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.

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Deforestation – What companies don’t tell you is hiding in plain sight

Henry Morgan, Co-founder, Frontierra

The data to meaningfully assess deforestation risk in your portfolio already exists. The question is whether you’re using it.

There is a quiet assumption embedded in how most institutional investors approach nature-related risk. It goes something like this: assess what companies disclose, screen their policies, consult sector-level data tools, and if a company scores well enough, proceed. The assumption is that disclosure is a reasonable proxy for reality.

It isn’t.

This is not a critique of sustainability data providers, many of whom do excellent work contextualising sector-level exposure. It is a structural observation about the limits of any framework anchored in what companies choose to report. And as the regulatory environment around nature risk accelerates through TNFD, the EU Deforestation Regulation, and growing shareholder pressure, that structural gap is becoming a material one.

The question fiduciary duty is increasingly demanding is not “does this company have a deforestation policy?” It is: is this specific company, at these specific locations, linked to actual deforestation on the ground, right now? Those are very different questions, and only one can be answered by reading a sustainability report.

The capability already exists
What is often underappreciated is that the tools to answer the second question are already here, and the underlying data is largely open-source.

Satellite-based Earth Observation now offers continuous, independently verifiable coverage of forest loss and land use change across the globe. Annual forest cover data can be interrogated at the site level, layered with land use classifications, filtered for non-deforestation signals, and cross-referenced with protected area boundaries, peatland maps, and Indigenous territory datasets. This is not experimental technology. It is operational.

The limiting factor has never really been the satellite data. It has been the ability to translate that data into decision-relevant formats that portfolio managers actually need: standardised, comparable, and actionable at portfolio level.

A recent project conducted by geospatial data and analytics firm Frontierra, in partnership with Norwegian asset manager Storebrand, illustrates what becomes visible when this approach is applied systematically. Working from nothing more than a list of company names, a geospatial database was compiled detailing over 3,500 operational sites and sourcing locations across 35 countries, spanning paper and pulp, mining, and palm oil. Government concession databases, RSPO mill lists, technical reports, annual report disclosures: the data existed. It required systematic effort to compile and verify, but it was there.

The satellite analysis that followed revealed material deforestation exposure that policy-level screening had not surfaced. Across the paper and pulp companies assessed, the majority received a Critical rating — with total forest loss running into the hundreds of thousands of hectares. Mining sites revealed high rates of natural vegetation conversion that a tree cover loss metric alone would have missed. Palm oil supply chains showed active, ongoing deforestation as recently as 2025, at roughly half of all sourcing locations assessed.

None of this required company cooperation. It required methodology.

Non-disclosure is not a neutral finding
One of the more significant outputs of this kind of analysis is what it reveals about the companies where location data cannot be found. Of 22 companies assessed, location data could be sourced for 14. For the remaining eight, including consumer goods businesses with significant palm oil exposure, no traceability information was publicly available.

This should not be read as an absence of risk. It should be read as an amplification of it.

When external verification is impossible, deforestation exposure can be neither confirmed nor ruled out. For investors operating under TNFD-aligned frameworks or zero-deforestation commitments, that uncertainty is not a neutral gap in the data. It is itself a risk signal, and arguably a more serious one than disclosed exposure, which can at least be measured, monitored, and engaged with.

The implication for investment practice is clear: non-disclosure of traceability information should carry a risk weighting. Institutions should seek to incorporate traceability requirements into stewardship expectations and, where possible, into investment criteria.

The direction of travel
UKSIF’s mission to advance sustainable finance depends on the quality of the information available to the market. Better data enables better engagement. Better engagement drives better outcomes. That chain only works if investors are willing to look beyond the report on the page to the ground beneath the company’s feet.

Location-specific, satellite-verified analysis is not a niche capability reserved for specialists. It is scalable, standardised, and increasingly automated. Geospatial analytics can be extended across portfolios of any size, applied across sectors, and is translatable into the kind of decision-useful output such as clear exposure ratings, visual evidence and engagement triggers, which investment professionals can act on.

The question for institutional investors, investment managers, and portfolio managers is not whether geospatial intelligence will become part of credible nature risk assessment. It is whether their processes are ready for it when it does.

Satellite imagery doesn’t lie. Public reports sometimes do. The gap between the two is where material risk lives.

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.

Corporate climate polluters liabilities for extreme weather event damages exposed

Dr Quintin Rayer, Head of Research & Ethical Investing, P1 Investment Services

New conceptual research provides an accessible pricing framework linking corporate values of high-emitting companies to the huge damages caused by extreme weather events.

Scientists have long known that emissions of carbon dioxide accumulate in the atmosphere, and together with other greenhouse gases, increase the likelihood of incredibly damaging extreme weather events. These include those leading to wildfires, life-threatening heatwaves, and the most intense hurricanes. Event damages can amount to hundreds of billions of US$ or more, with full damages from consequences being multiples of direct costs.

Our new conceptual research study, applies the emerging tool of emissions-based attribution from climate science and proposes an elegant and tractable framework linking individual company emissions to their extreme weather-related liabilities. Scientific climate attribution causally links emissions to extreme weather damages through three steps.

Firstly, firms’ activities emit greenhouse gases; that secondly, cause anthropogenic global warming; which thirdly, is linked to extreme weather by probabilistic attribution statements. Liabilities can therefore be attributed in a manner mirroring financial options.

