picture complex frameworks or client conversations filled with hard questions. However, sustainable real estate investing can be simple, practical, and aligned with financial goals. Yet, misconceptions often hold advisors back from exploring this space.

At Vert, we’ve found that addressing these misunderstandings not only builds confidence for advisors but also helps them guide clients toward resilient, future-focused portfolios. Let’s look at three of the most common misconceptions.

Misconception 1: Sustainable buildings cost more and hurt returns
A frequent assumption is that “green” means “expensive,” both to build and to own. But research and real-world examples tell a different story.

• Lower operating costs: Energy-efficient upgrades often cut utility bills significantly. The Empire State Building retrofit reduced energy use by 38% and achieved a payback in just three years.
• Stable cash flows: Tenants increasingly prefer buildings with sustainability features, leading to higher occupancy rates and reduced turnover.
• Stronger risk management: Green-certified buildings may help to reduce exposure to rising energy prices and other long-term risks.

For advisors, this means sustainable real estate isn’t about sacrificing returns for values—it’s about aligning financial performance with long-term stability.

Misconception 2: Sustainability in real estate is only about the “E”
While environmental factors like energy use and emissions are crucial, the “S” (social) and “G” (governance) dimensions matter just as much for investment outcomes.

• Social factors: Walkability, transit access, and indoor air quality all influence tenant satisfaction and demand. Affordable housing or inclusive hiring policies can strengthen community resilience and reduce reputational risk.
• Governance factors: Strong governance practices such as transparent reporting, clear sustainability goals, and engaged boards signal management quality, which investors increasingly value.

When talking to clients, advisors can highlight that sustainable real estate investing takes a holistic view, considering not just energy efficiency but also tenant well-being, community impact, and long-term governance.

Misconception 3: Real estate investors can’t move the needle on sustainability
Because real estate is fragmented across markets and property types, some assume change is impossible. But listed real estate investment trusts (REITs) own roughly 10% of U.S. commercial real estate, and they can scale improvements quickly.

• Portfolio-wide impact: When a REIT finds an upgrade that adds value, they often roll it out across many buildings in their portfolio.
• Efficiency incentives: Operational efficiencies that reduce expenses may contribute to larger dividend distributions.
• Market leadership: Investors allocating to REITs that lead in sustainability are supporting companies setting new standards for resilience and competitiveness.

This isn’t niche stewardship, it’s mainstream, risk-adjusted portfolio construction.

Turning misconceptions into confident conversations

Oftentimes, the challenge for advisors isn’t a lack of interest; it’s uncertainty. By reframing misconceptions into clear talking points, you can help clients see sustainable real estate not as a compromise, but as a practical, profitable, and future-ready investment option.
At Vert, our goal is to make these conversations easier. We provide advisors with tools, resources, and investment solutions that bridge sustainability and real estate in a way that’s grounded in research and simple to explain.

Want to dig deeper? Our paper, Investing for Sustainability: Real Estate, explores the evidence behind sustainable real estate investing in more detail.

Note: Vert Asset Management is a sustainable real estate investment manager dedicated to helping financial advisors build resilient, future-ready portfolios. We connect institutional-quality investments with the long-term goals of clients, focusing on both financial returns and sustainability.

Investors should consult their investment professional prior to making an investment decision.

The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

The Local Investing Mandate: Why the LGPS Local Investing Agenda is a Strategic Imperative for UK Sustainable Finance

Sarah Forster, CEO and Co-founder, The Good Economy

A significant policy evolution is underway within the United Kingdom’s investment landscape – one that promises to reshape the relationship between institutional capital and local economic development. The government’s ‘Fit for the Future’ pension reform programme has established a powerful new mandate for the Local Government Pension Scheme (LGPS). This is not a minor regulatory adjustment, but a structural realignment of one of the world’s largest pension schemes – with nearly £400 billion in assets, projected to reach £1 trillion by 2040 – to address some of the UK’s most persistent economic challenges, including regional inequalities and a chronic domestic investment gap.

