Despite evolving political views, regulatory recalibration and market volatility, sustainable investing has shown resilience rather than retreat over the past year, with growth shifting geographically and adaptation emerging as a critical new frontier for investors, according to Jaakko Kooroshy, global head of sustainable investment research at LSEG.
Environmental Finance: How would you characterise the past year for sustainable investment?
Jaakko Kooroshy: The past year has been defined by uncertainty and change. Shifting politics, trade and tariff tensions, and regulatory recalibration have unsettled markets.
One key question for investors has been whether this uncertainty would reverse the rapid growth of the green economy and sustainable investing over the past decade. Our research suggests the answer is no. While there has been a pullback in some regions, there has been clear acceleration in others. Overall, the picture is one of resilience and continuity rather than collapse.
In our 'Investing in the Green Economy' report published in May 2025, we found:
- The global green economy exceeded $5 trillion in market size for the first time.
- Green bond markets crossed another important threshold, surpassing $3 trillion outstanding.
- US corporate issuance declined sharply, but US municipal issuance continued to grow, while issuance accelerated in Asia, particularly China.
- We are also seeing climate adaptation emerge as a new growth vector in sustainable finance.
EF: How are investors responding to the need for adaptation financing?
JK: Physical climate risk is no longer a future concern; it's a present reality. We are already experiencing more frequent and intense extreme weather events, alongside chronic stresses such as extended heatwaves and water scarcity1. How severe these impacts become depends on the future emissions trajectory, but a 1.5°C pathway now appears increasingly difficult to achieve.2
In late 2024, as part of our COP29 Net Zero Atlas, we published research highlighting cities as a key vector for physical climate risk. We were nonetheless shocked when the devastating wildfires in Los Angeles in early 2025 illustrated the reality of these trends just a few months later.
Our latest Green Economy report also focused on the investment opportunities linked to adaptation responses. We're seeing increased planning and investment across both public and private sectors. For example, our analysis showed that a third of FTSE All-World companies now reference taking some form of adaptation measures in their annual disclosures.
EF: What are the challenges in identifying adaptation-related investment opportunities?
JK: As disaster recovery costs and uninsured losses continue to rise, investors are more readily seeing the economic case for investing in resilience measures. However, adaptation looks very different from mitigation. Mitigation is often associated with identifiable technologies such as solar panels or electric vehicles. Adaptation is, in many cases, more diffuse: water utilities upgrading infrastructure, construction companies using more heat-resilient building materials.
Identifying companies that benefit from these trends is therefore more complex. Using our Green Revenues Framework, we analysed where adaptation-related revenues are already emerging and found around $1 trillion in adaptation-linked revenue across our coverage universe today. These revenues rarely accrue to pure-play adaptation companies, but there are many firms whose products and services will increasingly benefit from resilience investment.
We're at a similar stage with adaptation today as we were with transition risk a decade ago. We know it's real and material, but the industry doesn't yet have a fully developed toolbox to identify sector-by-sector impacts.
We already know that sectors such as real estate, insurance and agriculture are viewing adaptation as critical. Beyond that, the landscape of risk and opportunity is still emerging, and questions around who bears the costs and who captures the upside remain complex.
EF: Where else do you see resilience in the green economy and sustainable finance last year?
JK: One important factor was COP30. While public commentary has been downbeat, we see the most recent COP as a meaningful success in several respects.
This was the first time countries were required to submit 2035 targets, filling the gap between 2030 goals and mid-century net-zero ambitions. For much of 2025 it was unclear whether countries would actually commit to such new targets, but in the final weeks before COP we saw a surge of new submissions.
Today, over 70% of G20 emissions are covered by updated nationally determined contributions. Crucially, several major emerging economies – including China, Mexico and Indonesia – have committed to absolute emissions reductions for the first time. Advanced economies have also made meaningful new commitments, with the EU for example committing to halve its emissions over the next 10 years, and then to halve them again in the following five.
These are significant new commitments that may not have happened without COP30. While these targets are insufficient to put us on a well-below-2°C pathway, they do imply a significant acceleration in global emissions reductions after 2030.
EF: What does this mean for investors?
JK: Many companies plan around 2030 horizons, with 2050 as a long-term endpoint. What's changing is the need to factor in interim milestones such as 2035, which raises difficult questions around credibility and execution.
At the same time, investors face a more complicated risk landscape. Transition risk is rising in several sectors while physical risk continues to intensify too.
In our COP30 Net Zero Atlas, we explored what a well-above-2°C world looks like in physical terms. We analysed eight countries – Including China, the US and Japan – across roughly 4,400 regions under a ~2.4°C scenario.
The results are stark. Around 2.2 billion people would be affected by materially worse physical impacts. We are moving into a new geography of risk that affects everything from real assets to local economies.
EF: Portfolio decarbonisation analysis and Scope 3 emissions remain a challenge for investors. What trends are you seeing?
JK: We've worked with various partners on our research including on tracking carbon intensity across portfolios and benchmarks. Scope 3 disclosure rates are improving, and data quality is slowly getting better, but from a very low base. Scope 3 data remain far more volatile than Scope 1 and 2, making portfolio-level calculations difficult.
We focus on technical innovation to manage this noise and our analysis focuses on the most material Scope 3 categories, which typically account for around 80% of emissions in a sector.
We have observed some interesting trends: for example, fixed income portfolios frequently show faster decarbonisation than equities due to benchmark composition and higher exposure to developed markets.
Investors recognise the importance of Scope 3 but are cautious about embedding it directly into products. Initiatives such as updated GHG Protocol guidance and suggestions for new approaches from groups like MEASURE show the issue remains very active.
EF: Finally, what are your priorities looking ahead to 2026?
JK: We'll continue developing our research across key sustainable investment themes. We're also revisiting portfolio alignment. Reducing alignment to a single temperature score doesn't capture the complex risks and opportunities climate change creates for portfolios. Alignment is better seen as a continuum along several key dimensions.
We'll also be returning to the topic of ESG scores, which has been subjected to criticism at times. Nonetheless, they continue to be widely used across the investment industry, and we need to understand why that is the case despite their limitations.
For more information, see: Insights | LSEG
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