Regulators and legislators rolled back pro-sustainable investment rules in the United States, tightened guidelines in Europe and paused headway in Canada in a global onslaught on green financing.

Assets invested in environmental, social and governance portfolios flattened as the ESG term itself fell into disfavour among the least committed green funds and investment managers. Even so, growing interest in climate transition industries and renewable energy buoyed the sector’s prospects, strengthening impactful areas of sustainable finance.

So what’s next for 2026? Here are my predictions for sustainable and responsible investment for the year ahead.

1. Sustainable funds will assume a low profile in the battle for market share

The share of the total investment market in the United States held by sustainable finance held steady in 2025 at 11% of total assets under management in 2025, a slight decline from 12% a year earlier, according to the U.S. Sustainable Investment Forum (US SIF), the industry’s trade group. Sustainable assets were US$6.6 trillion in 2025 and total assets under management were US$62 trillion. The estimate includes institutional and individual assets specifically labelled as “sustainable” or “ESG.”

Maintaining this market share in 2026 will be a challenge. The industry is facing a continuing barrage of anti-ESG rhetoric from the Trump administration. The attacks were exemplified by a September speech by Trump pension policy adviser Justin Danhof, who told an international conference in Paris that “ESG at its core, looks a lot like a Marxist march through corporate culture.”

The industry is taking a low profile in the face of such bombast. Only 10% of sustainable investment managers surveyed by US SIF this year said they planned to add significantly to their assets in the next 12 months, and about a quarter said they plan to moderately increase their allocation. About half are planning to hold their sustainable assets at the current level.

Some asset managers have become reluctant to publicly associate their sustainable funds with ESG strategies. One in four sustainable investment managers surveyed by US SIF said they have stopped using the ESG acronym.

Launches of new sustainable funds around the world have largely dried up. Morningstar said there were only 26 new sustainable funds launched in the three months ending September 30, down from 92 in the second quarter and significantly lower than the 200 funds launched in the fourth quarter of 2022. Of the 26 launches, 20 were in Europe.

The takeaway: As the Trump assault on ESG continues, large mainstream investors like BlackRock, State Street and Vanguard will keep their heads down. Don’t expect a revival in sustainable fund launches or increased ESG marketing in 2026 and not until 2028 near the end of Trump’s term.

2. Banks will ramp up financing for liquefied natural gas projects

The world’s largest banks provide important financing to fossil-fuel and renewable-energy companies through loans and underwriting services. As a major source of capital to oil and gas, climate action groups are pressuring banks to phase out their fossil fuel financing.

Initial data show that banks reduced fossil fuel financing by about 25% in the first seven months of 2025 compared with the same period a year earlier. The current glut in oil supplies has put a damper on new drilling and reduced demand for capital, particularly in the United States.

Nevertheless, lending and underwriting to the fossil fuel industry is expected to grow in the coming year because of a continued global expansion in liquefied natural gas (LNG) infrastructure. According to Paris-based Reclaim Finance, there are 279 new LNG projects  planned around the world. If completed, these projects will produce enough gas to create more than 10 billion tonnes of carbon dioxide annually (or more than a quarter of all current energy-related emissions), “destroying any hope of achieving global climate goals,” Reclaim Finance says. The group estimates that global banks have already provided US$174 billion to LNG projects between 2021 and 2024.

The takeaway: With some exceptions such as a possible new oil pipeline in Western Canada, demand for bank financing for oil companies and projects will weaken in 2026 along with lower oil prices. But the massive expansion in LNG projects will continue to  create demand for gas infrastructure financing. This will trigger added pressure on the banks by climate action groups and Indigenous communities to turn off the taps to the gas industry.

 3. Renewable-energy and climate-transition industries will be a bright spot

As 2025 came to a close, stock markets became increasingly jittery over prospects for the highly concentrated tech sector, especially the so-called Magnificent Seven stocks that make up about 35% of the S&P 500 index. Concerns are growing that the colossal run-up in these stocks caused by massive investments in data centres is coming to an end.

The stocks (Apple, Microsoft, Nvidia, Amazon, Meta, Alphabet and Tesla) were darlings of conventional investment portfolios in 2023 and 2024. Many broad-based sustainable portfolios with ESG screens also held them based on neutral to positive rankings on most environmental and social issues.

Popularity among ESG investors started to cool in 2023 after the introduction of ChatGPT raised concerns over the massive energy demands of AI data centres and other environmental issues such as water use. There are also exploding concerns over the role of social media in shaping political views among many groups such as young men.

Now, some conventional analysts are suggesting that investors should take their profits from the Magnificent Seven and rotate into other sectors such as energy and industrial stocks. For sustainable investors, this could be a good time to buy shares in clean-energy companies, which outperformed both tech and oil in 2025, and climate-transition industries.

Examples of such companies can be found in the Morningstar Sustainalytics 21-company climate transition list. The names include Italian utility Enel, electrical component manufacturer Schneider, Norwegian aluminum and energy producer Norsk Hydro, industrial gas manufacturer Air Liquide and wind power systems company Vestas.

The takeaway: Look for continuing strength among renewable-energy stocks in 2026, as well as some surprise breakouts in industrial and basic materials companies with strong carbon dioxide emission policies and product lines that will benefit from the climate transition.

Read Eugene’s predictions from last year

Seven sustainable finance predictions for 2025

4. European sustainable fund turmoil will come to an end

Europe, where about 85% of the world’s sustainable fund assets are located, has been embroiled in a year-long controversy over how its sustainable funds should be named or described to investors. Morningstar estimates that more than 1,500 funds with a value of more than US$1 trillion, or 28% of the sustainable funds in Europe, have been renamed since the beginning of 2024. More than 700 of these were renamed in 2025.

The key issue is a new set of rules stipulating that funds with environmental terms in their names must exclude fossil fuel holdings and ensure that at least 80% of their portfolio meets environmental goals. Funds using a “sustainable” name must show meaningful holdings in sustainable assets. The rules were established by the European Securities and Markets Authority (ESMA) with a May 2025 compliance deadline.

Most funds that changed their names dropped the terms “sustainable,” “ESG” or “responsible” from their labels but didn’t change their objectives or strategies. The controversy has created confusion among investors and reinforced greenwashing suspicions.