For the sustainable finance community, this development moves place-based impact investing from a niche, discretionary activity to a core strategic consideration. At The Good Economy, we have prepared an essential strategic guide for this new terrain with our latest White Paper, “Scaling-Up Local Investing for Place-Based Impact“. Based on extensive consultation with the LGPS sector, we have created a framework for navigating what is arguably the most important domestic impact investing agenda of the decade.

A Shift from Discretionary to Mandatory Action

The ‘Fit for the Future’ reforms represent more than a recommendation; they establish a formal requirement for LGPS Administering Authorities (AAs) to develop explicit local investing strategies. Crucially, this includes setting target allocation ranges and reporting annually on the impact of those investments. As a result, transparency of impact and local benefit is going to be increasingly important for LGPS fund allocators.

This mandate necessitates a clear and consistent framework for identifying and categorising suitable investments. We propose a practical methodology built on the Place-Based Impact Investing (PBII) model. This organises opportunities into six core pillars that are both investable and central to local development: Housing, Regeneration / Real Estate, Infrastructure, Clean Energy, SME Finance and Natural Capital. These pillars provide a common language for investors and local government, defining the tangible, real-economy assets capable of delivering both appropriate risk-adjusted returns for pension members and measurable, positive outcomes for communities.

A New Alignment: Integrating Capital with Place-Based Strategy

The strategic innovation of this agenda lies in its mechanism for alignment. The framework requires LGPS funds and their Pools to collaborate directly with devolved Strategic Authorities (SAs), ensuring that investment strategies are informed by new, bottom-up Local Growth Plans (LGPs).

This creates a systematic pathway connecting top-down institutional capital with democratically defined, place-specific priorities. It ensures that capital allocation is not arbitrary but is instead grounded in a coherent economic strategy. For example, a pension fund can now be expected to consider investments in a local SME finance fund or a clean energy project that has been identified as a priority within that region’s own growth plan, all while fulfilling its fiduciary duty.

The Market Response: An Emerging Need for Specialised Products

This new framework necessitates a sophisticated market response. The operating model outlined by the government requires the AAs and Pools to collaborate on strategy, while Pools will be responsible for implementation and execution. Consequently, these Pools will require a new generation of specialised investment products.
The demand will be for:

• Specialist fund managers with demonstrable regional expertise
• Innovative investment structures, such as regional ‘sleeves’ on national funds
• Blended finance vehicles that can effectively combine public and private capital
• Co-investment opportunities in infrastructure, housing, and regeneration

And, importantly, fund managers will need to understand their local impact and identify the extent to which these products are aligned with local growth plans.

Pioneering examples of these models are already in operation, demonstrating the viability of the approach. For the UK’s sustainable finance sector, this represents a substantial opportunity to design and deliver the institutional-grade products that will be essential for the successful implementation of this agenda.

You can view the case studies here.

The Measurement Challenge: Standardising Place-Based Impact Reporting

A pivotal element of the new mandate is the requirement for impact reporting. The government has, at this stage, refrained from prescribing specific metrics, creating a crucial opportunity for the industry to lead in establishing a robust and credible standard.

This is a challenge the sustainable finance community is uniquely positioned to address. Our White Paper proposes a practical methodology grounded in the internationally recognised Five Dimensions of Impact (what, who, how much, contribution, risk). This approach enables a move beyond generic ESG scoring towards a more nuanced framework for measuring place-based outcomes in private markets. Building on the PBII Reporting Framework, co-created with a number of LGPS and asset managers, it will allow us to demonstrate, with credible data, how LGPS capital contributes to sustainable economic growth through job creation, the development of affordable homes, and progress towards decarbonisation within the communities where scheme members live and work.

Conclusion

The ‘Fit for the Future’ agenda represents a landmark development for UK domestic investment. It establishes a market for institutional-grade products that can deliver both financial and social returns and provides the mechanism to align substantial capital flows with local, sustainable development strategies. This is the moment for the sustainable finance sector to provide the expertise and innovation required to help turn policy into lasting prosperity for communities across the UK.

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

Climate Progress of just another COP out?

Miranda Beacham, Head of UK Responsible Investment, Aegon Asset Management

COP 30 is upon us – being held this week in Belem, Brazil. This is the 10th anniversary of the Paris Agreement and a good time to look back on what has been achieved over the last decade and what needs to come next.

