2026 will be the year of 'certain uncertainties' for ESG in Australia, with the landscape characterised by stark contrasts: headwinds from an oscillating macro environment, muted fund flows, and markets that continue to climb despite challenging fundamentals. Yet tailwinds are emerging from the rise of regulatory change, particularly around sustainability reporting and climate disclosure.
As evidence of physical climate risks surfaces, investors are, more than ever, driven by the recognition of risks and opportunities for their portfolios, putting sustainable investing back in the spotlight as a core consideration rather than just being a second thought.
The regulatory floor: mandated climate reporting
Mandatory climate reporting in Australia is set to hit its first critical year where large entities and financial institutions have been required to publish emissions data, setting the stage for the convergence of global sustainability reporting standards.
As one of the first countries to mandate adoption of the International Sustainability Standards Board (ISSB), other countries planning to follow Australia’s footsteps will start to account for nearly 60% of global GDP and nearly 50% of global stock market capitalisation, setting powerful expectations for consistent measurement and disclosure.
While regulations are being phased in for bigger entities, the ripple effect will be far-reaching where external suppliers will eventually also provide their carbon footprint. It’s expected that the perception of carbon reporting be treated with the same rigour as financial accounting and begs the question: Is the market ready for this?
The ripple effect of US greenhushing
With Donald Trump driving some of the most visible rejections of sustainability issues, like withdrawing from the Paris Climate Agreement in 2017 and again in 2025, the US has become one of the biggest greenhushing hotspots in the world.
At first, there was outrage from many large corporates, but now, as the US retreats from global climate action at an unprecedented scale, withdrawing from over 60 international organisations focused on combating climate change, the response has been a resounding silence, and understandably so. Corporate opinion on political decisions lead to retaliation, so working behind closed doors has become the norm for those who understand the material ESG issues related to profit and loss, as risk is a major decision driver and physical climate risk is now considered a core financial vulnerability.
Recent US anti-ESG moves, such as the introduction of the 'Protecting Prudent Investment of Retirement Savings Act', which limits pension funds from considering ESG in decision-making, continue to miss the fundamental point. Despite being characterised by one US congressman as 'appeasing left-wing environmentalists', ESG is not an ideology, but rather a framework for assessing risk and opportunity.
Ironically, the new bill itself states that US pension fiduciaries are required to make investment decisions based solely on factors expected to have a material effect on the risk or return of an investment, and that’s precisely what ESG in investment decision-making is designed to do: focus on what's material.
Global sentiment surrounding ESG
Unfortunately, the wave of greenhushing in the US is reaching Australian shores, particularly among US-based managers operating locally. These organisations face an increasingly delicate balancing act: appeasing the anti-ESG sentiment back home, while needing to meet the higher expectations of offshore investors which have varying sentiments on sustainability. Ultimately, this is less about posturing than intelligent decision-making and fund managers are likely to act accordingly: money follows the physics, not the politics.
Additionally, the rollout of standardised ESG labelling laws in Europe over the past year holds relevance for Australia and the broader Asia-Pacific region, as it’s an issue stuck in limbo due to the unclear and inconsistent frameworks from different European regulatory bodies. Shifting thresholds on global standards have given rise to 'framework fatigue' where labels, once a primary seal of approval for a fund, no longer carry the weight they did in earlier years.
Given that the Australian Government is currently consulting on its own rules for localised sustainability labelling of financial products, ESG labelling is likely to take a back seat until greater clarity is achieved on a domestic level.
Sustainable investing at a crossroads
Political headwinds, regulatory wind-backs and negative headlines have prompted investors to question the roles of sustainability and ESG and its importance, but in a world of volatile macroeconomic conditions and rising geopolitical tensions, the shift is turning to a more pragmatic realism. The driver? Increased attention to rising physical climate risks, and a rise of new-wave investors who have started to recognise the urgency of climate mitigation.
The goal? To have better assessments of physical climate risks and, crucially, better data in areas that fall short of sustainable opportunities.
Local sustainable funds are likely to face another muted year of investor inflows, continuing the trend of the past 18 months. However, Australia remains one of the few regions to maintain net inflows, indicating that demand has been more stable here than in other markets. Our data continues to demonstrate that funds focused on sustainability tend to perform broadly in line with traditional funds across major asset classes over the long term. As with any active strategy, there are periods of over or underperformance due to relative asset positioning, but we believe fund managers who lead the next phase of sustainable investing will demonstrate how their ESG expertise provides that tangible investment edge.
Looking ahead
2026 represents a pivotal moment for sustainable investing in Australia with the convergence of mandatory climate reporting, and the undeniable reality and results of physical climate risks.
While political headwinds and market uncertainties persist, the fundamental economic case for sustainable investing will test the market’s ability, and investors’ know-how, to separate signal from noise for the next phase of ESG integration in this ever-evolving landscape.