The framework we propose is designed to be practical, combining academic rigor with commercial investment insights. A key strength is that it is accessible and straightforward to use by financial analysts, accounting and risk management professionals, policymakers, insurers and actuaries, for assessing climate risk exposures.

Climate scientists have long understood that carbon dioxide released to the atmosphere by extracting and burning underground carbon reserves takes exceedingly long times to return underground; geological timescales, over 10,000 years. Thus, such emissions effectively accumulate in the atmosphere and permanently change climate and weather patterns to increase probabilities of extreme weather events. This permanency of emissions’ atmospheric impacts means that firms’ climate polluting activities generate perpetual climate liabilities.

Beyond carbon dioxide accumulation, continuing emissions point to ongoing increases in extreme weather event frequencies, causing growing perpetual climate liabilities. For many extreme weather events, annual event probabilities increase linearly with increasing temperature, although past research has also suggested faster increases are possible. With global warming temperatures inexorably increasing ever higher from ongoing emissions, damages from extreme weather events should be treated as perpetual and with increasing frequency.

Our study estimates firms’ climate liabilities using a Gordon’s growth variant model. Under the innovative approach we develop, high-emitting firms’ exposures appear considerable, potentially 3% of market capitalisation from single events, implying similar reductions in stock value. We use scientific results to estimate extreme-weather-event liability growth rates. Our examples based on recent extreme weather events indicate liabilities growing at between 1.7% to 3.2% annually.

Comparing long-term discount rates with estimated climate liability growth rates shows the significant difficulties of hoping to outpace climate damages through economic growth which is accompanied by emissions. This insight is key for policymakers and our research includes allowance for societal responses to climate-damaging emissions.

Our novel and accessible approach to assessing climate liability costs can help stakeholders quantitatively estimate the corporate climate liabilities associated with emissions for risk management purposes. Governments can assess high emitting companies’ carbon cost implications when balancing against societal costs during policy design and considering assigning responsibility (and cost) to emitters. Accountants and analysts can explore company value sensitivities to extreme weather phenomena, emissions’ estimates and evolving societal positions on climate responsibility, including litigation. This will allow markets and decision-makers to better respond to corporate emissions’ regulatory or financial consequences.

Increasing transparency on emissions-related damages, may reduce societal acceptance of firms’ externalising emissions, perhaps through litigation, regulation or other measures. Consequently, following damaging extreme weather events, high-emitting firms’ valuations would better adjust to reflect their operations’ climate damages, stimulating transition to cleaner activities.

This research is published in the Journal of Applied Accounting Research:
Rayer QG, Andrikopoulos P (2026), “Extreme weather attribution: re-assessing company values using carbon emissions”. Journal of Applied Accounting Research, Vol. 27 No. 6 pp. 22–46, doi: https://doi.org/10.1108/JAAR-08-2024-0302

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 UK’s £240bn Decommissioning Challenge Is the Investment Opportunity Hiding in Plain Sight

Julien Halfon, Head of Pension Solutions, BNP Paribas Asset Management

By any measure, the UK is standing on the edge of one of the largest industrial transitions in its history. The country’s legacy energy, manufacturing and nuclear estates are reaching the end of their operational lives. What they leave behind is not just rusting steel and contaminated land, but, according to BNP Paribas Asset Management’s new Policy White Paper (Mobilising UK Pension and Insurance Capital for Closure, Decommissioning, Remediation & Redevelopment), a staggering £240 billion in closure, decommissioning and environmental remediation liabilities.

For decades, these obligations have been treated as an inconvenient footnote: a cost to be pushed into the future, a problem for the next government, the next regulator, the next generation. But the era of deferral is over. Ageing assets, tightening climate policy, and accelerating transition pathways mean these liabilities are no longer distant abstractions. They are crystallising now — and they are growing.

Yet within this challenge lies a generational opportunity. If the UK chooses to see it.

The blind spot investors can no longer ignore
Asset Retirement Obligations (AROs) — the legal duty to dismantle and remediate industrial assets — behave like long dated debt. They accrete over time. They move forward when policy tightens. And when recognised prematurely, they can devastate corporate balance sheets.

Credit rating agencies are beginning to take notice. Fitch’s recent commentary on Canadian Natural Resources, explicitly referencing its CAD 8.6bn ARO liability, is a sign of things to come. The Institute for Energy Economics & Financial Analysis has warned that decommissioning risk remains systematically under priced in European oil and gas credit markets. And UK regulators and accounting standards specialists are increasingly clear: climate related financial risks include transition driven balance sheet impacts — and AROs sit squarely in that definition.

A national liability and a national opportunity
The numbers are sobering. The Nuclear Decommissioning Authority estimates the undiscounted cost of cleaning up the UK’s civil nuclear estate at £216 billion, with Sellafield alone accounting for more than 50%. The North Sea Transition Authority projects £44 billion in remaining offshore oil and gas decommissioning costs. Coal mine remediation, abandoned industrial sites, and contaminated land add billions more.

But these liabilities sit on land that is often strategically located: in freeports, investment zones, and future green industrial clusters. They are not just environmental burdens — they are redevelopment opportunities waiting to be unlocked. The question is: who will finance them?