In Paris, back in 2015, there was an admission that swift action was needed to prevent a climate catastrophe. A bold agreement was reached to keep the global temperature to well below 2° above pre-industrial levels and to limit the increase to 1.5° by means of emission reduction targets (known as Nationally Determined Contributions – NDCs), set by individual countries. These commitments included measures for adapting to climate change and providing financial support to developing nations most affected by its impact. Crucially, the agreement required all parties to progressively enhance their emission reduction efforts over time.

When the agreement came into force in November 2016, it was surrounded by positivity with 55 countries ratifying the agreement, accounting for 55% of the global emissions.

What has been achieved since?

The 1.5° goal has become a north star for all climate commitments and therefore those who monitor this data regularly were dismayed to read the Copernicus report in January this year showing that the global temperature rise in 2024 had breached the 1.5° limit. However, scientific convention means that this goal is based a long-term average – i.e. 20 years – with the first “breach year” being the midway point. As a result, it will be a further nine years before the breach can be declared officially.

Global Surface Air Temperature Increase

Source: Copernicus Climate Change Service (C3S) / European Commission by the European Centre for Medium-Range Weather Forecasts (ECMWF).

Given the trend in global temperature, highlighted in the chart above, it does not look like meaningful progress has been made since 2015. It is clear the NDCs are intended to be the implement for driving change – but do they stack up against the 1.5° target?

One of the biggest issues with the NDCs is that President Trump withdrew the US from the Paris Agreement. Latest figures from the EU show that the US is responsible for 11% of global emissions in 2024, so its loss from this process is significant. It could also have knock on effects to the overall ambition of other countries, who may feel it is pointless if the US is not willing to engage in a meaningful way. However, we see China committing to a target, based on absolute volumes of emissions, which is progress, albeit they have not submitted a NDC yet. China accounts for around 30% of global emissions and the targets set fall short of net zero.

In the rest of the world, 65 countries have submitted their 2035 NDCs – which sounds promising until it becomes apparent that there are varying degrees of alignment and 128 countries have failed to submit, with the COP summit only days away.

The reality is that 65% of global emissions are covered by NDCs until June according to the Climate Action Tracker. The question is whether this is enough or if there is a better way to motivate change?

Brazil, the host nation, is keen to take the lead. It has suggested a Globally Determined Contribution – a broader, more inclusive framework that engages cities, indigenous peoples, youth and businesses alongside national governments in determining how climate change can be tackled.

It is also suggesting a Global Ethical Stocktake – with the plan to include dialogues with civil society across all continents. These reflect on the values, behaviours and responsibilities that must shift for UN climate commitments to become a reality and ensure historically excluded voices are not ignored in the negotiations.

Finally, it aims to introduce the Tropical Forest Forever Facility – a fund aimed at mobilising $4 billion annually to reward countries for conserving tropical forests.

These are lofty ambitions, only time will tell if they are successful in achieving them.

Are there any reasons to be cheerful?

There are a few things that have happened in the last 10 years that, in all probability, would not have happened without a global focus on emission reduction.

In 2015 solar and wind energy made up less than 5% of the energy mix – they now represent 15%. Sales of electric vehicles have grown from 540,000 in 2015 to 15.1 million in 2025, fuelled by new battery and charger technology and we are also seeing most developed countries successfully decoupling emissions from economic growth.

What can we expect from COP 30?

The thematic days suggest a broader scope of progress. The opening days will focus on cities, infrastructure and resilience – signalling that the discussion is moving on from mitigation and recognising that we need to adapt to the changing environment.

The debates will move on to discussions around moral obligation and governance of change before heading on to biodiversity. For too long biodiversity and climate change have been discussed as different topics whereas, in reality, they are two sides of the same coin.

As COP30 unfolds in the heart of the Brazilian rainforest, we’ll be watching closely. In future articles, we’ll explore how these ambitions translate into action – and what they mean for investors.

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

When will alternative fuels take off?

Will Farrell, Manager – Engagement and Michael Yamoah, Director – Engagement, Federated Hermes

Biofuels, hydrogen, and sustainable aviation fuel have been mooted as potential low-carbon alternatives to fossil fuels. However, although they increasingly feature in company transition plans and government policies as an attractive opportunity, there are drawbacks that must be addressed.

