Sustainable investment: an improving context for 2026

The last 12 months have been characterised by an increasingly complex and uncertain policy landscape, with some of the biggest global political shifts seen for half a century, making it difficult for investors to consider longer term macro trends represented by climate and sustainability themes. We’ve seen increasing regional policy divergence and challenging conditions for sustainable investment. 

Despite this, we see continued support for sustainable investment. A recent survey of asset owners from FTSE Russell (an LSEG business) found sustained adoption of sustainable investment strategies – and continued rising investor sophistication and focus on issues such as climate change. As many investors and asset owners focus on climate transition, consistent demand from investors and firmer regulatory foundations look set to boost sustainable investment over the long term.

Since its beginning in the late 1990s, the sustainable investment market has enjoyed steady, if not spectacular growth. By 2018, our annual survey of asset owners found that 53% of responding investors were evaluating or implementing sustainable investing practices.

Four years later, however, that figure had leapt to 86%.

Consensus through the 2015 Paris Agreement had catalysed climate policies around the world, boosting climate-related investments such as renewables and a nascent electric vehicle industry, and the European Union had launched a far-reaching regulatory agenda in support of sustainable finance.

Assets flooded into sustainable investment, and asset managers rushed to meet demand. However, in a rapidly evolving market, a lack of consistency and rigour in product labelling raised questions around ‘greenwashing’.

The strong outperformance of many sustainable investment strategies was reversed in the wake of Russia’s 2022 invasion of Ukraine. That led to skyrocketing energy prices and the recovery of the fossil fuel sector. As this unfolded, energy security became a more pressing priority for European policymakers rather than cutting emissions. Subsequent poor economic growth in Europe, together with the changing make-up of the European Parliament and Council, prompted a deregulatory push.

Around the same time, we also saw increasing divergence in political views, with decreasing support for ESG policies that had promoted net zero and diversity.

Fast forward to 2025, and the sustainable investment market is operating in a very different economic and political context with a combination of policy developments, and mixed perceptions, and more focus on balancing national growth and competitiveness priorities.

Amidst this new context, it is noteworthy that the sustainable investment market has proved to be resilient. This year, 73% of respondents to our asset owner survey said they are taking sustainability into account in their investments to some extent – a figure that has remained broadly steady for the last three years. For these investors, sustainability issues are potential sources of investment risk and return.

Climate change is the pre-eminent case in point.

While climate policies are changing in some countries, such as in the US, the multilateral climate process remains intact.

While COP30 in Belém may not have delivered everything needed to hold warming below 2 degrees it did lead to seventy countries, representing 71% of global emissions, setting 2035 targets in the run-up to the talks. These targets materially accelerate emissions cuts: to deliver them, countries are increasingly putting the laws, regulations and incentives in place that provide a firm basis for investments in climate-related companies and assets.

This is particularly the case where countries see economic advantage from the climate transition. China is investing massively in the clean energy economy. Its breakneck installation of renewables has enabled it to set an absolute emissions reduction target, of at least 7-10% below peak levels by 2035, for the first time. It is also exporting clean technology, from solar and wind technology through to batteries and electric vehicles, in enormous volumes, including to developing markets. Here, low-cost Chinese clean energy technology is outcompeting fossil fuel-generated power in terms of price [Note 1].

Europe, too, continues to promote renewables and energy efficiency to reduce its dependency on fossil fuel imports and to meet the increased energy projections, driven among other things by AI adoption. At the same time, its Carbon Border Adjustment Mechanism (CBAM) aims to address the issue of ‘carbon leakage’ – by protecting European industry from competitors in jurisdictions that are not pricing carbon. While the policy is generating some pushback, it could encourage the EU’s trading partners to introduce their own carbon markets.  

All this means that climate change remains squarely on the agenda of many investors. Our asset owner survey found higher-than-ever levels of concern among investors about climate risk and there was record engagement at London Climate Action Week and New York Climate Action week this year. There’s evidence that investors are moving capital in response: for example, assets tracking our FTSE All-World TPI Climate Transition Index family grew by more than 50% in 2024/2025, to over US$100 billion, following allocations by Phoenix, CalPERS and New York State Common Retirement Fund. 

The climate transition is contributing to growth in the wider green economy. The global green economy made up 8.6% of listed equity markets, with a market capitalisation of US$7.9 trillion, as of Q1 2025. That market cap has grown at a compound annual rate of 15% over the past decade – second only to the Technology sector. At the same point, green equities had delivered 59% of cumulative outperformance since 2008, comparing the performance of the FTSE Environmental Opportunities All-Share index to its benchmark, the FTSE Global All Cap.

This provides a wide range of investible opportunities–which extend beyond listed equities, into infrastructure, commodities, private equity and fixed income markets. The green bond market reached a record high of US$572 billion annual issuance in 2024, up 10% from 2023. As of the end of Q3 2025, the total outstanding value of green bonds exceeded US$3 trillion for the first time, illustrating the scale and maturity of the asset class.

We are also seeing something of a reset in the regulatory context for sustainable investment, particularly in Europe. Here, the EU’s Omnibus proposal – unveiled by the Commission in February but only finally agreed in December 2025 – introduced a range of simplifications to the EU’s sustainable finance framework.

As we argued at the start of 2025, there is clear potential for significant streamlining and reforms to reduce complexity, cut compliance costs faced by companies and improve international alignment. The final package goes a long way towards meeting those objectives. As the final details are hammered out, we see a real opportunity for the EU to, for example, boost the interoperability of EU rules and taxonomies with those under development around the world, and make technical enhancements, such as requiring XBRL tagging to enable automated analysis of sustainability information. 

Overall, we see positive effort to take a more pragmatic approach to regulation around corporate disclosure and sustainable finance, while working to ensure transparency, there is a focus on what is most useful to the end user.

Over the course of 2025, we saw something of a language shift in the sustainable investment market. With investors applying more scrutiny to claims around sustainability, providers have had to clarify the investment case for integrating sustainability factors.

This investment case depends upon a long-term assessment of the materiality of specific sustainability factors, in specific contexts. It requires high quality analysis, based upon robust data.

This effort is supported by the gradual improvement in the availability of corporate data on climate and other sustainability factors. As of last September, 37 jurisdictions, representing 60% of GDP and 40% of global listed market capitalisation were in the process of adopting corporate reporting rules aligned with International Sustainability Standards Board.  

Despite an increasingly complex policy landscape, the combination of pace of the energy transition, ongoing policy action, streamlined and more efficient regulation, better data availability and a renewed focus on the sustainable investment case, provides a strong footing for sustainable investment going forward.

This year also marks an important milestone for LSEG as we celebrate the 25^th anniversary of the FTSE4Good Index family. The principles that we applied when we designed that pioneering product in 2001 – transparency, robust data, good governance and ongoing innovation – continue to apply to our suite of sustainable investment indexes, data and analysis products. We believe these principles will help lay the foundation for the market’s ongoing development and growth in 2026 and beyond.