UK institutional investors are the missing piece
The UK’s pension and insurance sectors collectively manage more than £3.2 trillion in assets. They are long term, inflation sensitive, liability driven investors — precisely the profile that matches the cash flow characteristics of decommissioning and redevelopment.

Decommissioning liabilities unfold over 30, 50, even 100 years. They are inflation linked. They are domestic. They are policy aligned. And they can be structured into stable, revenue backed investment vehicles that fit neatly into the portfolios of DB schemes, DC defaults, and annuity providers.

In other words: this is productive finance in its purest form.

The tools already exist but need to be scaled
The UK does not need to invent new financial engineering. It needs to scale what already works.

• Decommissioning Reserve Funds (DRFs), ring fenced, prefunded vehicles that invest contributions until liabilities fall due, are standard in nuclear and increasingly common in oil and gas.
• Climate Transition Bonds can prefund closure while linking repayment to revenues from repurposed assets — from solar farms to logistics hubs to small modular reactors.
• Redevelopment Trusts can pool public and private capital to transform contaminated land into productive infrastructure, accelerating regional regeneration.

Early pilots in nuclear, North Sea oil and gas, and coal to renewables conversions show that these models work. What’s missing is scale, policy clarity and a coherent pipeline.

A call to action for policymakers
If the UK wants to mobilise billions of pounds of private capital into decommissioning and redevelopment, it must do three things:

Legislate for DRFs across nuclear, oil and gas, and heavy industry — with clear governance, ring fencing, and investment mandates aligned with productive finance reforms.
Create a national framework for Transition Bonds and Redevelopment Trusts, enabling institutional investors to participate in structured, revenue backed vehicles.
Provide targeted co investment guarantees to crowd in private capital and de risk early projects, especially in regions undergoing industrial transition.

These are not subsidies. They are catalysts, mechanisms that unlock private capital for public good outcomes.

The UK could lead the world
The UK has a once in a generation opportunity to turn a £240bn liability into a national investment engine. To transform stranded assets into productive ones. To align pension capital with climate goals, regional regeneration and long term economic resilience.

Decommissioning is not the end of the industrial lifecycle it is the bridge to the next one. And if the UK gets this right it will clean up its past and finance its future.

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.

Why investors are urging food companies to match animal welfare ambitions with action

Nicky Amos, Managing Director, Chronos Sustainability

Despite significant growth in animal agriculture – global meat consumption per capita has doubled since 1961 – investors remain concerned that not enough is being done to manage a risk at the heart of the industry’s future success. The need for high standards of farm animal welfare in our global supply chain is an issue that is not only about the wellbeing of animals, but essential to managing food security, human and environmental health risks.

The financial risks that stem from poor management of animal welfare include both reputational and regulatory issues, environmental pollution from animal waste and the risk of disease outbreaks – affecting both livestock and humans.

For example, almost 1.8 million farmed birds were culled in the UK in three months last year due to avian flu – a risk that can be exacerbated by intensive farming systems which typically feature high stocking densities and overcrowding. The livestock industry is also associated with the overuse of antibiotics which contributes to antimicrobial resistance – something the World Health Organization has identified as one of the top ten global public health threats facing humanity.

Encouraging food companies to manage these risks is one of the reasons investors tuned into the launch of the latest BBFAW (Business Benchmark on Farm Animal Welfare) report this week, hosted by BNP Paribas Asset Management – who are part of a $3 trillion backed investor coalition to support higher standards of farmer animal welfare. BBFAW ranks 149 leading food companies on animal welfare performance.

Results spotlights both progress and concerns

The report highlighted that the food sector was making uneven progress on animal welfare issues.

There are some signs of encouragement – including a decreasing reliance on cages across the world. There is, for example, a 4% year-on-year rise in the proportion of companies reporting progress toward achieving cage-free eggs, and in companies with targets to phase out farrowing crates for sows (small metal enclosures that prevent pregnant and nursing sows from turning around).

We’re also seeing a combination of regulation and technology addressing endemic issues such as the culling of day-old male chicks. Legislative changes in Germany, France, Italy, Austria and Luxembourg, and the European Union’s review of its animal welfare legislation, combined with technological innovations such as in-ovo sexing, which can detect the sex of a chick before hatching, are enabling companies to move toward eliminating this inhumane practice.

Ambition-action gap

These advances however are counter-balanced by the slow pace of implementation for several animal welfare commitments.

There are 96 companies that have set a target for laying hens in their supply chain to be cage-free, but BBFAW analysis shows that only 33 of these targets are universal in scope, covering all products and geographies, and only 17 companies have succeeded in eliminating cages from 100% of their supply chain.

There’s a similar story with the Better Chicken Commitment – an NGO-developed set of welfare requirements for broiler chickens. Of the 39 companies signed up to the Better Chicken Commitment, only 4 report that a substantial portion of their supply chain meets its three core requirements of lower stocking densities, slower-growing breeds and humane slaughter.

This year’s benchmark results show that while many companies have set a course toward a more compassionate, resilient and future-fit food system, progress remains too slow. This lack of delivery increases exposure to regulatory, reputational and financial risk, and may weaken investor confidence, alongside wider implications for consumers and for farmed animals.

For details on how to become a signatory of the BBFAW Global Investor Statement on Farm Animal Welfare or to join the BBFAW Global Investor Collaboration on Farm Animal Welfare, contact secretariat@bbfaw.com

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.