In November, the European Commission proposed a set of amendments to its Sustainable Finance Disclosure Regulation (SFDR) to further clarify naming rules for sustainable funds.  Going forward, funds will fall under three labels: sustainable, transition and ESG basics.

The Institutional Investors Group on Climate Change welcomed most of the changes, saying they are useful tools for fund transparency. However, IIGCC also said that a streamlined list of mandatory criteria for assessing assets could help to promote greater comparability between funds. The package will now go to the European Council and Parliament for final approval.

The takeaway: Now that the ESMA renaming controversy has eased, European fund managers and advisers have a better framework to explain the differences in sustainable fund approaches. And while the new SFDR rules won’t be finalized until 2027, fund companies and advisers can immediately discuss investments with their clients using the new framework, suggesting options for clients concerned about issues such as fossil fuel holdings in ESG funds.

5. Canadian pipeline plans won’t find private investors

A sustainable-investment controversy is brewing in Canada over the recent agreement between Prime Minister Mark Carney and Alberta Premier Danielle Smith to work toward a new pipeline to ship oil-sands bitumen to the West Coast. Almost immediately after the November announcement, industry experts and critics said the pipeline is not feasible since there is no private-sector proponent, required Indigenous approval is unlikely, and the British Columbia government is opposed to lifting a West Coast tanker ship ban.

What few people have talked about is that it is also unlikely that a major bank, consortium or equity investor will also come forward. There is no official cost estimate for the project. However, based on other recent pipelines, it would likely be in the tens of billions of dollars, a cost too high to be recovered through oil transit tolls, according to the International Institute for Sustainable Development. Investment analysts have expressed skepticism that the pipeline will receive private-sector support.

Even if the economic model for the pipeline worked, any bank or consortium of lenders or equity investors would be hesitant to back the project. One of the last major pipelines constructed in Canada – Coast GasLink – triggered multi-year vocal protests at RBC, one of its lenders. Given the high-profile nature of the  West Coast oil pipeline, similar protests could be expected at any bank or equity investor supporting the project.

The project is also unlikely to fall within the green or transition “taxonomy” guidelines to be developed starting in 2026, governing which Canadian investment activities will be officially labelled as sustainable. Development of the guidelines will be led by the Canadian Climate Institute think tank and Business Future Pathways, a coalition headed by a who’s who of sustainable-investment champions and representatives of climate action NGOs. Even if oil shipped through the pipeline will be produced with lower per-barrel process emissions than present oil-sands oil, it will be tough for the new group to give such an investment a transition label given the high level of Scope 3 or end-use emissions it will facilitate. It’s highly unlikely that banks or equity investors will be able to proclaim investment in the pipeline as a transition investment.

The takeaway: The lack of a pipeline company or group of companies to champion the project in 2026 will enable banks and equity investors to stay on the sidelines. Given the longstanding glut in oil supplies, there will be little progress on the project in the coming year despite ongoing political support from Ottawa and Alberta.

The big picture

The Trump administration is ramping up its attacks on sustainable finance and ESG and its support for fossil fuels. This has provided hope for oil and LNG proponents that the financial community will get behind an expansion in conventional energy. The economics of alternative energy sources suggest that renewables should win out, but this is not a sure thing. What’s known is that inexpensive green energy and climate-friendly manufacturing are moving ahead. The crusade against ESG will continue for a few more years, but it won’t stop the smart money from supporting the industries of the future.

Eugene Ellmen writes on sustainable business and finance. He is a former executive director of the Canadian Social Investment Organization (now the Responsible Investment Association).

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Concerns about BlackRock’s poor stewardship of climate risk were to blame for the break. PFZW says it is now pursuing an investment strategy that gives equal weight to financial performance, risk and sustainability.

The Dutch climate advocacy group Fossil Free Netherlands celebrated the move as a victory for its Break with BlackRock campaign, which it launched in January when the behemoth asset manager withdrew from the Net Zero Asset Managers alliance. More than 2,500 people wrote letters to their pension funds asking them to break ties with BlackRock, according to the non-profit’s website. “BlackRock is one of the world’s largest investors in the climate crisis,” the organizers wrote. “Climate risks are financial risks: when climate disasters strike, our pension money evaporates.”

BlackRock is the largest money manager in the world, reporting US$11.6 trillion in assets under management at the end of 2024, including $1 trillion of sustainable and transition assets. CEO Larry Fink was previously a strong advocate for investing strategies that consider environmental, social and governance factors, but the firm has dramatically scaled back its support for ESG-related proposals from activist shareholders since 2021, when it supported 47% of such proposals. Last year that support had fallen to 4%, and this year it’s at 2%. A spokesperson for BlackRock told Bloomberg that the asset manager continues to help clients meet their sustainable investment goals.

While U.S. investors are increasingly backing out of funds that consider ESG factors, many Dutch pension funds still view sustainability as a smart long-term investing strategy, Reuters reports. Another Dutch pension manager, PME, is also said to be reviewing its mandate with BlackRock.

Sustainability advocates were quick to identify the move by PFZW as a market signal for money managers that investors are raising their standards when it comes to accounting for climate risk and corporate social responsibility. “Pension funds are sending a clear message – asset managers must step up on climate stewardship, or risk losing major mandates,” writes Danny Takhar, business development manager for the sustainable investment platform Vericap in Vancouver.

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Others highlighted the link between ESG strategies and managing climate and transition risks. “Sustainability is risk management,” writes Sigrid Carstairs, a sustainability specialist at the Swedish renewable energy developer Eolus, in a commentary on the development. “This is not about looking good. It is not about marketing. It is about doing your job properly as a steward of capital.”

In February, the People’s Pension in the United Kingdom made a similar move, transferring US$35.3 billion in assets from State Street in the United States to be managed instead by other firms with ESG and net-zero alignment. “The People’s Pension’s broader mission is to balance strong financial performance with responsible investment principles,” Mark Condron, the fund’s chair of trustees, said at the time.

The gap between Europe and North America appears to be widening. A recent Financial Times survey asked institutional investors whether pulling back from ESG commitments damages their view of an asset manager. 70% of European respondents said it did, compared to 47% in North America. 

