The sustainable investing landscape is undergoing profound structural change as the world transitions through a period marked by geopolitical uncertainty, accelerating climate impacts, rapid technological adoption, and deepening social inequalities. These forces are reshaping not only how environmental, social, and governance (ESG) factors are interpreted, but also how investors integrate them into portfolio construction, risk management, and stewardship strategies. As we enter 2026, TD Asset Management Inc. (TDAM) sees several themes rising to the forefront — themes that demand both nuance and adaptability from long-horizon investors.

Reframing Defense in a New Geopolitical Era

One of the clearest shifts in the sustainable investing conversation is the reassessment of defense exposure. Historically, ESG frameworks tended to avoid the sector altogether, in part because of the ethical sensitivities associated with war and conflict. However, the rapid deterioration of global geopolitical stability has altered this dynamic. National security is increasingly recognized as a foundational component of resilient, functioning economies; without it, environmental and social progress becomes far more difficult to sustain.

For investors, this has created a more complex analytical challenge. The exclusion of controversial weapons remains consistent, but there is growing acknowledgement that some defense companies, particularly those focused on protection technologies, cybersecurity, and responsible practices, may play a positive role in maintaining the security conditions required for stability and long-term economic health. This evolution reflects a broader maturation of ESG frameworks: a willingness to engage with real-world complexities rather than rely solely on categorical exclusions.

The Energy Transition Deepens as AI Reshapes Demand

While decarbonization has been a central theme for much of the past decade, the scale and speed of capital flows into clean energy now reflect a decisive global shift. The International Energy Agency estimates that approximately US$2.2 trillion is being invested in renewables, nuclear energy, grid modernization, low-emissions fuels, energy efficiency, and electrification, roughly double the amount allocated to fossil fuels¹. Institutions are responding by enhancing their use of transition-risk modelling, sector-specific decarbonization pathways, and scenario analysis frameworks that capture both policy volatility and technological disruption.

The sudden acceleration of artificial intelligence (AI) introduces new complexity. Large-scale computing and data-center growth require enormous amounts of power, raising questions about the reliability, carbon intensity, and long-term economics of global energy systems. As a result, nuclear and renewables are expected to form the backbone of future energy supply, while grids and storage systems become increasingly central to investment strategies. The interplay between AI-driven energy demand and decarbonization targets will be a critical area of focus throughout 2026, influencing everything from corporate engagement priorities to infrastructure allocation decisions.

Physical Climate Risk Moves from Horizon to Present

Physical climate risk has transitioned from a theoretical long-term challenge to a material near-term financial issue. Worldwide natural catastrophes resulted in almost US$140 billion in insured losses in 2024², a stark indicator of the escalating frequency and severity of climate-related events. For institutional investors, this change has reinforced the need to incorporate asset-level exposure analysis, supply chain vulnerability assessments, and forward-looking physical risk modelling into traditional financial evaluations.

At the same time, the growing visibility of climate impacts is catalyzing investment in resilience and adaptation. Infrastructure designed to withstand extreme weather, advanced climate adaptation technologies, and innovative insurance structures such as catastrophe bonds are gaining attention as opportunities that pair long-term demand with diversifying return profiles. As markets begin to more explicitly price physical risks, institutions are increasingly recognizing that resilience, both physical and operational, will differentiate corporate and asset performance over the coming decades.

Governance and Shareholder Rights Diverge Across Markets

Governance remains the cornerstone of sustainable investing, but global standards are fragmenting. Differences in disclosure expectations, regulatory environments, shareholder rights, executive compensation structures, and emerging areas such as AI governance are creating a patchwork of frameworks that vary significantly by region. For institutions with global portfolios, this fragmentation requires more tailored stewardship strategies and heightened attention to local context.

TDAM’s 2026 stewardship priorities emphasize deeper alignment between investment and engagement activities, with thematic focus areas such as climate governance, compensation alignment, board composition, and oversight of rapidly evolving technologies. The ability to evaluate governance through a market-specific lens, and to engage companies, accordingly, is essential for maintaining accountability and protecting long-term shareholder value in an era of regulatory divergence.

Inequality Emerges as a Systemic Macroeconomic Risk

Income inequality has reached levels that present meaningful challenges for political and economic stability. An Organisation for Economic Co-operation and Development (OECD) study from late 2025 reported that 83% of countries have high income inequality, representing roughly 90% of the world’s population. Such widespread disparities can erode institutional trust, intensify political polarization, destabilize policy environments, and weaken consumer demand, all of which pose interconnected risks for institutional portfolios.

For long-term investors, inequality is no longer a peripheral social issue but a structural macroeconomic factor. At the same time, it opens avenues for impact-oriented and SDG-aligned investments in areas such as affordable housing, financial inclusion, workforce development, and social infrastructure. Capital allocation that addresses inequality is increasingly viewed not only as socially beneficial but also as supportive of long-term economic resilience.

Integrating Sustainability for a Transforming World

The themes shaping sustainable investing in 2026 underscore the growing importance of sophisticated ESG integration within institutional portfolios. From geopolitical realignment to climate resilience and socioeconomic stability, the sustainability issues facing investors are more interconnected, and more financially relevant than ever. At TDAM, our focus remains on deepening research, enhancing scenario analysis, strengthening stewardship alignment, and anticipating the policy, technological, and societal shifts that influence global capital markets. In an environment defined by complexity and transition, these capabilities are essential for navigating risks and capturing long-term opportunity.

¹ World Energy Investment 2025, Executive summary. June 2025.

² Swiss Re Institute sigma 1/2025: Natural catastrophes: insured losses on trend to USD 145 billion in 2025. April 2025.

³ G20 South Africa 2025. G20 Extraordinary Committee of Independent Experts on Global Inequality. November 2025.                                                                                                                                                    

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