Future-fit food: Why finding new sources of protein matters for investors

Jo Raven, Director of Thematic Research & Corporate Innovation, FAIRR Initiative

The resilience of our food systems has never been more crucial. Shifting towards a broader array of protein sources is not only a strategic imperative for businesses and policymakers, but also a critical step in ensuring food security and planetary wellbeing for generations to come.

In finance, diversification is the cornerstone of risk management, spreading investments to minimise exposure to the failure of any single asset. A similar logic applies for protein diversification – not putting your eggs in one basket – reducing dependence within the global food system on a narrow set of animal-based proteins by expanding portfolios to include plant-based, fermented, cultivated and hybrid options (FAIRR, 2024)

Companies heavily exposed to animal protein supply chains face material climate, nature and public health risks, with climate-related shocks alone projected to drive up to 1.3 trillion US dollars in losses for major livestock producers by 2030 if business continues as usual, according to the recently published Protein Diversification Engagement (Phase 2) Report (FAIRR, 2025). Diversifying protein sources can therefore increase supply chain resilience, reduce the likelihood of disruption and support a more stable, forward-looking food system (FAIRR, 2025).

At the same time, high consumption of red and processed meat is linked to higher risks of bowel cancer and cardiovascular disease. Yet in many high income countries, men in particular still exceed these levels (FAIRR, 2024).

By deliberately shifting towards a more diverse mix of protein sources, from plants to novel food technologies such as cellular agriculture, investors can help build healthier diets, cut emissions and restore nature – in short, a food system that works better for both people and planet (FAIRR, 2025).

The new reality
The story of protein diversification over the past decade is one of rapid experimentation, painful lessons and a return to fundamentals. When FAIRR first started engaging companies on this theme ten years ago, protein was barely on the sustainability agenda. Then came the rise of meat-analogue brands – foods that are designed to mimic the taste and texture of meat – followed by a sharp reset as some products failed to meet taste and price expectations.

Today, the market is shifting towards simpler, minimally processed plant-based wholefoods – beans, lentils, chickpeas, nuts and seeds – as well as established categories like plant-based dairy, where consumers more easily recognise the nutritional and culinary value (FAIRR, 2025).

At the same time, demand for protein dense foods keeps rising, driven by fitness culture and the spread of GLP 1 drugs for weight loss, which are reshaping food choices and reinforcing the premium placed on high-quality protein (AAEA, 2026).

Yet corporate and investor action has not kept pace with either the risks or the opportunities. In FAIRR’s engagement with 20 major retailers and brand manufacturers, around 70% now flag health and wellness as a material issue for their business, but only about 30% have nutrition expertise at board level, and a quarter still lack any formal health strategy (FAIRR, 2025).

Many retailers continue to prioritise launching processed meat and dairy alternatives even as they acknowledge these products are less popular (AFN, 2025).

What’s in the way
Early generation meat analogues struggled on several fronts: many consumers were underwhelmed by taste and texture; products were often priced at a premium that became untenable during the cost of living crisis; and marketing frequently failed to connect the dots between these products and clear health or sustainability benefits (AFN, 2025).

Thankfully, companies are still innovating: FAIRR’s engagement with leading retailers and manufacturers found that roughly 90% launched at least one new alternative protein product in the past year, and there is growing recognition that diversification is necessary if we are to meet climate and health goals (FAIRR, 2025).

The next chapter
We are at an important juncture for the future of food. Diets are fast becoming a core indicator of health and sustainability: they cut across climate, nature, water and public health, and they are increasingly being scrutinised by regulators, investors and citizens alike (EAT Forum).

Instead of treating plant based innovation as synonymous with ultra processed meat analogues, we should see leading companies putting plant based wholefoods at the centre of product development, directly addressing concerns around ultra processed foods while keeping protein quality high.

That shift should go hand in hand with a quieter but no less powerful revolution in ingredient lists: secondary and tertiary substitutions that swap in higher fibre, lower carbon plant proteins in everything from ready meals to snacks and dairy, improving the nutritional profile and the environmental footprint of everyday products.

In other words, the next phase of protein diversification will be less about headline grabbing “future foods” and more about systematically relaying the foundations of the global diet.

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.

AI and sustainable finance: why investors need a broader materiality lens

Thomas Vergunst, Programme Director, Finance Sector Education, University of Cambridge Institute for Sustainability Leadership (CISL)

Barely a day goes by where I don’t engage in a conversation on AI. Sometimes it is with my teenage son who is intent on finding ever more inventive ways to outsource homework. Sometimes it is with senior leaders in finance who are equally intent on taking advantage of the technology, while at the same time trying to navigate a complex landscape of evolving risks, opportunities and impacts. This is no easy feat given that AI is driving an industrial revolution at a pace and scale that we’ve never seen before.

If investors want to understand where long-term value will be created or destroyed, and the wider implications for society, they need to take a broad lens on the deployment and application of AI.

That is one reason I developed the Sustainable Finance Foundations online course at CISL: to help finance professionals interpret major disruptions through concepts such as single and double materiality. The course is designed to give professionals across banking, investment and insurance a practical grounding in social and environmental trends and how these translate into material risks and opportunities for the households, businesses and governments that they finance or insure.