Mark Mann is a journalist and editor at Corporate Knights. He is based in Montreal. 

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In January, ExxonMobil launched a lawsuit against U.S.-based Arjuna Capital and Netherlands-based Follow This. The shareholder advocacy groups had filed a proposal calling on ExxonMobil to set targets and to reduce its Scope 3, or end-use, carbon dioxide emissions. The two organizations represent small shareholders in the company.

In response to the suit, the shareholder groups withdrew the proposal, but ExxonMobil continued its action.

“Exxon is sending a clear message – dissidents will not only be fought, they will be punished,” legal blogger Zachary Barlow writes.

The lawsuit is unusual because companies ordinarily appeal to the U.S. Securities and Exchange Commission (SEC) for rulings on the permissibility of shareholder resolutions. In this case, which is a first for ExxonMobil, the company asked the U.S. District Court rather than the SEC to rule that the Arjuna and Follow This proposal falls outside of normal shareholder proposals, which can be disallowed if they deal with day-to-day company business.

In recent years, the Biden administration has loosened Trump-era regulations that made it easier for companies to ask the SEC for permission to exclude shareholder proposals. There has been an increase in proposals on climate change and other environmental, social and governance issues as a result of the Biden reforms.

In a media statement, ExxonMobil characterized this increase as a “breakdown of the shareholder proposal process, one that allows proponents to advance their agendas through a flood of proposals.” In its lawsuit, the company also asked the court to direct the shareholder groups to cover legal costs for both sides, a burden that could amount to hundreds of thousands of dollars.

The request for fees and costs “exacerbates the perception that Exxon’s intention is to utterly silence dissenting investors,” said Christina Herman, program director for the Interfaith Center on Corporate Responsibility (ICCR), a U.S. coalition of faith-based investors that file shareholder proposals and engage with corporations on social and environmental issues.

Growing numbers of multinational corporations are taking advocacy groups to court in so-called strategic lawsuits against public participation, or SLAPP suits. The London-based Business and Human Rights Resource Centre identified 437 SLAPP suits brought or initiated by 144 companies or business organizations between 2015 and 2023.

Exxon is sending a clear message – dissidents will not only be fought, they will be punished.

 

– Zachary Barlow, legal blogger

“This aggressive action is nothing less than a SLAPP suit intended to intimidate perceived opponents,” said Josh Zinner, CEO of ICCR, in regard to the ExxonMobil lawsuit.

Nicolai Tangen, CEO of Norway’s US$1.5 trillion national oil fund, the world’s largest sovereign wealth fund and one of the world’s largest stock market investors, said ExxonMobil’s action is a worrisome development. “We think it’s very aggressive and we are concerned about the implications for shareholders rights,” he told the Financial Times.

ExxonMobil filed the lawsuit in a U.S. District Court in the Northern District of Texas, which has a reputation for conservative legal rulings. Judge Mark Pittman was assigned to hear the case. Pittman, appointed to the court by former president Donald Trump, has made notable rulings against student debt relief and restrictions on the rights of 18- to 20-year-olds to carry handguns.

ExxonMobil has faced a number of investor actions in recent years, including a Follow This proposal voted down by investors at last year’s annual meeting to adopt a medium-term greenhouse-gas-reduction plan. Three years ago, ExxonMobil suffered a historic defeat on a proposal from hedge fund Engine No. 1, which was successful in ousting three of its directors on a demand for more stringent climate change action.

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Driven by concerns that investors are being misled, sustainable investment leaders are hoping to streamline and codify the sometimes-murky terminology of ESG investing (which takes into consideration environmental, social and governance factors).

“It’s very important that we have clear terminology that everyone understands,” says Roger Beauchemin, CEO of Addenda Capital and chair of the Canadian Responsible Investment Association (RIA). RIA is a member of one of the three sustainable investment networks that formed the Collaboration to Align and Refine ESG Terminology (CARET) late last year.

The CARET partnership includes the Global Sustainable Investment Alliance, made up of responsible investment networks in the United States, Europe, the United Kingdom, the Netherlands, Australia, Japan and Canada (RIA is the Canadian member); the Principles for Responsible Investment, with more than 5,000 signatory organizations managing over US$120 trillion in assets; and the Chartered Financial Analyst (CFA) Institute, the global professional body for more than 190,000 investment managers and analysts.

A technical committee is reviewing key ESG and sustainable investing concepts, which will go to a steering committee by the end of the year, says Mary Robinson, director of research and investor networks for RIA and a member of the CARET technical committee. Once the new terminology is finalized, the organizations will encourage the money management industry and investors to incorporate it into their own definitions of sustainable and responsible investment.

As well, organizers hope to influence the growing body of regulatory standards governing industry practice and disclosure, which has been triggered by greenwashing concerns.

“The regulators are concerned that investors may be getting misled – or mis-sold something that hasn’t been properly characterized,” Robinson said in an interview after participating in a session on the CARET project at the RIA conference in Toronto in early June.

The conference was held at an important time for the responsible investment industry in Canada and around the world. The sector has faced a steady drumbeat of greenwashing allegations and a series of regulatory crackdowns on misleading communications and marketing.

The theme of this year’s conference was “This is the moment to get it right,” a reference to a feeling by many in the industry that it has overpromised and underdelivered on environmental and social impact. This has become especially true in the last few years as UN climate change summits have raised expectations that global capital can be deployed to help solve the climate crisis.

Oversight lacking

The CARET project is a response to a problem that has its roots in the early 2000s, when small and medium-sized money management firms started to issue funds and other products with little regulatory oversight using basic ESG screening, engagement, thematic and impact investing strategies.

In the beginning, most banks and large money management firms didn’t pay much attention. But after rebounding from the financial crisis of 2008, they found a new market in sustainable investment and launched a barrage of funds using ESG integration as the dominant strategy.

The value of global sustainable investment assets jumped from US$23 trillion in 2016 to US$35 trillion in 2020. In the U.S., sustainable investments quadrupled from US$4 trillion in 2014 to US$17 trillion in 2020.

The regulators are concerned that investors may be getting misled – or mis-sold something that hasn’t been properly characterized.

