US sustainable investing outlook: Another year of lawfare

The sustainable investment industry in the US leaves 2025 much as it entered it: facing a continued onslaught of litigation, regulation and investigation, with many large US financial institutions pulling back from net-zero targets and initiatives in the face of political pressure.

Bryan McGannon, managing director at US SIF, expects 2026 to be another “combative year” as the SEC continues its attacks on shareholder engagement and the prospect of more investigative letters out of Congress looms.

When it comes to collaborative initiatives, anti-ESG advocates in the US can largely say “mission accomplished”. The Net-Zero Insurance Alliance was already defunct, while the Net-Zero Banking Alliance shut its doors this year in the face of widespread departures.

Similarly, the flow of US investors pulling out of Climate Action 100+ continued at the start of the year, with Wellington, US SRI investors and the California University Endowment all leaving.

The big test next year will be how far the Net Zero Asset Managers initiative (NZAM) manages to retain large US managers that may be nervously eyeing the exit.

The group dropped all specific requirements and targets as part of its new commitment, while references to the need to recognise fiduciary duty and “deliver better investment outcomes” were added. NZAM also dropped all references to 2050 and weakened its previous 1.5C aim to “well below 2C”.

State Street Investment Management has already pulled part of its business and when the group reveals its updated signatory list early next year, it may look radically different to the one taken offline in January.

There are also some signs that attention is turning to the Principles for Responsible Investment, which got an explicit mention in an information demand from Republican financial officers earlier this year. However, the relative breadth of the principles versus more narrow climate initiatives makes it a more difficult target, according to one US investor.

Michael Littenberg, a partner at Ropes & Gray and head of its ESG practice, expects additional action by red state attorneys-general targeting ESG-related practices by asset managers, various ESG initiatives and proxy advisory firms on the basis of alleged breach of fiduciary duty and violations of consumer protection and antitrust laws.

BlackRock settled with the state of Tennessee at the start of the year in one such case, while suits from Texas and Florida against asset managers and proxy advisers, respectively, are ongoing.

Littenberg predicts that, in the US, 2026 will be “another year of lawfare on both the left and the right”. “ESG is just one front in a larger political and culture war, but it will not be a quiet one,” he says.

He raises the open question of whether the Trump administration will go after companies more aggressively on DEI. He also flags ongoing uncertainties around the litigation against California’s climate disclosure rules, including injunctions and the possibility of an appeal to the Supreme Court.

Transition progress

While the ESG industry is on the back foot and lawfare continues apace, many investors point out that the energy transition itself is proving relatively resilient in the US, not least as an investment opportunity for asset owners.

Investment consultancy RVK told a Los Angeles pension fund this month that it expects the renewable energy market to remain strong over the next several years, “driven by favourable economics rather than policy”.

Similarly, Maine’s public employee retirement system said its generalist GPs “are increasingly finding energy transition investments more attractive relative to fossil fuel investments”.

RVK added that, as costs for renewables production continue to fall and demand for energy continues to rise, “we see continued growth across all energy industries”. “Recent improvements in energy storage and renewable energy deployment have only accelerated this.”

However, the consultancy did note that high tariffs on component parts for renewable projects may be the biggest headwind in the sector.

CalPERS sustainable investment head Peter Cashion also tells Responsible Investor that he is bullish on US climate investments.

“There have clearly been challenges this year from a US policy perspective, whether it’s the [Inflation Reduction Act] changes, potential changes to the Clean Air Act, the Environmental Protection Agency, the reduction in Department of Energy spending for climate tech,” he says.

“Despite those, we’re still very bullish in terms of climate investment opportunities in the US, and one of the reasons is simple economics. Given that renewables are faster to market and lower cost, we’re still seeing strong demand in that area.”

Amy O’Brien, head of responsible investment at Nuveen, points to battery storage and grid enhancements as a key theme in the US.

The energy transition is “sufficiently broad and multifaceted that if you’re not paying attention to the investment opportunities you’re missing out”, she adds.

Bonds begone

The bond market is also feeling the impact of the anti-sustainability drive. The US was the largest single-country market for ESG-labelled issuance as recently as 2024, but now barely features as a footnote in many banks’ forecasts.

NatWest does not mention the US in its $1.1 trillion 2026 forecast, focusing instead on the expectation for increased APAC issuance, while JPMorgan Chase says increased ESG scepticism and political scrutiny have reduced appetite for issuance in the US.

Similarly, Barclays says in its corporate outlook that it expects “muted supply” from the US amid the conditions that led to a 53 percent year-on-year decline in issuance in the first 11 months of 2025. The bank attributes this largely to “the heightened regulatory scrutiny of corporate ESG initiatives”.

One US banker tells Responsible Investor that companies’ sustainability departments and legal and compliance resources are mainly focused on tracking developments and preparing for various mandatory reporting standards, leaving less time to focus on voluntary sustainable finance labels.

Borrowers are also put off by the lack of pricing advantage for labelled debt, the banker adds. “There wasn’t much to begin with, but even that has dropped down to more or less zero.”

At the same time, the banker says, issuers that have come to market this year have seen “some sizeable interest and increase in order books that we would have otherwise not seen with if they had gone with the conventional label”.

“Asset managers are begging me, ‘Please, you must have some corporate issuers’, because they have mandates to invest and they can’t fill them.”

While the overall picture is gloomy, the market for labelled asset and mortgage-backed securities remains strong. Federal mortgage giants Fannie Mae, Freddie Mac and Ginnie Mae are major contributors to the market, and are still using green and social labels despite the anti-green stance of the current administration.

The sustainability-linked loan market is still thriving, with issuers putting increasingly robust and material targets in place, the banker adds. However, DEI targets are increasingly being removed as borrowers refinance.

AI agenda

AI will be a key topic for other investors, who are sharpening their focus on board oversight and are also concerned about its environmental and social impacts.

RVK highlighted a plethora of AI-related risks to the LA fund, including increased resource usage, a lack of understanding around emissions generated by AI development, intellectual property infringement, compliance risks and fears related to the future of work and widespread job losses.

Connecticut’s state treasury is mulling filings on the topic of the Just AI Transition, while the topic is increasingly seeing mentions in proxy voting policies. ISS STOXX has added board oversight of AI to the factors in its governance quality score, for instance.

The firm will now rate companies in the US on whether the board has oversight of AI, how many directors have AI skills, and whether the company has policies and procedures relating to the development, deployment and monitoring of AI.

Nuveen is also looking at AI both from the tech company and energy utility perspective, and will be engaging portfolio companies to better get a sense of “whether these companies truly understand the risks and benefits of their overall strategy”, says O’Brien.

Regardless of what comes in 2026, she remains positive. “The majority of our large strategic clients are still asking questions about these topics. We’ve probably never had as many questionnaires,” she says.

“The industry is more resilient than ever, and client conviction is strong. We survived 2025, we’ll also meet the challenges of 2026.”