The International Energy Agency (IEA) expects an expansion of low-carbon fuels (renewable or alternative fuels) from a 1% weight in global final energy consumption in 2022 to almost 5% in 2030 under its Net Zero Emissions by 2050 (NZE) scenario. However, most low-emissions fuels are likely to remain more expensive than their fossil counterparts. For example, SAF is currently twice as expensive as conventional jet fuel. This means that any discussion of the role of low-carbon fuels should focus on credible emissions savings, particularly for those emissions-intensive segments of the economy where the technological and commercial feasibility of electrification remains unlikely or impossible.

Companies are increasingly exploring the potential of low-carbon fuels, seeing them as an attractive ‘plug in’ solution to some of the challenges associated with the energy transition. On the surface, alternative fuels appear to help companies continue with business as usual, sometimes without the need to wait for the build out of costly new supporting infrastructure. For example, biomethane can be injected directly into gas grids. However, a push into low-carbon fuels, even as an interim solution, is not without risk, such as competition for supply, or regulatory reversals.

For investors, there are also unintended consequences to consider. The expansion of biofuel crops, such as palm oil and sugarcane, has been associated with land grabbing, forced displacement, and labour exploitation in developing countries. These human rights violations raise ethical concerns, disrupt supply chains, and create reputational risks for companies. Land use change can also have severe environmental and social consequences, including biodiversity loss, increased greenhouse gas emissions from forest and soil carbon release, and the erosion of food security.

The production of advanced low-carbon fuels, such as green hydrogen, also faces technological constraints. Competition for biomass resources between biofuel production, food, feed, and other bio-based industries can lead to price volatility and supply shortages. The lack of adequate infrastructure for the production, distribution, and use of low-carbon fuels presents another supply constraint.

On the demand side, there is uncertainty surrounding long-term policy support for low-carbon fuels, which can dampen investor confidence and limit demand growth. For example, the EU’s Renewable Energy Directive II (RED II) has set sustainability criteria for biofuels, including minimum greenhouse gas savings thresholds. These thresholds can limit the demand for certain types of biofuels that fail to meet the required emissions reductions. The US EPA and Department of Agriculture are considering policies that focus on increasing the demand and supply of low-carbon fuels.

Demand for alternative fuels

In the aviation sector, the use of sustainable aviation fuel (SAF) in the near-term is expected to drive emissions reduction, as a fully commercially-viable electrification option is not yet well developed. In the near-term, SAF penetration is supported by targeted regulation, including the ReFuelEU’s requirement – from 2025 – that EU airports’ aviation fuel supply reaches 2% SAF, increasing to 70% by 2050. Similarly, the UK’s SAF Mandate also requires 2% of total UK jet fuel demand in 2025 to comprise SAF, increasing to 22% in 2040. However, in a business-as-usual demand scenario, 50% biofuel penetration by 2050 would require almost 20% of global cropland to be dedicated to aviation biofuels. Land use, food security, and price concerns associated with such a significant displacement of agricultural markets strengthen the economic case for exploring alternative technologies over the longer term. Gas distribution infrastructure also represents a hard-to-abate segment, and the blending of low-carbon gases, such as biomethane, has been mooted as an intermediate solution. We have engaged Engie, the French utility, on the viability of its plans for its biomethane sales to reach 30TWh by 2030. This has included challenging business leaders over the risks of relying on scarce waste feedstocks at a meeting at its headquarters in 2024. We continue to engage on the delivery of this strategy and its consistency with the company’s longer-term vision for a hydrogen grid.

In some easier-to-abate sectors, such as power generation, low-carbon fuels can support a lowest-cost energy transition. The co-firing of biomass in coal-fired plants would support near-term emissions reduction in countries where the existing coal fleet is unlikely to be phased out in the near-term. In India, Adani Power – which we have engaged on the transition-related financial risks faced by its fleet of coal-fired power plants – is piloting green ammonia and biomass co-firing. It expects these solutions to reduce coal use by up to 30% over time. However, we do not expect co-firing to be a long-term solution given supply constraints and the cost competitiveness of renewable solutions.