 

– Mary Robinson, the Canadian Responsible Investment Association

Accusations of greenwashing grew along with this expansion.

Regulators responded with a wave of new rules. Europe established the Sustainable Finance Disclosure Regulation earlier this year, requiring funds to categorize themselves on a sustainable investment scale. Securities rulemakers in the U.S. and U.K. have proposed similar regulations. Last year, Canada set new disclosure guidance for funds with ESG names, requiring transparency on investment objectives and how ESG factors are evaluated and monitored.

The regulatory crackdown has resulted in ​a shrinking of official estimates of the size of the ESG industry. Asset managers are reluctant to publicize ESG funds that may be offside of the new rules. And industry researchers are scrutinizing which managers qualify for the sustainable label. As a result, the official estimate of sustainable investment assets in the U.S. has dropped from US$17 trillion in 2020 to US$8 trillion last year.

ESG integration under scrutiny

While all ESG strategies have definitional problems, ESG integration is generating the most confusion among investors. ESG integration is the explicit and systematic inclusion of ESG factors in investment analysis and investment ​​decisions.

“One of the biggest issues with ESG integration, and probably one of the sources of confusion, is that you can’t look at a portfolio to verify whether ESG has been integrated,” Robinson told the conference. This is different from sustainable investment screening or thematic strategies, for example, in which it’s easy to discern whether screens or themes are being adopted by looking at the companies in a portfolio.

In addition to ESG integration, the project is reviewing definitions for four other ESG strategies: screening (the exclusion of investments based on certain ESG screens – i.e., human rights violators or fossil fuel producers), thematic investing (investing in specified ESG themes, such as renewable energy), stewardship and engagement (management of ESG issues through corporate meetings and voting) and impact investing (the conscious investment of capital to create social or environmental impact).

A 2015 report from the U.S. Forum for Sustainable and Responsible Investment found that eight of 16 large money managers claiming to use ESG integration failed to disclose specific ESG criteria being integrated, or provided criteria only for certain asset classes such as property or fixed income.

The CARET project proposes to define ESG integration as the incorporation of ESG factors into financial risk management, distinguishing it from ESG screens or themes more associated with social or environmental impact.

This business is full of acronyms. We need to simplify that. We need to codify it.

 

– Roger Beauchemin, CEO of Addenda Capital and chair of RIA

“It should help reduce risk if you are considering material ESG factors that could have a material impact on your performance,” says Nicole Gehrig, the CFA Institute’s director of global industry standards. New ESG integration guidance from the CFA for managers and analysts is expected to be a part of the CARET recommendations.

By emphasizing ESG integration as a risk-reduction tool rather than a vehicle for environmental or social impact, the new definition of ESG integration will help to distinguish money managers who want to use it for risk management from those who want to tackle real-world problems like climate change by using the other sustainable investment strategies.

It remains to be seen how successful the CARET project will be in winning over the sustainable investing industry to its new terminology, or whether regulators will incorporate the new language into communication and marketing rules.

But Beauchemin says the project is vital to the future success of the industry. “This business is full of acronyms,” he says. “We need to simplify that. We need to codify it. Those are foundational pieces. And if we’re going to build, we need to have strong foundations that everyone agrees on.”

Eugene Ellmen is a former executive director of the Canadian Social Investment Organization (now Responsible Investment Association). He writes on sustainable business and finance.

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The report, released by Principles for Responsible Investment (PRI), a body of financial institutions supported by the UN, ranks Canada as “a low-regulation jurisdiction” that relies on voluntary measures to align business investment with responsible climate action. PRI’s report recommends that Canada revise its laws to make climate concerns part of investors’ legal obligations.

PRI found that Canada lags behind other nations when it comes to regulating how pension funds and other asset managers consider the sustainability impacts of their investments. “Our own analysis shows that many Canadian investors may be interpreting their legal duties in ways that discourage them from considering sustainability impact goals, even where pursuing such goals can help them discharge their duty to achieve financial return,” the report says.

PRI urges federal regulators to provide clear guidance on how investors should go about incorporating sustainability factors into their decision-making, and how they should report on their progress toward sustainability goals.

Specifically, regulators should clarify when sustainability impacts can or must be considered by pension authorities in discharging their legal fiduciary duties (the duty of care by investors to their shareholders or pension fund members). And to avoid any doubt, regulators should declare that climate change is indeed relevant to a pension fund’s long-term financial performance.

Maintaining healthy, long-term financial returns depends on the viability of environmental and social systems, the report says. That’s particularly true with regard to climate change and the loss of biodiversity, for which the earth is reaching the boundaries of sustainability.

“The world is facing environmental and social emergencies – for example, the crossing of planetary boundaries – which pose material risks to the basic quality of life for current and future generations,” the report says.

“Canada still lacks the kind of economic policies that would signal to investors its long-term commitment to an equitable transition to a low-carbon economy,” it concludes.

Canada’s financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), has stressed the need for “sound climate risk management” in the country’s financial system. To date, however, OSFI has failed to implement a mandatory approach to risk management beyond a broad expectation that banks, pension funds and insurance companies disclose their practices.

Conservative backlash stifles ESG investing

There has been a growing trend of pension funds and other large institutional investors incorporating environmental, social and governance (ESG) factors in investment decisions. However, ESG investing remains far from being a business-as-usual practice, and there has been a backlash from conservative investors and politicians (particularly in the United States) who view it as politicizing investment decisions.

The financial and investment risks arising from climate change have been well documented by organizations such as the Financial Stability Board, an international body representing the world’s central banks. They include physical risks from flooding, extreme heat waves and other weather phenomenon; policy-related challenges as governments seek to transition away from reliance on fossil fuels; and risks that new technology will supplant existing businesses.

A report produced nearly four years ago by Canada’s Expert Panel on Sustainable Finance urged the federal government to clarify the concept of fiduciary duty to make it clear that long-term investors must consider “non-financial issues” that could undermine economic performance.

That panel was chaired by current Bank of Canada Governor Tiff Macklem and included such industry luminaries as Barbara Zvan, now chief executive officer at Ontario’s University Pension Plan, and Andy Chisholm, a board director with the Royal Bank of Canada.

