ESG 2026 outlook: Resilience and evolution

Key takeaways

• Sustainable investing showed itself to be resilient and evolving in an eventful and volatile 2025, with policy support and growing artificial intelligence (AI) power demands emerging as tailwinds for renewables by year end.
• Biodiversity, the social impact of AI and shareholder rights will be among the top environmental, social and governance issues in 2026, respectively.
• Policy on defense stocks in Europe is shifting, while nuclear is gaining acceptance as a critical component of both energy security and sustainability, especially for powering data centers and the energy transition.

For a detailed overview of the topics that will define the landscape of sustainable investing in 2026, we recently spoke with ClearBridge Head of ESG and Portfolio Manager, Mary Jane McQuillen.

How are you thinking about portfolio-level sustainability opportunities right now?

Sustainable investing showed itself to be resilient and evolving in an eventful and volatile 2025. We entered the year with elevated interest rates and some political pressure weighing on renewables; at the same time, a heavily concentrated AI-driven market was a headwind for diversified investors seeking sustainability opportunities across economic sectors.

In a market-driven twist, we end the year with positives for renewables on both of these fronts: despite wind being a slight outlier, renewable energy stocks steadied following the US’s One Big Beautiful Bill passing in July, whose safe harbor update provided some relief and clarity to the renewable space. At the same time, the AI boom’s large power demands have given renewable energy an additional tailwind as hyperscalers sign power purchase agreements to secure low-carbon sources of energy, including nuclear. Roughly 90% of incremental power added to the US grid in 2025 was from renewables.¹ Despite negative rhetoric on US renewables, the reality is that renewables form a relatively high percentage of power, both being built today and planned for the immediate future.

We also continue to see data pointing to outperformance of sustainability-leading companies; one performance-tracking model has found that an environmental and social factor has produced positive alpha independent of other style factors, suggesting active sustainability managers have an attractive opportunity set (Exhibit 1).² Similarly, one measure of sustainable-themed stocks found that most cohorts (16 of 28) outperformed global equities in 2025, led by materials supporting a circular economy, grid efficiency and green capex dominate thematic cohorts.³

Sustainable allocations are also shifting in certain subsectors, as defense and energy security have grown as policy priorities alongside the energy transition, particularly in Europe. This has led to Europe’s Defense Readiness Omnibus bill in June 2025 and the clarification under EU Sustainable Finance rules that defense companies’ contribution to safeguarding peace and security make them eligible for inclusion in Article 9 funds, which are required to disclose impact outcomes relative to their sustainable investment objectives. Supporting energy security in Europe, nuclear energy is also increasingly on the table for European sustainable investors, as well as in the United States, where nuclear has been in demand as a power source for data centers.

Looking at sector exposures of sustainability portfolios, the largest overweight relative to global equities broadly is to industrials, likely reflecting interest in energy efficiency, electrification, the renewable energy supply chain and the circular economy / resource efficiency.⁴

What sort of demand for sustainability investment do you foresee in 2026?

Sustainable investing remains in demand around the globe. Recent surveys show 86% of asset owners expect to increase allocations to sustainability strategies in the next two years; energy efficiency and renewable energy are the top two investment priorities for nearly 1,000 institutional investors surveyed across North America, Europe and Asia Pacific, with climate adaptation ranked third.⁵ In another survey of 500 global institutional investors, 73% report growth in assets aligned with sustainable criteria, with Southeast and South Asia at 80% and the United Kingdom at 78%.⁶ Natural capital strategies—such as biodiversity—aligned with the energy transition are also in demand.⁷

What are the main sustainable investment themes you foresee in 2026?

While policy support remains dynamic, the reality of climate change has kept climate solutions—decarbonization as well as climate adaptation strategies—very relevant. Companies with products and services that help us adapt to climate change are seeing their opportunities expand. Investable categories we’re looking at in particular for 2026 include: water scarcity and management to handle droughts and intensifying water stress; grid hardening and resilience via utilities; disaster response needs driving demand for rebuilding materials as well as generators and pumps for emergency response. Other ways to address climate change include climate-resilient construction and materials including insulation, roofing and HVAC systems; wildfire prevention and air quality via monitoring and personal protective equipment; climate-resilient agriculture solutions such as precision agriculture technology and irrigation infrastructure; and climate and environmental data needs in support of supply chains, insurance companies and governments.

Critical minerals are also on our radar, with electrification, the energy transition, AI and defense needs all driving demand for commodities such as copper, aluminum, silver, platinum and lithium. Both independently and as part of Advance, a PRI-led stewardship initiative for human rights and social issues,

What are your expectations for biodiversity as an investable sustainability theme?

Biodiversity has been garnering more discussion in the past few years, and companies, investors and governments are making strides in how they measure and approach it. We generally approach biodiversity through major subcomponents such as forestry, water and climate, which are often related. Forestry topics are especially relevant to homebuilders, home improvement retailers, makers of wood alternatives and consumer staples companies manufacturing paper products, all of which we own or have owned recently.

Biodiversity is also a concern for AI data centers. In a study on data center growth and water use in Phoenix, a booming data center hub, Ceres found that annual water use associated with data center electricity consumption is expected to increase by 400%, from an estimated 2.9 billion gallons to over 14.5 billion gallons, based on planned facilities—enough to supply the entire city of Scottsdale, Ariz. (population 244,000) for over two years.⁸ Water stewardship is therefore a major topic of engagement for companies in the AI data center value chain, including hyperscalers. Cooling data centers using air requires more energy than with water, making water the lower-emissions choice; however, more data centers are being built in water-stressed areas, creating potential operational and environmental risks.

Climate and biodiversity are deeply interconnected, as effects of climate change on temperatures, rainfall and seasonality affect how and where species thrive, while biodiversity helps control the climate: forests and wetlands absorb and store carbon dioxide, for example. Companies with products and operations that affect both carbon emissions and biodiversity—both on land and in the water—are relevant investments.

New biodiversity metrics and tools we’re exploring to better understand nature-related opportunities and risks include AI-driven geospatial analytics, which use location-based data provided by satellites to identify company asset location and determine operational exposures at the site level. These analytics can then leverage ecological data, such as habitat degradation, species distribution and ecosystem services and components (such as water and pollination) to estimate a company’s impacts and dependencies on the ecosystem.

Human rights will continue to be monitored and considered for company engagements where best practices can be applauded, or weak policies and oversight could lead to negative implications, such as in a company’s supply chain.

What is the most pressing development on the social side?

Many workers and governments are concerned about the social impacts of AI, for example on employment, as well as the responsible and ethical uses of AI. While some have feared elevated job losses due to AI, a closer look reveals a more nuanced picture. When evaluating job creation and AI adoption by industry, labor weakness has been most evident in industries with the lowest AI adoption rates (Exhibit 2). This suggests other dynamics are playing a larger role than AI in slowing job growth — perhaps changing immigration and trade policy and an aging US population, for example.