Applying the frameworks set out in this course to AI changes the quality of the conversation.

Source: Thomas Vergunst

UK regulators report that AI adoption was already widespread in financial services by the autumn of 2024: 75% of UK firms were already using AI and 55% of AI use cases were reported to involve some degree of automated decision-making. These figures will no doubt be a lot higher today.

AI can improve productivity, accelerate scientific discovery and reduce the cost of some services. Penn Wharton, for instance, estimates that AI could lift US productivity and GDP by 1.5% by 2035, with larger cumulative gains over the following decades. Researchers and firms are already using AI to speed advances in areas from protein science to product design.

But that is only half the story.

The first challenge is that the economic upside is uncertain and uneven. Stanford researchers have found that workers aged 22 to 25 in the most AI-exposed occupations have experienced a notable relative decline in employment since ChatGPT was launched in November 2022. Elsewhere, an MIT study notes that AI is not yet yielding any productivity gains despite US$30-40 billion in enterprise investment into generative AI.

The second challenge is operational and systemic risk. The Financial Conduct Authority has warned that AI in retail financial services could bring algorithmic bias, opaque decision-making, fraud, reduced consumer agency, market concentration and new forms of systemic vulnerability. As such, the deployment of AI within UK financial institutions is already facing greater regulatory scrutiny.

This is where a sustainability lens helps: it reminds us that social and environmental impacts and externalities, are not “non-financial” for very long.

Take energy and water. The International Energy Agency projects that global electricity use by data centres will more than double to around 945 TWh by 2030, with AI as the main driver of growth. Indeed, AI is already driving up electricity prices for US citizens. Separate academic research suggests that, without mitigation, global water consumption associated with data centres could rise more than sevenfold by mid-century. These issues will drive future cost pressures and are already leading to community opposition and political intervention.

For UKSIF’s members, that means stewardship and analysis needs to evolve. Investors should press companies on the quality of AI governance, not just the scale of AI ambition. They should interrogate workforce impacts, third-party dependencies, explainability, energy sourcing, water use and consumer outcomes. They should also resist simplistic narratives: AI poses an existential threat for both democracies and totalitarian states if not carefully managed. This should act as a major wake up call for investors who are concerned about the long-term stability of our economies.

Sustainable finance is useful precisely because it trains us to see second and third-order effects before they become first-order losses. It also requires us to take responsibility for how we are stewarding capital through time and the fact that our investments are creating the future that our children will inherit.

What kind of world will my son be retiring into if he even has a job to retire from? I’m sure, like me, he will not only be concerned about the size of his pension pot but also about the quality of life that he is able to lead with the savings he has.

AI will be one of the defining investment themes of the next decade as we shift from the ‘attention economy’ of the social media age to the ‘intimacy economy’ of the AI age. Financial institutions need to not only focus on the deployment of AI internally, but also how they are financing its deployment within society. We best get this right.

That is why we’ve worked with UKSIF to launch the accredited Sustainable Finance Foundations: Banking, Investment and Insurance short course to help you, your team and peers develop a crucial understanding of the risks of the global sustainability crisis and opportunities for a sustainable transition in your work. Book your place today and ask about group discounts 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.

Managing systemic climate risks and opportunities: why tipping points matter for long term investors

Charlie Young Ethical, Sustainable and Impact Researcher, Greenbank

For decades, responsible investors have assessed climate risk through the lens of gradual linear change with incremental warming, steadily rising physical risks, and transition pathways that unfold smoothly over time. However, emerging Earth system science suggests this framing is no longer sufficient.

A growing body of research shows that the climate system does not always respond linearly. Instead, it can shift abruptly when critical thresholds are crossed, moving into new states that can be impossible to reverse. These shifts are known as climate tipping points, and they pose a fundamental challenge for long term investors.

At Greenbank, Rathbones’ specialist sustainable investment team, we have published a series of whitepapers exploring both negative and positive climate tipping points and what they mean for portfolio resilience, capital allocation and stewardship. This work is motivated by a simple observation, if markets continue to assume smooth, predictable change, they risk systematically under pricing some of the most material climate related risks and overlooking powerful sources of opportunity.

From gradual change to systemic shifts
Climate tipping points are critical thresholds beyond which environmental systems undergo irreversible, self-reinforcing changes, representing an underestimated risk in financial modelling. Negative climate tipping points are increasingly familiar in scientific literature.

Examples include the potential collapse of the Atlantic Meridional Overturning Circulation (AMOC) which includes the Gulf Stream in its cycle, large scale dieback of the Amazon rainforest, or the irreversible loss of polar ice sheets. These events are typically low probability but high impact, with cascading effects across food systems, infrastructure, insurance markets and geopolitical stability.

What makes tipping points particularly challenging for investors is not just their severity, but their non linearity. Small changes in temperature, precipitation or land use can push systems past critical thresholds, triggering rapid and self reinforcing change within investable timeframes. Once crossed, these thresholds may lock in long term damage regardless of future mitigation efforts.

Original source: Marsden et al. (2024). Ecosystem tipping points: Understanding risks to the economy and financial system.

This perspective is gaining traction among leading climate-focused institutions. The Intergovernmental Panel on Climate Change (IPCC) and the Global Tipping Points Report have both highlighted that several Earth system components are showing early warning signals of destabilisation, even under current warming trajectories.

