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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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.

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 need to treat workforce mental health as a core stewardship issue

Amy Browne, Director of Stewardship and Deputy Head of Sustainability, CCLA

For CCLA, stewardship sits at the intersection of client priorities and long term value at risk. We believe that companies with strong sustainability and governance practices are best positioned to serve the interests of all stakeholders. Such companies demonstrate greater resilience to regulatory change, shifting consumer behaviour and long term challenges such as climate change.

Our stewardship team engages with companies across a wide spectrum of systemic and financially material issues, from climate resilience and labour standards to workplace culture and human rights. Increasingly, one issue cuts across all others: the mental health and wellbeing of the workforce.

For years, mental health was treated as a ‘soft’ topic, something for human resources departments to dip into at the margin. But the data tells a very different story. Poor mental health costs employers an estimated £1,800 per employee per year, and for a company the size of Amazon, that equates to an estimated £2.7 billion in lost productivity. Meanwhile, the return on investment for effective mental health interventions is estimated at £4.70 for every pound spent (Deloitte 2024). These are not marginal figures. They are financially material, strategically significant, and measurable.

Why we created the CCLA Corporate Mental Health Benchmark
When we launched the CCLA Corporate Mental Health Benchmark in 2022, our aim was simple: to bring transparency, accountability, and ambition to an area that had long lacked all three. We wanted to give investors a tool to assess how companies support their people, and to give companies a roadmap for improvement.

Since then, the benchmark has become a powerful catalyst for change. We have now published eight rankings over four years, conducting annual assessments and public league tables that shine a light on corporate performance. The investor community has rallied behind this work: our global investor coalition now represents $9.5 trillion in assets, signalling that mental health is firmly on the stewardship agenda.

The results speak for themselves. Seventy four companies have improved their ranking, including 13 that have moved up two tiers and three that have climbed three tiers. Collectively, these improved companies employ 5.3 million people worldwide. That is real world impact at scale.

What the latest benchmark tells us
The findings from 2025 reveal a tale of two markets. In the UK, we are seeing genuine momentum. Companies are increasingly embedding mental health into governance structures, reporting frameworks, and leadership priorities. The global cohort, by contrast, is more geographically diverse and heavily weighted toward the US, where progress is uneven.

There are standout improvers; companies that have made remarkable strides in transparency, leadership commitment, and workforce engagement. But there are also areas of concern. Several of the so called ‘magnificent seven’ companies that dominate global indices and shape the digital economy sit at the bottom of our ranking. They are extraordinary businesses, but our data suggests they are not yet extraordinary places to work.

The healthcare sector also presents a mixed picture. Novartis, Roche, Novo Nordisk, and Johnson & Johnson are working hard to improve, demonstrating that large, complex organisations can lead on mental health. Yet AstraZeneca has deteriorated more than any other company, falling 25 percentage points since its first assessment. As stewards, we respond accordingly. In AstraZeneca’s case, we escalated our concerns and voted against the CEO at its annual general meeting: a clear signal that in our view, mental health is not just a peripheral concern, but central to the company’s long-term resilience.

How companies can improve
For organisations seeking to strengthen their approach to workforce mental wellbeing, three practical steps stand out:
1. Leadership commitment
Senior leaders must set the tone. Mental health should be visible in strategy, governance, and reporting, and not confined to internal wellbeing campaigns.
2. Good working conditions
Workload, job design, autonomy, fair pay, and psychological safety matter. Companies must address the root causes of ill-health, not just offer support once people are struggling.
3. Measurement and management
Companies should track wellbeing, respond to findings, and build resilience through training, listening, and continuous learning.

Why the benchmark works
The success of the benchmark reflects several factors: the financial case for action, the credibility of the methodology, its alignment with WHO and ILO standards, peer competition, strong investor collaboration, and sustained media attention. Together, these elements create a powerful incentive for companies to improve.