The PRI report urges the federal government to take specific action to improve sustainable finance regulations. Under Finance Minister Chrystia Freeland, the federal government has been slow to respond to the expert panel’s recommendations.

ESG investing integrated

In an interview, Senator Rosa Galvez applauded the direction of the PRI report, saying she hoped it would prompt concerted action from Freeland.

Galvez introduced her own legislation, Bill S-243, the Climate-Aligned Finance Act, that reflects many of the PRI recommendations, but that bill is stalled in the upper chamber due to opposition from conservative senators.

“Integrating sustainability goals across the investment industry is critical,” Galvez says. “It is urgent for pension plans and other institutional investors, with respect to their fiduciary duty, to be looking at the long term, but they remain focused on the short term.”

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The year started optimistically, fresh off the bold and ambitious agreement in November 2021 that established the Glasgow Financial Alliance for Net Zero (GFANZ). GFANZ assembled some of the world’s most powerful financial institutions to fight global warming by pledging to bring loan and investment portfolios worth US$130 trillion to net-zero by 2050.

But within months, that optimism started to wither as leading members threatened to leave the alliance after learning they were expected to implement stringent emission cuts by 2030. By November, GFANZ organizers conceded that the 2030 emission-reductions targets would not be mandatory, acknowledging the one-year-old agreement had no teeth.

This surrender was part of a wider pullback, as banks, investment funds and asset owners axed billions of dollars from sustainable investment funds and reined in marketing excesses.

What caused this turnaround? And what does it mean for the future? Here are five trends that helped to shape this astonishing shift, as well as a look to the next 12 months as sustainable finance reimagines its future.

North American banks dug in on fossil fuels and pressured GFANZ to capitulate

Climate advocacy organizations ramped up criticism of North American banks in 2022 as the banks touted their 2050 net-zero commitments while also lending billions to oil, gas and coal projects. Canadian and U.S. banks accounted for nine of the 12 largest financiers to the fossil industry in 2021, according to Banking on Climate Chaos, a report published in 2022 by BankTrack. North American banks also increased their oil, gas and coal financing by 23% in 2021.

With such heavy involvement in the global fossil fuel industry, it’s not surprising that three of those banks (JPMorgan Chase, Morgan Stanley and Bank of America), along with a group of unnamed Canadian banks, successfully pushed GFANZ in 2022 to lift stringent new CO2 reduction rules. The rules set by the United Nations Race to Zero campaign would have required GFANZ signatories to stop financing new fossil fuel projects and to cut CO2 emissions by 50% by 2030. Lifting the rules was a big concession to these signatories, allowing them to continue as GFANZ members even if they failed to meet the 2030 reduction targets.

Index fund managers slow-walked on net-zero

Like the major banks, large asset managers also touted their GFANZ commitments. But research released in the summer of 2022 revealed a big gap between their 2050 net-zero commitments and the degree to which  their emission targets were on a net-zero pathway. This was particularly true of low-cost, passively managed index funds, which invest in companies in proportion to their size in the market (regardless of CO2 emissions).

Vanguard Group, the world’s second-largest asset manager and a major index investor, came last on the study’s list of 43 asset managers, at 4% net-zero assets under management. Pointedly, Vanguard quit GFANZ in December, saying it aims to “provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks.”

More than US$8 trillion removed from sustainable investment tally

Against this backdrop of net-zero commitments, investors, regulators and the media started paying more attention to the staggering growth in assets claimed to be invested under sustainable or responsible strategies. In the U.S., for example, assets defined as “sustainable” tripled between 2013 and 2019, from US$6.6 trillion to US$17.1 trillion, prompting industry insiders to express doubt about how such a huge run-up could happen without greenwashing.

In 2022, the US Forum for Sustainable and Responsible Investment (US SIF) and its Canadian counterpart, the Responsible Investment Association (RIA), took a hard look at how they measure assets that incorporate environmental, social and governance (ESG) criteria  (which is the industry definition of sustainable investment).

The review resulted in a big decrease in the industry estimate of U.S. sustainable investment, to US$8.4 trillion at the end of 2021. Canadian assets declined to $3 trillion from $3.2 trillion in 2019.

Asset managers showed restraint in identifying their assets as “sustainable” in the 2022 surveys, removing trillions of dollars from the total. This was triggered in part by stiff anti-greenwashing proposals from the U.S. Securities and Exchange Commission (SEC) and ramped-up Canadian regulatory guidance.

As well, the two organizations tightened their methodology for this year’s reports, excluding assets from managers who claimed to employ “ESG integration” strategies but were unable to identify or document specific ESG policies.

Republicans slammed ESG as ‘woke’ and boycotted sustainable asset managers

Meanwhile, sustainable finance also had to stave off a backlash against ESG from conservative critics in the U.S. “The woke left is poised to conquer corporate America,” said former U.S. vice-president Mike Pence in May. By August, Texas had banned 10 asset managers and about 350 investment funds from doing business with the state. By the end of the year, 35 anti-ESG bills had been introduced in state legislatures, although only 15 had become law.

BlackRock and Vanguard took much of the brunt of the conservative attacks for supposedly avoiding investment in oil and gas companies, although the two companies are index investors that hold billions of dollars in fossil fuel assets. The companies were summoned to the Texas state legislature to explain themselves, but Vanguard was excused after it quit GFANZ, a development that many in the ESG community fear will have a chilling effect and could spread to other investors.

European asset managers struck US$140 billion from ‘dark green’ investment category

Citing potential greenwashing from the expansion of sustainable funds in Europe, European Union regulators established the Sustainable Finance Disclosure Regulation in 2022, requiring funds to categorize themselves as dark green, light green or conventional, based on the degree to which investments support sustainability. The regulation has alarmed the industry, prompting managers to downgrade at least US$140 billion in funds previously identified as dark green.

The finance industry “sprinkled ESG fairy dust” on many of these funds, says Paul Clements-Hunt, who invented the ESG term in 2004 during his work for the UN. “Anybody who uses ESG, sustainability or green purely as a marketing device is really heading for trouble. You’ll see a developing queasiness from marketing departments where, perhaps, ESG funds aren’t all what they’re cracked up to be.”

So what’s ahead for 2023?