For long-term investors, this raises new questions. Many financial models still embed assumptions of stability, diversification and reversibility, yet tipping points challenge all three.

Why positive tipping points equally matter
While much of the discussion focuses on downside risk, an exclusive emphasis on negative tipping points risks missing half the picture.

Recent work by researchers including Professor Tim Lenton has highlighted the potential for positive tipping points, or self reinforcing shifts that accelerate decarbonisation once critical thresholds are reached. Examples include the rapid cost decline and adoption of renewable energy technologies, electric vehicles, or digital grid infrastructure that enables system wide flexibility.

These dynamics matter for investors because they can reshape markets far faster than linear forecasts suggest. Once a new technology or behaviour becomes cheaper, easier or more socially embedded than the incumbent, adoption can accelerate rapidly. Capital markets often underestimate the speed of these transitions, mispricing both incumbents and enablers.

By examining positive and negative tipping points together, we aim to understand not just where systemic risks may emerge, but where targeted investment, engagement or policy support can help shift systems onto more resilient pathways.

A systems lens for investors
Our research approach draws on systems thinking rather than single-issue analysis. Tipping points rarely occur in isolation; they interact through feedback loops that can amplify or dampen outcomes. For example, changes in ocean circulation can reshape weather patterns, with knock‑on effects for food systems, energy demand and migration. Likewise, accelerating clean energy adoption can reduce emissions, lower costs and strengthen political support, reinforcing the transition.

Produced by Greenbank.

Destabilisation in one Earth system can therefore increase the likelihood of tipping elsewhere, creating cascading risks across regions and sectors. For investors, this means moving beyond asset by asset climate assessments towards a more integrated view of systemic exposure. It also means recognising that traditional risk tools may struggle to capture non linear dynamics.

Original source: Marsden et al. (2024). Ecosystem tipping points: Understanding risks to the economy and financial system.

There is no settled methodology for embedding tipping points into financial models, and we do not pretend otherwise, which is precisely why engagement with this area is necessary. Ignoring complexity because it is difficult to model is itself a risk.

Integrating tipping points into investment research
Through our series of whitepapers on climate tipping points, we aim to translate emerging Earth system science into insights that are relevant for investors today. Rather than predicting specific outcomes, the focus is on identifying where risks may be under appreciated, where opportunities may be accelerating, and how feedback loops could reshape markets over time.

Ultimately, resilience in investment portfolios depends on the stability of the systems that underpin economic activity. As climate change pushes those systems closer to critical thresholds, investors need frameworks that reflect this reality.

Tipping points are not a niche concern for climate scientists. They are a reminder that the future may arrive unevenly and faster than expected. For long term investors, recognising that possibility is the first step towards managing it.

You can visit our Insights Series page here to access the full climate tipping points reports, along with our other whitepapers to help you navigate the evolving landscape of sustainable investing.

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.

When screens fail: stewardship in a geopolitical era

Mathieu Joubrel, Co-Founder and COO, ValueCo

For much of the past decade, the defence sector has been widely regarded as incompatible with sustainable investing. Ethical exclusions, screening methodologies, and sustainability-labelled funds have largely positioned defence companies as structurally hard to include in responsible strategies, associated with controversial products, human rights concerns, and environmental risks. For investors seeking alignment with sustainability principles, exclusion appeared to offer a clear and principled solution.

Recent geopolitical developments have disrupted that consensus. The wars in Ukraine and Iran, rising security threats across Europe, and renewed emphasis on strategic autonomy have forced investors and policymakers to reconsider the role of defence in their portfolios. Even though defence budgets are rising and security is increasingly framed as a public good, the means used to provide it still create severe externalities that must be properly governed, not merely rebranded. This reassessment does not signal a retreat from responsible investing, it rather raises the bar. As exclusions prove insufficient to address complex trade-offs, stewardship has emerged as the central mechanism through which investors seek to manage geopolitical risks. Defence is not ESG-compliant by default, and exposure remains conditional on red lines, controls, and escalation strategies.

Underperformance, exclusion, and the limits of ratings

Quantitative analysis consistently shows defence manufacturers scoring poorly on climate mitigation and human rights risk indicators relative to the broader corporate universe, driven by structural features of the sector: industry-heavy production, end-use uncertainty, opaque customer bases, and concentrated supply chains. At end-2023, 74% of global climate-transition fund assets tracked EU climate benchmarks restricting exposure to companies involved in controversial weapons, and across SFDR-classified funds, defence remains systematically underrepresented relative to market capitalisation. These exclusions are not arbitrary, they reflect real risks that investors are unwilling to ignore. From a stewardship perspective, however, underperformance serves a second function: identifying where risks are concentrated and where investor expectations are likely to focus. Climate impacts, human rights safeguards, governance quality, and compliance with international conventions consistently emerge as the most material dimensions for defence companies.

The methodology producing these assessments is nonetheless structurally flawed. ESG ratings penalise defence through coarse sector classifications and controversy flags, often without adequately differentiating between prohibited activities and legitimate defensive roles, and without capturing whether risk management is improving. Security’s social consequences are almost entirely absent from rating models, meaning ratings can reinforce exclusionary outcomes even where selective engagement would be more effective. In sectors characterised by inherent risk and ethical complexity, a score cannot tell you whether risks are unmanaged, mitigable, or actively addressed.

