Labels Are Changing, Goals and Risks Are Not

Fires, floods, storms, extreme heat—all realities of 2026, one of the hottest years on record. According to current estimates, it’s likely that the planet will heat beyond 1.5 degrees Celsius, the number that represents a tipping point on global climate change. Just a few years ago, many institutional investors and asset managers were part of alliances formed with the hope of avoiding this point. So what happened?

It’s hard to point to one specific factor. Geopolitical conflicts, rising inflation and changes in policy have dissolved a number of climate alliances. The wars in Ukraine and Iran have forced change in energy policy priorities as global governments respond to disruptions in the energy supply chain. The rapid growth of data centers is also putting extreme pressure on electrical grids, and power providers have responded by taking the focus off decarbonization and moving toward an “all options on the table” strategy to meet the demand—at least in the short run.

For institutions interested in sustainability and responsible investing, the game is not over, but investors’ approaches are starting to change.

Reevaluating

 “I think we’re seeing the institutional community evaluate the prior 20 years,” says Daniel Ingram, a partner in and the head of responsible investing at Aon. “Many of them have portfolios that have adopted so-called responsible investing practices that in many cases look quite similar to those who have not formally adopted them. So more clients are asking where we go from here.”

Investors, Ingram says, are refocusing on alignment and what he calls an integrative approach to sustainability. In this view, investors are focused more on pragmatic goals and have clearer motivations behind their investments. The challenge with targets such as “net zero by 2050” is that they are not clear investment targets, but resulting outcomes. Consequently, when a regional conflict or other macroeconomic event happens, it forces a rethink that pushes stakeholders off target, although not necessarily fully away from sustainability.

“We’re seeing a reclassification in investment policy statements toward integration, which is more forward-looking and relies more on trends we see in the data, as well as risk mitigation,” Ingram says.

Risks and Opportunities

Going forward, Ingram expects institutions will focus more on evaluating material risks and physical risks, as well as identifying specific investment opportunities that could make a significant impact, than on sticking to a specific score based on environmental, social or governance factors or on trying to map to a target. By taking a more holistic approach, he expects that investors will be able to accomplish more on sustainability with clearer motivations and better visibility into how their approach is performing over time.

Peter Cashion, managing investment director of sustainable investments at the California Public Employees’ Retirement System, agrees.

“We see sustainability as both an opportunity set and an important risk mitigation tool,” he says. “Those are fundamental beliefs we have had at CalPERS for a long time.”

The $657.61 billion public pension fund recently made some changes to the type of sustainable investments it is pursuing. Cashion says the pension fund is making fewer investments in electric vehicle charging networks and offshore wind power. Instead, the fund is adding more investments in solar power, data center build-out, electrical grid improvements and geothermal energy.

“When it comes to language and taxonomy, we have moved away from the term ‘ESG,’” Cashion says. “We are looking at it as sustainability integration. So that’s our nomenclature change.”

Despite those changes, Cashion sees sustainability as a core portfolio management factor. The material risks resulting from climate change are not going to go away, even if certain phrases do.

“CalPERS is definitely not a sustainability tourist; we’re a bona fide resident,” Cashion says. “We do it because it’s aligned with our fiduciary duty. If [we’re] not taking into account climate risk in our real estate portfolio or infrastructure portfolio, for example, we’re getting an incomplete picture. If you’re not managing these risks, you’re not fulfilling your duty.”

Refocusing With Fewer Tools, More Risk

Rethinking nomenclature and parts of the investment strategy are not the only changes when it comes to sustainability. Investors expect they will receive less information from companies about emissions and will have fewer tools available to compel companies to act.

The Securities and Exchange Commission recently proposed limiting the climate disclosures that companies would have to make, which would put the U.S. behind other global jurisdictions in terms of climate disclosure and would give investors less visibility into the public companies in which they invest.

The SEC has also given companies the upper hand when it comes to responding to shareholder proposals. In November 2025, the SEC stated it would no longer make rulings on common proxy objections and would let companies rely on state exemptions. The move was interpreted by many as a means by which companies could disallow most shareholder proposals without interference. The change caused a spate of lawsuits, which have seemingly made companies less willing to decline proxies as they come up, but with the rules as they are, companies still have the upper hand—at least for now.

Not surprisingly, there has been significant investor resistance to making these changes permanent.

“We submitted a comment to the SEC opposing the climate disclosure rule decision,” says John Adler, who leads ESG investing in the New York City Comptroller’s office and for the New York City Employees’ Retirement System. “What we are talking about is the disclosure of material risks that can impact investment decisions. So for the SEC to unilaterally declare they aren’t material risks, we think, is a mistake.”

NYCERS, which had $326.26 billion in assets as of June 30, also pushed back on the proxy voting changes.

“We are also very concerned about the decisions the SEC has made around Rule 14a-8. Shareholder democracy is a very important issue—it is an integral part of healthy capital markets,” Adler says. “It does feel like investors and investment managers find themselves in an environment where they do not feel like they can vote existing proxies the way that they otherwise would because they might be targeted” by anti-ESG groups and politicians.

Still, with less data and fewer tools with which to engage corporate management, institutions will have to find new workarounds. Right now, institutional investors are using all of the engagement tools they can. Adler says one key focus area for the city’s five pension funds over the past three to four years is utility companies.

“Utilities are increasingly moving away from decarbonization benchmarks because they are trying to figure out how to meet the increased demand for electricity, and that’s been troubling to us,” he says. “So we are looking for ways to work with utility companies to meet their previously stated decarbonization goals.”

Adler points to the rise of data centers and growing electrification—of cars, homes and more—as the two key factors taking utilities off target when it comes to decarbonization.

“We have had success engaging with some companies. But there are a number of companies—mostly large tech companies—that ignore engagement and aren’t interested in issues raised by shareholders. They don’t respect shareholders,” Adler says. “They rely on dual-class shares or classified boards or other mechanisms to get around any issues that investors might raise.”

Over the next few years, Aon’s Ingram says markets might see some refinement to how investors work with companies to obtain data and to raise issues. To him, that could be a net positive if it ultimately leads to better outcomes.

“The key about responsible investing is that it is iterative,” Ingram says. “I think people have a tendency to think that if they make policies or join an initiative, they are done and they can set it and forget it. But these are issues that evolve over time, and the impacts reveal themselves over time. So it is important to keep reviewing your approach.”

Being willing to review the approach over time is also important from an investment perspective, he adds.

“It’s always going to be difficult, if not impossible, to quantitatively isolate or attribute what ESG factor has contributed most meaningfully to investment performance,” Ingram says. “But if you’re always asking more and better questions, you’re going to get greater visibility into the quality of ESG integration.”