Under pressure from regulators, climate campaigners and conservative Republicans, sustainable finance is quickly moving away from the marketing excesses of the past. But will it switch its focus to real and documented social and environmental change? Here are some reasons for cautious optimism.

HSBC, European banks lead on net-zero

HSBC, the largest bank in Europe, announced it will cease financing new oil and gas projects, although the policy won’t apply to its Canadian unit being taken over by Canadian bank RBC. HSBC joins Dutch bank ING and La Banque Postale of France in stopping new fossil fuel financing. HSBC’s announcement is “a hugely important symbolic step,” says Matt Price, director of corporate engagement for Canadian advocacy organization Investors for Paris Compliance.

Biden act could jump-start U.S. green investment

The U.S. Inflation Reduction Act approved in 2022 has been called the most significant piece of climate legislation in American history. But it also could be instrumental in kick-starting private investment in renewable energy and green industry. A policy brief from the Environmental Defense Fund shows that some of the law’s key climate-finance programs could leverage 10 times more investment from the private sector. Federal spending of US$38.7 billion on a new green bank, infrastructure projects and additional support for energy loan programs could translate into private investment of $385 billion.

Ukraine war accelerates renewable energy ramp-up

The Ukraine war has been a boon to the oil and gas industry, driving up prices and stock values and eroding returns on ESG funds with zero or light exposure to fossil fuels. But the war could also accelerate investment in renewable energy as countries look for ways to avoid high-cost fossil energy. The world is expected to build 2,400 gigawatts of new generating capacity, mainly from solar and wind energy, in the next five years, says a report from the International Energy Agency, equal to China’s entire current generating capacity.

Regulators will push back against greenwashing

Financial regulators in the U.S. and Europe will continue to put pressure on sustainable funds to label themselves appropriately and disclose their sustainability objectives. Look for even more fine-tuning from EU regulators on rules for sustainable finance disclosure and investments qualifying for its new green taxonomy tag. In the U.S., the SEC has released proposals requiring that 80% of a fund’s assets adhere to the ESG approaches specified in its name. What’s more, the historic COP15 biodiversity agreement to protect 30% of the planet by 2030 is also expected to create new disclosure obligations on funds to report their impacts on biodiversity and natural capital.

Meanwhile, maybe, Canada will move forward

After years of regulatory dithering, Canada is tentatively getting its act together on financial rules to support its climate goals. Already a leader on carbon pricing, Canada is now moving to require banks and other federally regulated financial institutions to develop and report on how climate risks affect bank operations and financial stability. As well, Canada is developing a taxonomy for green and transition finance, similar to Europe’s green finance taxonomy. While a lot of the Canadian taxonomy still needs to be finalized, an early draft obtained by the Globe and Mail suggests new oil and gas projects could be disqualified from the green label, discouraging investment from funds and money managers.

ESG overwhelmingly popular with young investors

And, over the long term, young investors are expected to generate strong demand for sustainable finance that creates impact. A survey of 2,470 investors in 2022 found that almost 80% of investors 41 years and younger want investment companies to use their size and voting power to influence the environmental practices of the companies they are invested in. This compares with 42% of older investors.

What’s more, younger investors expressed support for such activism, even at a financial cost. “ESG activism is clearly driven by younger investors,” said Amit Seru, professor at the Stanford Graduate School of Business, which sponsored the study. “Investors under 40 want to make progress across a broad range of environmental and social initiatives and claim to be willing to suffer personal financial loss – sometimes very large loss – to see those changes realized.”

This may be the best reason yet to feel some optimism that sustainable investment can be a tool for climate action in 2023 and beyond.

Eugene Ellmen is a former executive director of the Canadian Social Investment Organization (now Responsible Investment Association). He writes on sustainable business and finance.

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Emotions have a strong influence on purchasing decisions. More often than we realise, we make these decisions based on emotions rather than rational calculations and facts. It is well documented that financial decisions are also influenced by emotions.

In low mood periods people are more pessimistic about firms’ prospects, which is associated with decreases in stock market prices.

Because of the growing popularity of assets with a strong focus on environmental, social and governance (ESG) goals – companies with corporate policies that encourage them to act responsibly – we wanted to look at what role emotions can play in determining people’s preference for sustainable investments.

Why do investors choose sustainable investments?

There are several reasons why people may want to invest in sustainable assets. Some may be “social signalling” – they like to talk about how their investments are socially responsible.

Another reason can be found in how someone was raised. An individual’s propensity to invest in socially responsible assets is influenced by having parents owning similar assets or growing up in a family that values environmental sustainability.

The “warm glow effect”, which is a good feeling experienced through the act of giving, also explains why investors choose ESG assets. Investors experience positive emotions when choosing sustainable investments, irrespective of the investments’ impact.

But does an investor’s mood influence their preference for sustainable investments? There are several reasons why emotions might affect where people put their money.

The role of mood in our investment decisions

There are two competing theories when it comes to examining the role of mood and sustainable investment.

The first is based on the idea that sustainable assets are generally less risky. In this sense, assets that are considered completely or mostly sustainable have been shown to outperform less sustainable assets in crises, as investors see them as more trustworthy and having fewer structural, legal and reputational risks.

This theory is also based on the idea that a lower mood leads to more risk-averse behaviour. That is, when someone is sad, depressed or angry they tend to become more cautious when making investment decisions and choose investments with lower risk.

A second and competing theory is based on the idea that a positive mood promotes prosocial behaviours and greater altruism. Investors with lower mood tend to focus on themselves and less about others. As such, they have less preference for sustainable investments.

Happier investors, on the other hand, may be more altruistic and favour sustainable investments because it benefits others (for example, community, workmates and the environment).

Our research has tested these theories, documenting evidence consistent with investors’ greater risk aversion.

More specifically, we found that a worse mood is associated with greater investment in sustainable assets. This is arguably due to a greater risk aversion pushing investors to favour sustainable investments that they perceive as less risky.

How to identify sustainable funds and test investors’ mood?

To identify sustainable versus non-sustainable funds, we used the Morningstar Sustainability rating. This rating is intended to help investors better understand and manage total ESG risk in their investments. A higher sustainability rating is associated with a lower ESG risk.