Green hydrogen may also play a role in connecting locations with abundant renewables to centres of high energy demand. This could improve the efficiency and reliability of a net-zero energy system without the significant transmission losses. In the UK, National Gas’s Project Union is pioneering this approach to build a hydrogen ‘backbone’ for the country. It is proposing to repurpose 2,000km of gas transmission pipelines to carry hydrogen to connect large-scale offshore wind assets in Scotland to industrial clusters in England.

Implications for engagement

There are several economic and social consequences associated with low-carbon fuels that need to be considered and addressed. These include:

• Justification of why a low-carbon fuel is a significant and competitive emissions reduction lever for the particular intended application, timeframe, and systemic context.
• Feedstock risk management, including:
- • Minimising any negative impacts on biodiversity and water
- • Upholding high human rights standards, including respecting indigenous group and community engagement, and fair labour practices throughout the company’s supply chain
- • Addressing potential food security issues, particularly when sourcing food crops for biofuel production.

• Proper board oversight of the strategy on low-carbon fuels and how companies are evolving financial and strategic risk management systems to identify and manage such risks, including when purchases are a regulatory requirement, plus the effectiveness of supplier selection and monitoring processes.
• Addressing technological and infrastructure limitations associated with some low-carbon fuels (where these are reasonably expected to be competitive for the intended application), including through commercial partnerships and public policy.

EOS generally adopts a technology-agnostic approach but routinely inspects transition plans for their robustness and credibility. Where low-carbon fuels are referenced, EOS probes the assumptions being made. We encourage companies to develop capabilities to deliver decision-based climate scenario analysis, and to address their alignment with a transition scenario, capturing system effects. This improves investors’ understanding and enables them to play a role in influencing the policy environment. EOS also encourages companies to outline their advocacy efforts for relevant policies supporting low-carbon fuel adoption.

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

No more excuses for inaction on biodiversity

Karel Nierop, Head of Products and Solutions, Triodos Investment Management

The loss of animals, plants and our natural ecosystem poses a threat to our economy and humanity. Institutional investors are increasingly considering biodiversity loss to be a material risk for their investments. However, capital allocation is lagging, despite the availability of good and profitable solutions that make sense.

Many pension funds are still hesitant to fully embrace biodiversity as an investment theme. The numerous definitions and the high level of abstraction may contribute to this reluctance. But it can be simple: biodiversity ensures that nature functions properly and more than 50% of the global economy depends on this.

Biodiversity loss should be regarded equally as seriously as climate change for that reason alone. Like climate change, biodiversity loss is a systemic risk. Biodiversity loss destroys precisely what we depend on economically. Once you recognise that, the rest follows logically: investment policy, selection criteria and accountability to participants.

No more excuses for inaction

Pension funds are mainly struggling with the practical implementation of a biodiversity strategy. My advice: don’t wait too long and recognise biodiversity loss as a material risk at least.

A common objection is that it is difficult to measure the impact of biodiversity investments and therefore difficult to account for them to stakeholders and participants. But that should not be an excuse for inaction.

There are plenty of starting points for creating a framework. The main causes of biodiversity loss are now clear: climate change, pollution, habitat loss and overexploitation. And measurable indicators already exist for these, such as soil health, species diversity and land use.

Also, new technology is making it increasingly easier to measure these indicators. Satellite data and drones can be used to map changes in land use and soil quality over time. Echo technology can be used to measure a forest’s species diversity based on sound. AI models are improving analysis, pattern recognition and predictions.

A biodiversity strategy limits risks

There are plenty of opportunities to take the first steps, for example in regenerative agriculture or forestry. They have stable cash flows and a low correlation with financial markets. That dynamic does not change because you start farming in a more nature-inclusive way or manage forests differently.

In fact, a biodiversity strategy can actually reduce risks. Regenerative agriculture improves soil quality, which makes an area less vulnerable to flooding or drought. Healthy soils, for example, retain more water. These are all factors that not only protect and improve biodiversity, but ultimately also have an impact on financial returns.