From categorical judgement to conditional investability

On Bruegel’s estimates of European sustainable fund AUM, redirecting just 10% of Article 6 assets and 5% of Article 8 assets toward defence-eligible strategies would amount to roughly the EU’s investment target of €800 billion. It illustrates how classification and exclusion rules are the binding constraint rather than any shortage of capital. The tension here is not sustainability versus security, but low-information capital allocation versus well-governed, conditional exposure, and that reframing points directly to stewardship as the operative instrument.

Rather than asking whether defence is ESG-compatible in the abstract, rigorous investors are asking more specific questions: which activities are prohibited under international law, which risks require mitigation, and which governance standards are non-negotiable. This moves the analysis from binary inclusion or exclusion toward conditionality. Clear red lines remain essential, particularly for activities prohibited under international humanitarian law. Between exclusion and endorsement, however, lies a growing space where engagement can define the investment relationship.

What stewardship requires in practice

In practice, engagement with defence companies is less about relabelling and more about hardening controls. Investors expect board-level mandates for product governance and export controls, clear end-use and customer screening frameworks, incident disclosure with remediation KPIs, independent assurance of compliance systems, and supplier due diligence across high-risk tiers. Governance is the first test: weak board oversight is typically interpreted as a signal that other ESG risks are unlikely to be effectively managed. Where disclosure is constrained by legitimate security considerations, credible independent assurance of controls is the minimum acceptable substitute. Stewardship also makes assessment dynamic, requiring measurable trajectory, 12 to 24 month milestones, and a clear escalation path if progress stalls.

Defence is a stress test for responsible investment’s next phase: less comfort from screens, more discipline through stewardship. Geopolitics does not relax standards; it forces explicit red lines, verified controls, and escalation. That discipline applies equally to any strategically sensitive sector where risks are inherent but governable, including energy, utilities, and telecommunications. For asset owners and managers, the implication is practical: context-led materiality assessment, explicit engagement objectives, and transparent escalation. Stewardship, applied rigorously, is how sustainability principles translate into responsible strategies rather than into capital allocation that is principled in appearance but blunt in practice.

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.

ESG Ratings Regulation 2026: What Investors & Companies Should Know

Aymen Karoui, Ph.D., Head of Methodology, Inrate

The time of ESG ratings as an informal reference may have officially ended. In 2026, ESG ratings will cease to occupy a regulatory grey zone, becoming regulated market instruments subject to a level of scrutiny approaching that of credit rating agencies. ESG ratings regulation is intended to promote transparency, integrity, and comparability of ESG rating activities.

This is not a cosmetic change for financial institutions. It represents a significant shift in the way sustainability risk and long-term value are integrated into capital markets.
The current article discusses the latest EU and UK ESG ratings regulations and what investors and companies should know in 2026.

Why ESG Regulation Became Necessary?

ESG ratings assess how companies manage material environmental, social, and governance risks and opportunities. Therefore, they offer investors essential insights for constructing portfolios and making decisions aligned with social and environmental principles.

However, ESG ratings have long been characterized by limited transparency in methodologies and some inconsistencies in the underlying data. Another issue pertains to possible conflicts of interest between rating and advisory activities, and a lack of clarity around accountability mechanisms.

Taken together, the need to better support market participants while addressing current shortcomings has made it necessary to establish a more formal regulatory framework.

EU ESG Ratings Regulation: A New Supervisory Framework
Formally adopted in November 2024, the EU ESG ratings regulation has created a binding regulatory framework for providers of ESG ratings to the EU market. It entered into force on 2 January 2025, will apply from July 2026, and will be overseen by the European Securities and Markets Authority (ESMA). Below are the key pillars of the EU ESG ratings regulation:

1. Mandatory authorisation and supervision
ESG rating providers are required to be registered with ESMA and to meet ongoing supervisory requirements.
2. Transparency of methodologies and data sources
The ESG rating providers should make clear disclosures of their:

• Rating objectives and scopes.
• Weighting logic and methodologies
• Sources of data and methods of estimation.

3. Management of conflict of interest
Providers should not confuse ESG ratings with consulting or advisory services that may violate independence.
4. Provisions for third-country providers
Non-EU ESG rating agencies are allowed to carry on with their operations in Europe through equivalence, recognition, or endorsement, which ensures continuity in the markets globally.

UK ESG Ratings Regulation: A Principles-Based Approach

Although the EU and UK ESG rating regulations share similar goals, the UK regulation offers more flexibility. The UK Financial Conduct Authority (FCA) has suggested a regulatory framework based on the International Organization of Securities Commissions (IOSCO) principles with a view to governance, transparency, and resilience in operations as opposed to prescriptive standardisation.

Final FCA rules are expected in late 2026, with ESG ratings becoming a regulated activity from 29 June 2028, followed by a transition period into 2029.

The UK framework focuses on ensuring strong accountability and governance structures, promoting transparency in methodologies and assumptions, managing potential conflicts of interest, and clearly communicating any limitations or restrictions associated with ESG ratings.

