Diverging Sustainability Paths: Asset Owners Recalibrate as Regulatory Landscape Shifts

Rita Barcoe, Senior Manager, Stratagem Partners

Large investors maintain sustainability focus despite regulatory flux

Large asset owners managing over USD $20 billion are maintaining strong commitments to sustainability objectives despite evolving regulatory frameworks and political pressures. According to Mercer’s most recent research, 81% of large institutional investors and 64% of smaller asset owners now include sustainability goals in their investment policies, reflecting a deepening integration of environmental considerations into capital allocation strategies. According to Mercer's research, 29% of large asset owners expected to increase their allocations to impact strategies versus only 1% who said they would decrease theirs, showing the growing focus on measurable outcomes.

This commitment persists amidst significant regulatory realignment, with the European Union recalibrating certain climate policies and United States regulators adopting varied approaches at federal and state levels. The continued institutional focus on sustainability coincides with record growth in renewable energy infrastructure, with specialist transition funds raising substantial capital to address the estimated global infrastructure gap projected by 2040.

“The largest asset owners are increasingly focused on material sustainability factors rather than broad ESG integration,” says Gabriel D'Arcy, Partner at Centigo / Stratagem Partners. “This reflects a maturation of the market, with investors seeking measurable outcomes rather than simply ticking boxes.”

Industry impact reveals bifurcation in approaches

The financial services sector is witnessing a pronounced bifurcation in sustainability approaches, with large asset owners increasingly focused on materiality and investment outcomes rather than broad ESG integration. Impact strategies have emerged as the third most popular destination for new capital flows, behind only private credit and infrastructure, reflecting a shift toward measurable sustainability outcomes.

Corporate finance teams face increasing pressure to align capital expenditure plans with climate transition requirements, particularly as disclosure frameworks become more standardised globally. This has created a two-speed market, with leading companies integrating climate considerations into core financial planning while others maintain compliance-focused approaches.

The sustainability investment landscape is exhibiting structural evolution beyond early-stage implementation. Private markets have become central to sustainability strategies, with public market approaches increasingly challenged by concerns about financial materiality and measurement precision. The acceleration of renewable energy deployment creates substantial investment opportunities, with solar photovoltaic capacity having tripled between 2018 and 2023, and renewables expected to generate more electricity than coal for the first time in 2025.

Regulatory fragmentation accelerates compliance challenges

Regulatory fragmentation has accelerated, creating complex compliance environments for multinational organisations. California’s Climate Corporate Data Accountability Act (SB 253) and Climate-Related Financial Risk Act (SB 261) establish substantial reporting requirements beginning in 2026. The California Air Resources Board (CARB) has confirmed these statutory deadlines while finalising implementing regulations.

Meanwhile, the European Union has moderated certain sustainability ambitions through refinements to the Corporate Sustainability Reporting Directive (CSRD), adjusting reporting requirements and implementation timelines. This divergence creates particular challenges for organisations operating across multiple jurisdictions, requiring sophisticated management of disclosure requirements and stakeholder expectations.

“Companies are having to navigate an increasingly complex regulatory landscape,” says Ankit Kumar Das, Senior Manager at Centigo / Stratagem Partners. “The challenge is not just compliance with individual regimes, but managing the overlaps, gaps and inconsistencies between them.”

Strategic opportunities emerge amid transition risks

Progressive organisations recognise that sustainability strategy must balance regulatory compliance with commercial opportunity. The accelerating energy transition creates substantial capital reallocation opportunities, particularly in clean energy infrastructure, grid modernisation, and hard-to-abate sector technologies.

However, this transition also creates stranded asset risks, requiring strategic reassessment of legacy infrastructure. Companies demonstrating material climate risk management increasingly access preferential financing terms, with sustainability-linked loans showing significant year-on-year growth according to market data.

Operational integration deepens beyond compliance

Organisations are systematically integrating sustainability metrics into operational decision-making beyond compliance functions. Leading companies are establishing specialised sustainable procurement teams, implementing carbon pricing in capital expenditure frameworks, and developing climate-resilient facility management approaches.

These operational changes reflect recognition of both transition and physical risks, with climate-related hazards developing more rapidly than previously projected, creating particular risks for physical asset-dependent sectors.

Financial implications strengthen investment case

The investment case for sustainability initiatives continues strengthening as measurement methodologies mature and stakeholder expectations evolve. Capital availability increasingly correlates with sustainability performance, with high-performing companies accessing more favourable financing terms.

Investments in climate resilience demonstrate growing financial returns as physical climate impacts accelerate, while strategic positioning for the low-carbon transition enables competitive differentiation. These financial incentives exist alongside persistent shareholder scrutiny, with derivative litigation risk remaining substantial for organisations failing to effectively manage sustainability commitments.

Three critical success factors

The sustainability landscape is undergoing substantial maturation, evolving beyond early implementation challenges toward sophisticated integration with core business strategy. Successful organisations recognise that sustainability now requires precise materiality focus rather than broad ESG implementation, with particular emphasis on climate transition positioning and physical risk management.

Three critical success factors distinguish leading organisations in this environment.

• First, governance sophistication is essential, with sustainability strategy requiring clear board oversight and executive accountability.

• Second, quantification rigour increasingly determines credibility, with stakeholders demanding precise measurement of both sustainability impacts and financial implications.

• Third, integration depth determines implementation success, with sustainability considerations requiring embedding within core business processes rather than parallel initiatives.

Looking ahead, the sustainability regulatory landscape will likely continue diverging before potential reconvergence around global baseline standards. Organisations should develop regulatory horizon scanning capabilities to anticipate compliance requirements while maintaining focus on material sustainability factors with demonstrated financial relevance. This approach enables both risk mitigation and opportunity capture, positioning organisations to navigate the increasingly complex interface between sustainability requirements and commercial imperatives.