There is a serious danger in sticking to conventional models. If you continue to invest in unsustainable agriculture or forestry, you run the risk of these becoming the ‘stranded assets’ of the future. Models that deplete the soil are financially unsustainable in the long term. Research and practice show that nature-inclusive models are more sustainable and financially profitable.

In addition, we are seeing the emergence of ‘payments for ecosystem services’ (PES): financial compensation for providing or maintaining ecosystem services, such as carbon sequestration, water purification or biodiversity restoration. The best-known example of this are carbon credits, but PES is broader than that. For example, a sustainable forest manager can receive compensation from a drinking water company for improving the quality and availability of water downstream. In July 2025, the EU published a Nature Credits Roadmap to boost private investment in nature-positive actions. This will enable nature conservation to provide an additional source of income, underpinned by measurable impact and reliable contractual agreements.

A good start…

Pension funds should look beyond a separate ‘biodiversity portfolio’. Biodiversity is not a separate asset class. It is a systemic risk that should be taken into account in every investment category.

For listed equities and bonds, the focus is on limiting negative impact. Companies that damage biodiversity also pose a financial risk.

For those who want to go further than exclusion, there are concrete solutions with a positive impact. We are talking about financing sustainable land use, water management and sustainable food production; economic activities that we depend on every day. Many of these solutions can be found in private markets.

Bundling and scaling up small projects

You don’t have to reinvent the wheel. There are specialist fund managers with decades of experience in this field. We have been building sustainable agricultural supply chains since the 1990s.

An example: Triodos Investment Management is currently developing a real assets strategy with a Canadian pension fund, focusing on regenerative agriculture and sustainable forest management in Europe and North America.

By working with local partners who really understand sustainability and bundling smaller investments into a fund structure, you can achieve a positive biodiversity impact on a larger scale, making it interesting for parties that want to allocate larger sums.

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

Building resilience through sustainable food systems: why data and disclosures are vital for managing systemic risks

Kate Elliot, Head of Ethical, Sustainable and Impact Research, Greenbank Investments (part of the Rathbones Group)

In an era marked by climate instability, rising health costs, and growing inequality, the food system sits at the intersection of some of the most pressing global challenges. From environmental degradation to diet-related diseases, the way we produce, distribute, and consume food has profound implications, not just for public health and planetary wellbeing, but also for economic stability and investor returns.

The publication in July 2021 of the National Food Strategy, a ‘farm to fork’ review of England’s food system, provided the perfect catalyst for Greenbank to build on our existing partnerships and engagement work with the Food Foundation to establish The Investor Coalition on Food Policy. Now supported by over 30 investors, the coalition has been instrumental in pushing for policy reform that aligns public health, environmental sustainability, and long-term financial resilience.

The case for investor engagement in food policy

Food systems are deeply intertwined with global health, climate, and economic outcomes. Poor nutrition contributes to one in five deaths globally, while obesity costs the UK an estimated £58 billion annually. At the same time, the food system is linked to:
• 70% of freshwater withdrawals
• 80% of global deforestation
• 26% of greenhouse gas emissions

These impacts translate into tangible financial risks for food businesses via supply chain disruptions, increased compliance costs, and risk of litigation. It is these impacts, and the broader systemic risks they contribute to, that have led investors to increasingly recognise that a failure to transition to healthier, more sustainable food systems threatens long-term value creation. The investor case for engagement on food systems is explored in more detail in our recent report.

The role of the Investor Coalition

The Coalition’s work has been guided by two core principles:
1. Transparency: Investors need consistent, comparable data to understand how companies are contributing to or mitigating systemic risks.
2. Policy engagement: Market forces alone cannot solve structural issues like poor nutrition or environmental degradation. Policy environments and appropriate regulation are essential to create the right incentives for sustainable action.

The importance of mandatory reporting

One of the Coalition’s core aims is to improve the quality and consistency of sustainability data in the food sector. To date, health-related reporting in the food sector has been voluntary and inconsistent. Companies use different metrics and definitions, making it difficult for investors to compare performance across the sector, effectively assess risks and opportunities and then hold businesses accountable via our engagement activities.

The announcement earlier this year that the UK Government had committed to new reporting requirements for all large food sector companies was therefore a positive step forward. This world-first policy, announced in its Fit for the Future: 10 Year Health Plan for England, is a major win for transparency and public health.