That said, every company is different. One wanted to be recognised as a global business that genuinely cares about its employees. Another was responding to tragic employee suicides. A third recognised that our advice was sound and saw no reason not to act. A fourth was tackling negative media coverage. All of them understand the same truth: supporting mental health boosts productivity, reduces turnover and sickness absence, and strengthens their appeal to current and future employees.

As investors, we cannot afford to ignore the wellbeing of the people who create corporate value. Mental health is not a ‘nice to have’, but a strategic imperative. Through stewardship, transparency, and collaboration, we can help to ensure that companies treat it that way.

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.

Sustainability storytelling: A short guide to writing an annual ESG report

Roger Lewis, UKSIF Membership Committee Member

The Millennium, ‘Y2K’, gave us a Dome, a Bridge, a Bug for 11:59:59pm on December 31st, 1999 and ten Development Goals. These Goals aimed to help the future planet and future people meet their needs without compromising our own, the classic definition of sustainability. Twenty five years ago, a bit of reporting and donations to charities made up the bulk of ‘corporate social responsibility’ and efforts to meet these Goals, since rebranded the 17 UN Sustainable Development Goals. Such CSR came when companies had cash left over after paying dividends and interest, or after financing growth and expansion strategies.

But reporting alone is not a substitute for meaningful action. And while well intentioned, there are pitfalls with sustainability reporting. One risk is that focus on disclosure distracts from tangible sustainability outcomes. Another is too much inconsistent or incomplete data, leading to greenwashing. It is a complex topic that we are trying to summarise progress in. So before even picking up a pen, a sustainability report should understand four basic factors.

In the past year, what were the greatest material issues and impacts that you faced? Ninety plus factors make up ‘ESG’. Data providers and active investors can say what these risks, opportunities and exposures are for a company, and how well they are being managed.

Keeping the audience in mind is a good principle. Who are your stakeholders, what is their influence and interest in sustainability, and how can they help? Ideally the readers are critical to achieving sustainability goals, whether it is revenue from green products or environmental and societal upsides.

Next, what challenges did you face? Potentially shifting priorities with the digitisation and AIfication of everything. Or policymakers sending mixed signals. Take a large cap European company with over 50,000 staff but less than EUR50m revenue. Before it had to report detailed sustainability metrics, but now we’re not sure after the so-called EU Omnibus regulation. Or challenges from disruption to operations (read: suppliers in areas prone to wildfires, like California).

Last, what actions did you take? Getting a fund labelled for sustainability is real and material example, and means joining 7,500 funds and $3tr, globally and not just among EU SFDR peers. Another is engaging a portfolio company to recognise transition and physical climate risks, or screening suppliers for ESG risk in procurement – solar panels from forced labour for anyone? – as an area under a company’s direct control.

Now we can begin to type and create something compelling. Start by looking inwards and core environmental, nonfinancial metrics. Carbon is a must, up to scope 3 if you don’t want to be accused of ‘transition-washing’ and overstating your initiatives for climate. Water, waste and biodiversity footprints can also feature if material to a sector. Engaging colleagues and communities, and standard corporate governance declarations for risk, shareholders and boards complete this section.

And then look outwards. For investors, this means how many tonnes of CO2 their debt and equity financed, and how they engaged their portfolio companies to achieve positive outcomes. For companies, it’s environmental and social efforts, and processes and policies in place to implement. For both, frameworks for standardisation and validation help to avoid overwhelming stakeholders with data while providing little actionable insight. So we have TCFD, TNFD, CDP, ISSB and GRI as the top picks to consider.

Doing all this should leave your audience, human or AI, thinking that your organisation has just communicated a credible and robust strategy for sustainability. One which is suitable for a quarter of a century and much planetary and societal upheaval since the Millennium.

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.

Actionable Insights: Top Sustainability Themes in 2026

Mirtha Kastrapeli, Global Head – ISS STOXX Research Institute, ISS STOXX

The year 2025 was marked by an unprecedented rise in global economic policy uncertainty and some regulatory headwinds for sustainable investment. The new year is set to be one of pragmatism, as investors continue to expand and refine their analysis of their portfolio companies’ business case for sustainability.

