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

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

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.

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

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

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

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.

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

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

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

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.

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

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

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

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.

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

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

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

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.

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

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

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

ESG 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:

1. Stronger investment decision-making: By enhancing trust in the sustainability indicators used in investment and risk management.
2. Better regulatory alignment: By minimizing the legal and reputational risks, increasing transparency, and improving standardization.
3. 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.

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

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

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

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.

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

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

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

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.

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

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

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

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.

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

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

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

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.

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