Under the new plan, large food companies will be required to report healthy food sales using standardised metrics, enabling the government to set targets to improve the healthiness of food sales across all communities. These targets will be mandatory for companies, but they will have the flexibility to decide how to meet them – whether through reformulation or expanding their range of healthy products. The approach balances accountability with innovation, encouraging companies to invest in healthier offerings without prescribing a one-size-fits-all solution.

More broadly, the push for mandatory reporting comes at a time when some companies are scaling back what they say about sustainability to avoid scrutiny or backlash. And planned or enacted rollbacks in regulation and reporting requirements across broader sustainability issues threaten to undermine progress on climate and health.

By making reporting consistent and universal, it creates a level playing field for companies and enables investors to make informed decisions and direct capital toward companies that are genuinely contributing to public health and sustainability.

In this context, the UK’s commitment to food sector transparency is a powerful signal. It reinforces the importance of consistent, comparable data and shows that government and investors can work together to drive systemic change.

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

Modern Slavery: The Hidden Risk Lurking in Investment Portfolios

Maria Nazarova-Doyle, Global Head of Sustainable Investment, IFM Investors

Modern slavery is one of the most urgent human rights issues of our time, yet it remains alarmingly under-addressed in the context of global finance. In 2021, an estimated 50 million people were trapped in modern slavery – an increase from previous years that reflects the growing scope and complexity of this issue. Despite worldwide commitments to eliminate forced labour by 2030, it continues to proliferate, embedded in supply chains, industries and, perhaps most alarmingly, in the investment portfolios of institutional investors.

This is not just a moral dilemma; modern slavery represents a real and tangible financial risk. When forced labour exists in a company’s supply chain, the consequences can be severe. These include disruptions to business operations, regulatory penalties, reputational damage, and exposure to legal liabilities. Moreover, modern slavery often signals deeper issues with corporate governance, weak risk managements, and a lack of transparency – each of which can significantly affect asset performance and portfolio stability. Unfortunately, detecting these risks is no easy task. Forced labour often operates in the shadows – within informal or offshore economies, or through subcontracted operations – where visibility is low and oversight is fragmented.

The Regulatory Landscape: Progress, But Still Gaps

In recent years, a series of regulatory developments have started to address modern slavery, marking progress on this long-standing issue. The European Union is moving towards a ban on imports linked to forced labour, and a UK Parliamentary Committee has urged the UK government to take similar action. Australia is also taking steps to introduce penalties for companies that fail to meet modern slavery reporting requirements. Currently, over 70% of businesses in major global markets are subject to some form of regulation on modern slavery or human rights.

While these regulatory efforts are encouraging, they are not without their shortcomings. A significant number of regulations focus on disclosure rather than tangible action. The rise in reporting obligations has led to an increase in the volume of data, but often, the quality remains lacking. Corporate reports typically rely on broad, generic language, with little evidence of concrete steps being taken to address modern slavery. Moreover, smaller businesses are frequently exempt from these regulations even though forced labour is often most prevalent at the lower tiers of supply chains, where oversight is weakest.

Data availability continues to be a barrier. Investors often rely on company self-reports or high-level risk assessments, which can fail to capture the true extent of modern slavery risks. This reliance on incomplete or inaccurate data means that even portfolios considered low-risk based on geography or sector may still harbour hidden risks that could lead to significant financial fallouts.

The Need for a Collective Investor Response

Some asset owners have begun to act. Australian superannuation funds are increasingly assessing asset managers’ capabilities to identify and mitigate modern slavery risks. UK-based pension schemes such as Nest are embedding human rights into their investment strategies.

But individual efforts are not enough. Modern slavery is a systemic issue that demands a systemic response. It requires collaboration between asset owners, asset managers, companies, regulators, governments, civil society, and affected communities. Investors need to go beyond basic compliance and integrate modern slavery considerations across the investment process. They must enhance their data sources, scrutinise supply chains more deeply, and use governance tools such as voting and engagement to drive meaningful change.

Addressing modern slavery in investment portfolios is no longer optional. It is essential for risk management, for fiduciary duty, and for the legitimacy of sustainable finance. Identifying and eliminating modern slavery must become a strategic priority.