To capture the change in the average mood of households for a given month, we used a metric called “onset and recovery” (OR). This metric measures the change in the monthly percentage of seasonally depressed individuals who are actively experiencing symptoms.

Higher OR indicates an increase in symptomatic depression cases and, therefore, lower mood on average. For the Northern Hemisphere, OR is high during autumn (September), low during spring (March), and moderate during summer and winter. Southern Hemisphere countries experience the same pattern in reverse.

We contrasted OR levels in relation to investment in sustainable equity mutual funds in 25 countries over the 2018–2021 period.

In general, mutual funds with high sustainability ratings tended to attract more capital, suggesting that investors value sustainable investments.

More importantly, however, we found that when there was an increase in the percentage of seasonally depressed individuals, capital inflows into high-sustainability funds increased relative to low-sustainability alternatives (an extra 0.070% per month or 0.84% per year).

For an average mutual fund with a size of US$100 million, this additional capital inflow equates to $840,000 per year.

This negative association is consistent with a risk-aversion interpretation, supporting the conclusion that lower mood leads to more sustainable investments as investors perceive them as being less risky.

Our study comes with a caveat. Given the features of our data, we cannot test if the investors’ mood improves after investing in sustainable funds. This would not only confirm that sustainable investments are a safer option, but also that investing in them will boost people’s mood.

So, is sadness good for the environment and society?

Our research explores a potential channel that could explain people’s preference for sustainable investments.

Our findings suggest that, when it comes to investing in sustainable equity mutual funds, risk aversion triggered by negative moods was a more likely cause of increased investing than the potential happiness connected to their pro-social behaviour.

This does not imply that sadness is good for the environment or society, it rather confirms that investors consider sustainable investments a safer option.

Adrian Fernandez-Perez is a senior research fellow in finance at the Auckland University of Technology.

Alexandre Garel is a researcher in finance at Audencia.

Ivan Indriawan is a senior lecturer in finance at the University of Adelaide

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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It feels almost fashionable to bash responsible investing these days. 

Most of the criticism targets the acronym “ESG,” which stands for “environmental, social and governance.” ESG is used alongside traditional financial analysis to account for previously ignored “externalities” such as carbon emissions, boardroom diversity and employee satisfaction. Unfortunately, some circles erroneously refer to ESG as some sort of “woke” form of investing that pushes a “socialist agenda” into capital markets.

These misguided attacks are increasingly coming from people in high places. Elon Musk recently tweeted that “ESG is a scam” after Tesla got removed from a major ESG index for a lack of disclosure around key environmental and social issues and allegations of racism on the factory floor. Noted venture capitalist and PayPal founder Peter Thiel said in an April speech that “ESG is a hate factory” and equated it to the Chinese Communist Party. Even former U.S. vice-president Mike Pence joined the attack, saying “liberal activist investors are forcing private companies to abide by ESG investing principles, elevating left-wing environmental, social, and corporate governance goals over the interests of the business.”

Most of these hit jobs seem intended to score political points with a specific audience. Musk’s comments align closely with his recent embrace of right-wing politics. Thiel’s speech was made at a Bitcoin conference where attendees must have been upset about cryptocurrencies coming under fire for their heavy carbon footprint. Pence was speaking at an oil and gas conference where executives are being asked tough questions by investors looking to decarbonize their portfolios. Investors in unsustainable assets are feeling the heat, so we shouldn’t be surprised that they would fight back with anger against a movement that makes them accountable for the pollution they are generating.

But it’s not all broad-brushstroke political attacks. I’m seeing more nuanced critiques from industry insiders. Tariq Fancy, former BlackRock chief investment officer for sustainable investing, in a recent TEDx talk called fossil fuel divestment a placebo, equating it to giving wheatgrass juice to a cancer patient. Stuart Kirk was suspended from his job as head of responsible investing at HSBC after dismissing climate risk at a conference and telling us what he really thinks: “Who cares if Miami is six metres underwater in 100 years? Amsterdam has been six metres underwater for ages and that’s a really nice place.”

These comments have understandably caused quite a stir. They show that many large financial firms are just paying lip service to sustainable investing, and we shouldn’t kid ourselves to think that they are in it to change the world. Profit maximization is still the end goal, so sustainable investors need to expect greenwashing and do their homework before buying in.

These comments also show that there is a massive skills gap in the sustainable investment industry. Fancy and Kirk have no background in environmental studies, systems thinking or sustainability, and it shows. We are fooling ourselves if we think that a profit-first worldview will help us solve sustainability challenges. Fancy and Kirk have done a great job calling out problems in the responsible investment industry, but they offer little in the way of solutions.

Are these critiques a good excuse to dismiss all responsible investment funds and companies? Of course not. If anything, the political attacks show that we’re on the right track – we’ve got their attention. The more nuanced critiques are an opportunity for us in the responsible industry to step up our game, and fight back. We need better communication and explanation of what ESG is and what it isn’t. We need rigorous academic research to back up our claims. We need to be leaders in disclosure and transparency, opening up the curtain for anyone who asks. And we need change-makers and social innovators to learn finance so that we have people with the right worldview in positions of power at our large financial institutions.

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By their very nature, taxonomies are supposed to provide clarity and certainty. But a taxonomy being developed to help Canada’s financial sector transition to a more sustainable future is in danger of doing the opposite.

Transition finance is an emerging subset of the rapidly growing sustainable finance movement. The idea stems from a concern that restricting financing to companies that are already sustainable will slow the required transition for high-carbon industries. In theory, companies that aren’t yet sustainable will also need financing to become so in the future. It’s a good idea, but it creates a significant danger of greenwashing if we get it wrong.

The Canadian Standards Association (the CSA Group), a non-profit industry body, is developing a taxonomy for transition finance, which in theory should prevent greenwashing. However, the project could instead keep the door open for fossil fuels at a time when we need to transition away from them. 

In fairly stark contrast, the European Union (EU) has developed a comprehensive “EU taxonomy for sustainable activities” to create a consensus on financial standards backed by the legitimacy of financial regulators. This draft taxonomy is in the process of being adopted by the European Parliament. 