Why ESG Ratings Regulation Matters for Financial Institutions?
ESG Ratings Regulation is not merely a compliance exercise; it is increasingly a strategic priority for financial market participants. It can deliver several benefits:

Stronger investment decision-making: By enhancing trust in the sustainability indicators used in investment and risk management.
Better regulatory alignment: By minimizing the legal and reputational risks, increasing transparency, and improving standardization.
Enhanced due diligence: By supporting more rigorous assessment and governance of third-party vendors.

What Will Change for Financial Institutions?
The ESG ratings regulation will require financial institutions to adjust key internal processes. They will need to strengthen vendor governance by verifying ESG rating providers’ authorisation, understanding methodological differences, and documenting how ratings are used.

At the same time, product governance will be reinforced, with greater emphasis on tracing ESG data sources and ensuring the underlying information is transparent, well documented, and fit for investment and risk use.

Challenges and Trade-Offs in ESG Ratings Regulation
While ESG ratings regulation strengthens trust and accountability, it also introduces important trade offs.

• Transparency vs. proprietary innovation: Providers must enhance methodological transparency without undermining intellectual.
• Comparability vs. diversity of opinion: Greater disclosure should improve understanding of ratings without eliminating differences in ESG assessments.
• Cross border alignment: International providers will continue to face regulatory fragmentation in the short term.

Strategic Takeaways for Investors and Companies
As ESG ratings become regulated market instruments, financial institutions will need to reassess their ESG rating providers and ensure they are prepared for regulatory oversight. They will also need to strengthen internal ESG data governance and train investment and risk teams to interpret regulated ratings effectively. Finally, they must align their broader sustainability strategies with evolving regulatory expectations.

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.

Travers Smith’s Sustainability Insights: Six fixes for SFDR 2.0

Simon Witney, Senior Consultant, Travers Smith LLP

At the end of last year, we expressed disappointment at the European Commission’s proposal for a revised Sustainable Finance Disclosure Regulation (SFDR 2.0). We acknowledged that there were some positives, but we argued that private markets were an afterthought in the re-design of the EU’s landmark sustainable finance regulation. The text omits important detail. Some provisions would impose impractical requirements on private funds; others would lead to unintended – and undesirable – consequences.

Given the role of private markets in driving change, that’s very unfortunate.

But all is not lost. The Commission’s proposal still has some way to go before becoming law, and the industry has a window of opportunity to influence the outcome. Now is the time to offer practical fixes.

First, the positives: Grandfathering for fully closed funds means those raised under old rules will escape a disruptive retrofit. Transition strategies will gain formal recognition, and entity-level “principal adverse impact” reports – which were not regarded as decision-useful by most stakeholders – will be scrapped.

But the new categories – “Transition”, “Sustainable”, and “ESG Basics” – are not yet well-defined and leave too much to market interpretation or future rulemaking. More worryingly, products that do not fit neatly into one of the categories are allowed to say very little about their actual approach to sustainability.

This approach may suit retail funds. However, professional investors expect an open dialogue about how sponsors will apply ESG policies. LPs run tenders, conduct due diligence, and often impose their own sustainability requirements.

These limits pose the biggest challenge for alternative asset managers, and some lawmakers have recognised the industry’s concern. The obvious solution would be to exempt marketing communications directed only at professional investors from the SFDR’s straitjacket. If those communications are “fair, clear, and not misleading” – the existing standard under EU law – regulators don’t need to restrict them further. Otherwise, Brussels will bake greenhushing into law, stifling investor negotiation and innovation.

Second, Brussels should recognise the value of engagement in Article 8 (“ESG Basics”) funds. Private funds influence companies by taking board seats, owning large stakes, and working directly with management. Strategies that use credible, active engagement to drive sustainability progress should be reflected in all three categories.

Third, the mechanics of exclusions and minimum portfolio alignment need further work. Private funds investing in illiquid assets cannot rebalance quickly. If they conduct thorough screening up front, they should not be liable for subsequent changes outside their control. The existing proposal is inflexible and therefore unworkable.

Fourth, the rules do not fully reflect a private fund’s life cycle. Recognition that there is an investment (or “ramp-up”) period is helpful, but funds have both investment and divestment periods, which often overlap. Alignment should be measured across the entire fund lifespan, based on original investment cost – not fluctuating market values.

Fifth, the “ESG Basics” tag is a marketing own goal. It is too weak, too political, and poorly understood. Investors recoil at “ESG” in some markets, while it is an imprecise and often mis-used term. “Basics” does not capture the ambition that EU policymakers intend – especially since an entry-level fund will need to do more than consider sustainability risks. “Responsible” or “Stewardship” may be better terms, but should be tested with investors.

Sixth, funds-of-funds will need longer to comply, and even more flexibility in applying exclusions. Funds-of-funds will rely on the categorisation of – and reports from – underlying products. A later implementation date is needed for them. Moreover, blanket exclusions will significantly restrict their investible universe.

SFDR 2.0 will not take effect before late 2027, probably later. The time to influence its final form is now. Private markets play a crucial role in driving sustainability, and policymakers are open to practical, constructive proposals.

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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When screens fail: stewardship in a geopolitical era

Mathieu Joubrel, Co-Founder and COO, ValueCo

ESG Ratings Regulation 2026: What Investors & Companies Should Know

Aymen Karoui, Ph.D., Head of Methodology, Inrate

Travers Smith’s Sustainability Insights: Six fixes for SFDR 2.0

Simon Witney, Senior Consultant, Travers Smith LLP

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