Good morning everyone.
What I am going to talk about in my section today is the responsible investment landscape as we see it today, along with some of the interesting areas that we are working on and will continue to focus on in the coming years.
It will not be surprising, given everything you have heard today, that much of what I am discussing starts with what is happening in the White House. Looking back to the start of 2025, my overriding feeling, which was shared by many in the responsible investment community, was one of trepidation about what the year might bring.
Even before that, we were seeing rising skepticism around responsible investment and the importance of ESG and sustainability factors as drivers of investment performance. For much of the previous five years, flagship sustainable equity products, such as clean energy trackers, had significantly underperformed broader equity markets. As a result, many investors began stepping back from these allocations and questioning whether the ESG movement had gone too far.
Then Donald Trump returned to the White House with a promise to continue dismantling ESG-related structures and policies. As many will remember, his "drill, baby, drill" message reinforced concerns that the responsible investment industry could face significant challenges.
However, as is often the case, reality proved to be more nuanced. There were undoubtedly substantial challenges. In the United States, aggressive action against shareholder rights, particularly through the SEC, resulted in significantly fewer ESG-related shareholder proposals, which Morningstar reported were down 22% year over year. Renewable energy initiatives also came under pressure, especially sectors such as offshore wind, where major market participants experienced sharp declines in value, bond downgrades, and widening credit spreads.
Across the industry, there was a scaling back of net-zero commitments. One of the clearest examples was the effective collapse of the Net Zero Banking Alliance as a meaningful force. Sustainable equity funds also continued to experience outflows, with Barclays estimating $63 billion in redemptions from U.S. sustainable funds and $61 billion globally. Interestingly, ESG bond funds attracted approximately $32 billion in inflows during the same period.
Regulatory support also weakened. In the United States, climate disclosure requirements were rolled back, reducing the extent to which companies needed to report climate-related risks and opportunities. Europe also saw some regulatory easing through initiatives such as the EU Omnibus legislation, which was introduced to improve competitiveness among European companies.
Despite these challenges, investors increasingly looked beyond the political noise. This was particularly evident among asset owners. Research from organizations such as FTSE Russell showed little change in how asset owners viewed sustainability requirements. In fact, many surveys indicated an increased use of ESG and sustainability factors within investment mandates, driven by climate concerns and fiduciary responsibilities.
When engaging directly with companies, we found that sustainability initiatives were continuing, although they were less visible and no longer receiving the same level of public attention. This became evident through our engagement activities throughout 2025. Sustainability efforts were still progressing, just not always in the spotlight.
Another noteworthy trend emerged in equity markets. At the beginning of 2025, many expected traditional energy investments to perform strongly because of policy support for fossil fuels. While the S&P Index delivered strong returns of around 16%, global energy indices were largely flat and the U.S. energy sector actually experienced slight declines. In contrast, the Clean Energy Index significantly outperformed expectations.
This reflects investors taking a longer-term view of structural trends. Many believe that clean energy will play a critical role in supporting AI-related infrastructure and growth. This theme has been reinforced by industry leaders, including comments from Elon Musk highlighting the importance of solar energy in enabling future AI development. As a result, investors increasingly viewed clean energy through a thematic, long-term lens.
At Insight, our focus remains on financially material sustainability risks as they exist today rather than as we might wish them to be. One key area is climate change and its financial implications. We are placing greater emphasis on physical climate risks, including wildfires and other acute events, while also evaluating longer-term chronic risks.
We are examining questions such as which physical risks are most likely to impair value during the lifespan of an investment, which asset classes are particularly vulnerable, and whether regional climate risks should be reflected more explicitly in investment decisions. For example, we recently developed a climate risk framework for sovereign bonds, helping identify regions with greater exposure to climate-related threats and considering how that should influence investment processes.
Another focus area is identifying emerging sustainability issues, with artificial intelligence being one of the most significant. We are increasingly examining the ESG implications of AI deployment. Last year, our work concentrated on the environmental impacts of data centers, particularly issues around energy consumption and water scarcity. This research covered both public and private market issuers across corporate bonds and asset-backed securities.
This year, our attention has shifted toward AI governance. While much of the market is focused on AI's potential benefits, we believe there are also significant credit risks associated with poor implementation and inadequate controls. We are therefore studying what effective AI governance frameworks look like and how companies can establish controls that mitigate these risks.
We have also broadened our stewardship activity beyond individual company engagements to consider stewardship at a systems level. While investors do not have a mandate to set public policy, we do have unique insights into capital allocation and investor requirements.
In 2025, we published a policy advocacy document outlining our views. Since then, we have been encouraging governments to adopt more standardized disclosures related to sovereign bond emissions. We have worked with clients and policymakers on improving climate-related disclosure standards, contributed investor perspectives on transition planning in the UK and Australia, helped shape discussions around transition finance, and continued playing a leading role in developing best practices within the green bond market.
Finally, I want to return to the point about asset owners remaining committed to sustainability. Although sustainable equity funds have experienced outflows, we have not seen a reduction in demand for tailored fixed-income solutions that meet both sustainability objectives and financial return expectations.
The mandates we have won and onboarded this year demonstrate this clearly. Clients continue to seek a wide range of solutions. Climate remains the dominant theme, but many investors are also pursuing broader impact objectives. This demand is not limited to Europe. We have seen strong interest from clients in Australia, the United States, and other regions, highlighting the global nature of sustainability investing.
Importantly, ESG capabilities have become a structural part of our business. While some clients continue to apply basic exclusions, a growing proportion are incorporating specific sustainability targets into their mandates. Today, nearly a quarter of our total credit assets under management operate under such binding sustainability constraints.
The key takeaway is that while the world is changing and volatility remains high, responsible investment continues to be important. It is still happening, although perhaps less visibly than it was a few years ago. The focus has become more pragmatic, more accountable, and more grounded in financial outcomes, but its role in delivering client value remains as important as ever.