The EU taxonomy isn’t perfect, but it creates a specific definition of transition finance, dealing squarely with the danger that it can lead to carbon lock-in if defined as simply making incremental changes to practices that ultimately need to be replaced. The EU taxonomy defines transitional activities as ones for which no low-carbon alternatives are available and that have emissions profiles considered best in sector; those that don’t hamper the development and deployment of low-carbon alternatives; and activities that do not lead to lock-in of carbon-intensive assets.

Under those logical safeguards, an oil company could receive transition financing to install electric vehicle chargers in its gas stations or invest in renewable energy, but not for upgrades to a refinery, even if those upgrades marginally reduce emissions. The whole point of transition finance, then, is to support the wholesale transition away from fossil fuels to clean energy that’s required to reach zero emissions by mid-century. 

So what about Canada? A growing list of Canadian financial institutions have recently committed to align their strategy with what is required to address the climate crisis. Some actors in the country’s finance sector have rejected the EU taxonomy approach, however, in an apparent effort to preserve the deep entanglement between governments, financial institutions and the oil and gas industry. In 2019, Canada’s Expert Panel on Sustainable Finance released its final report, firmly renouncing the clear EU transition finance definition because it would largely shut out Canadian oil and gas producers. It’s not a mystery why. Canada is home to the oil sands, producing some of the highest-cost and highest-carbon oil in the world. This is an industry long facilitated by Canada’s political and financial establishments. Bending the rules to protect this industry is a hard habit to quit.

At the urging of fossil fuel companies and some of the Canadian financial institutions backing them, the expert panel argued that Canada should go it alone or work with countries “with similar resource endowments” and develop a taxonomy that would accept activities that others won’t. This attempt at creating a “made in Canada” green taxonomy amounted to a cynical effort to insert loopholes into sustainable-finance definitions to allow Canadian banks and institutional investors to continue financing oil and gas. If adopted, the CSA’s definition of transition finance could throw efforts to avoid carbon lock-in out the window, taking the “transition” out of “transition finance.”

The proposed taxonomy would grant the “transition” label to investments that increase access and use of natural gas to replace coal. That’s not decarbonization; it’s merely switching dependency from one fossil fuel to another. The proposed rules would also allow for the exploration and development of new oil and gas reserves, but no amount of creative accounting or qualification can credibly align financing for new fossil fuel expansion with climate science.

Any credible transition taxonomy should exclude the exploration and development of new oil and gas reserves, full stop.

The committee that the CSA Group struck to tackle the issue is composed only of financial actors, natural resource companies, governments, and industry stakeholders, while excluding climate experts, civil society and Indigenous groups. Why anyone would think this process to date won’t result in controversy and deeper uncertainty is hard to imagine. Canada is pursuing a pathway that lowers the bar and allows high-carbon activities to be labelled “sustainable” at a time when the International Energy Agency and United Nations are telling us to move rapidly away from fossil fuels. Canada is developing this behind closed doors with actors from the financial sector and the oil and gas industry, with the hope that the public, international financial institutions and our trading partners will somehow accept both the substance and the process.

Adopting a weakened taxonomy could stem financial flows into Canada, as major European investors will lack confidence in Canada’s compliance with international standards. It could also create headaches for internationally invested Canadian financial institutions like pensions. 

A better approach would be for Canada to hit reset and move to adopting standards aligned with the EU, ensuring that Canada’s valuable progress on sustainable finance isn’t undermined. 

Canada is well positioned to thrive as sustainable finance gains momentum. We can still get this right. Keeping the “transition” in “transition finance” is our best hope for a safer and more prosperous future.

Adam Scott is the director of Shift Action for Pension Wealth and Planet Health, a charitable project that works to protect pensions and the climate by bringing together beneficiaries and their pension funds on the climate crisis.

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As evidence, take Tiff Macklem. Appointed last June as the 10th governor of the Bank of Canada, his job is to ensure the stability of Canada’s financial system. With the bank’s tradition of political independence, and most of his seven-year term still to come, Macklem can afford to confront the climate threat head-on. 

In a November speech, Macklem declared that “climate change and the transition to low-carbon growth will have profound impacts on virtually every sector of the economy … so we need to understand the implications of climate change for economic growth and inflation.”

Politicians can trade barbs about climate issues, but financial institutions, as stewards of other people’s money, work hard to mitigate financial risks. “Transition risks are often mispriced, and physical risks are generally underappreciated,” Macklem noted. By filling in that knowledge gap, we could save billions in damage and eliminate an existential threat to Canada’s financial stability. 

The 2008 financial crisis pushed climate issues into the background. But the current pandemic, says Macklem, has “focused the public’s attention on extreme global risks and the value of resilience.” A key indicator is the flow of money into ESG funds – portfolios of equities or bonds that prize environmental, social and governance goals equally with profit. According to Macklem, ESG funds in 2020 raised twice as much money as in 2019, which itself tripled the 2018 amount. Canadian ESG issuance has also jumped, Macklem noted, from less than $2 billion in 2017 to almost $13 billion by mid-November.

To get ahead of the climate crisis, Macklem says the Bank of Canada is developing a multi-year research plan focused on climate risks to the macroeconomy and the financial system. It’s also collaborating on transition-mitigation strategies and sustainable finance with global partners such as the International Monetary Fund, the Financial Stability Board, and the Paris-based Network for Greening the Financial System. It’s essential, says Macklem, to be “in the room where it happens.”

And finally, the BoC is “working to bring this analysis home to Canada,” Macklem notes. In November, the Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) announced a pilot project working with a few bank and insurance company volunteers, such as TD, RBC, Manulife and The Co-operators. They’ll be developing climate scenarios that will help financial institutions better understand their climate risks under changing conditions. The Bank and OSFI will publish a report, planned for the end of 2021, sharing details on the specific scenarios, methodology, assumptions and key sensitivities.

In a statement, Jeremy Rudin, superintendent of OSFI, said, “Everyone, including the financial sector, will have to adjust to the new reality of climate change. The shape of that new reality will depend on many complex issues and on much that remains uncertain. This pilot project will allow us to refine our focus on the prudential aspects of climate change.”

Knowledge and transparency are power tools, Macklem says: “Scenario analysis will help financial institutions better understand their exposures to transition risks, and this will increase their confidence in their ability to disclose them.”

Then even the politicians will have to pay attention.

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