The ISS STOXX annual global outlook report, Actionable Insights: Top Sustainability Themes in 2026, highlights this pragmatism. In this report, we focus on the climate change preparedness of public companies, physical risk analysis using geospatial asset level data, AI governance, regulatory developments around labor rights, and data about investment flows into sustainable funds.

On climate preparedness, we propose a deeper analysis of companies’ ability to assess and manage climate risk that goes beyond traditional emissions data and targets, which tell only half the story. By examining governance, disclosure, and implementation indicators (such as management’s role in climate assessments, climate risk reporting in financial accounts, and capital allocation), investors can better assess the credibility of companies’ climate preparedness.

This highlights that while 74% of the companies assessed overshoot their 2030 carbon budgets, only 42% are considered “unprepared.” Being unprepared means that these companies not only overshoot their stated carbon budgets but also exhibit weak organizational readiness. For portfolio construction, the emissions-only approach potentially excludes all companies that overshoot their budgets, regardless of their organizational capacity. That removes from consideration “transition leaders”: companies that overshoot their budgets yet have strong governance structures.

Our analysis also shows that 17% of companies are considered “Best Positioned”: they simultaneously both meet their carbon budgets and demonstrate strong governance and operational readiness. These companies are best prepared as transition pressure intensifies and organizational infrastructure becomes more visible.

We also examined physical climate and nature risk across different scenarios and time horizons. Specifically water stress and heat wave risk in data centers using geospatial data. Based on granular data covering 100 assets globally, heat stress is expected to intensify: 43 data centers face medium or high risk in the next 15 years, rising to 64 over 30 years. Heatwaves increase cooling demands and lead to higher outage risks, operational costs, and need for infrastructure upgrades.

Another area of focus is Artificial Intelligence (AI). AI will likely continue to drive global markets’ momentum, yet investors’ questions around AI governance are also likely to intensify. Our research introduces the concept of Ethical AI, which reflects broad values and principles—such as data protection and transparency—aimed at enhancing AI’s benefits while reducing risks. Other crucial concepts are Responsible AI, which defines how Ethical AI principles are operationalized; and Just AI, which focuses on AI’s societal and economic impacts, ensuring fair and balanced outcomes for all stakeholders. Analysis of corporate disclosures from leading technology companies—the “Magnificent 7”—shows that most articulate Ethical AI values, but fewer translate them into Responsible AI governance frameworks or address the human implications central to a Just AI transition.

On the social side, we have analyzed regulatory developments in labor rights. Multinational companies, which are often part of extensive value chains, must navigate a range of labor regulations directly applicable to their operations while conducting effective due diligence over suppliers. This process may grow more complicated, as labor regulation in several jurisdictions is moving toward more stringent due diligence requirements. Data from ISS STOXX Corporate Ratings show significant or notable room for improvement across all labor-related disclosures under the Supplier Social Standard. Low levels of disclosure expose these companies to reputational, legal, and financial risks.

Finally, we reviewed the resilience of sustainable investment during 2025, notwithstanding lingering regulatory headwinds. This relative strength is evident in sustainable ETF flows globally, which have continued to grow at a rate comparable to the overall ETF market. Based on ISS MI MarketPulse data, Sustainable ETF AUM as of September stood at $631 billion, up 18% since December 2024. Further, while results differ across index methodologies, sustainability indices have often shown resilience and sometimes outperformance, particularly in European indices.

2026 is set to be a year of pragmatism in the sustainable investment space. More granular data, more rigorous models, and deeper industry-specific insights can help investors better assess the business case for sustainability.

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 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.

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

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Companies are confronting the rise in physical risk head-on

Umar Ashfaq, Research Director, MSCI Institute

3 Myths that Hold Back Sustainable Investing

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

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