IFM Investors recently published a white paper “Addressing Modern Slavery in Investment Portfolios”.

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

The importance of stewardship when selecting companies

Clare Wood, Portfolio Specialist, Stewart Investors

It is often said that investing is simple, but not easy. And it is certainly not easy for investors to have the inclination, culture, or structure allowing them to make investment decisions with a timeframe longer than the next twelve months. But in a world which is increasingly short-term focused, one of the most enduring competitive advantages a company can have is a long-term business builder at the top.

We believe the quality of management has the greatest bearing on a company’s long-term success or failure. But people who take capital allocation and risk-taking decisions like long-term owners are all too rare in global equity markets. We often find them as first-generation entrepreneurs, families, foundations or organisations with exceptional cultures. In a world of corporate blow-ups, short term management enrichment, and mistreatment of minority shareholders, it’s important to know who you are handing your money to.

For example, cyber-security company Fortinet was founded and is still run today by two brothers, Ken and Michael Xie. They have a long history of building successful cyber security businesses based on their engineering education and training. The Xie brothers have built Fortinet by driving product expansion through technical merit, while the industry chases the short-term gain of acquisition. It’s an approach that has enabled them to offer a single platform approach to cyber security. This provides customers with the simplicity that their competitors can’t achieve, being held back by a legacy of purchased technology and the complexity that comes with it.

By developing their own hardware and investing in chip power development, they have produced a chip that delivers better performance at a lower cost. The impact of this is twofold; other companies struggle to compete with Fortinet pricing, and customers with lower budgets can still access best of breed solutions, expanding their total addressable market.

Brazilian industrial company WEG started life as an electric motor company in 1961, founded by the three people whose initials became its name. Over the last 65 years, it has grown into a global company producing electrical products for end markets across industrial automation, power generation and distribution, and large electric vehicles. While it is no longer run by the families of the founders, they remain majority shareholders, enabling them to take decisions in the long-term interest of the company.

A key decision taken early in WEG’s history was to remain vertically integrated. They make every element of every product themselves and even source packaging materials from their own forest. This is in sharp contrast to the drive for efficiency through outsourcing that has been business orthodoxy over past decades. At times it has slowed their rate of capacity expansion. But it has provided them with a critical advantage: they can take market share when competitors are paralysed by supply chain snarls. For example, they have been able to supply transformers to data centres even as competitors face 4-year delays in building additional capacity.

Conversely, we have sold investments when the management acted against the best interests of all stakeholders. Our initial decision to invest in a world-leading healthcare company was inspired by a CEO who simplified a complex conglomerate into a focused healthcare business. However, we lost confidence when they responded poorly to quality issues in one of their products, leading to a subsequent recall. The way people respond to a crisis provides insights into the quality of stewardship. In this case, we felt that the short-term needs of shareholders were prioritised over the long-term health of the business. We sold our shares in the company after engaging with management over our concerns.

And there are the countless investments that we never made because the management was not of sufficient quality. This often happens with companies that could be considered high-quality businesses in most other respects and are often found in sustainable and ESG funds. For example, Bloomberg estimated that around 770 ESG funds worldwide were holding shares of a green energy company when its chairman was accused by US prosecutors of suspected bribery.

Like any qualitative judgement, assessing the quality of the people in charge of companies is more art than science and we have made mistakes that we have learned from. We have also learned that one of the surest ways to lose client money is by handing it to people who are not primarily focused on the long-term performance of their company and minority shareholders who are along for the ride. And we have been fortunate enough to invest alongside some great business builders where incentives, decisions and timeframes have led to fantastic growth over the long term.

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

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Building resilience through sustainable food systems: why data and disclosures are vital for managing systemic risks

Kate Elliot, Head of Ethical, Sustainable and Impact Research, Greenbank Investments (part of the Rathbones Group)

Modern Slavery: The Hidden Risk Lurking in Investment Portfolios

Maria Nazarova-Doyle, Global Head of Sustainable Investment, IFM Investors

The importance of stewardship when selecting companies

Clare Wood, Portfolio Specialist, Stewart Investors

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