There is a particular kind of market risk that doesn't show up cleanly in a spreadsheet. It doesn't follow earnings seasons or central bank calendars. It arrives through a headline, a border dispute, a sanctions announcement - and by the time most investors have processed it, the repricing has already begun.

Geopolitical risk is not new. But the current environment has a different character to it. What we are seeing is not a series of isolated shocks, but an accumulation of structural pressures: fractured supply chains, sustained conflict, and policy unpredictability operating simultaneously across multiple geographies. That combination has a way of staying in markets longer, and running deeper, than a single event.

The question for investors is not whether this will eventually resolve. It's whether their portfolios are positioned to navigate the period before it does.

 What Markets Are Actually Signalling

In periods of genuine geopolitical stress, the signal tends to show up in commodities and currencies before it surfaces in equities. Energy markets become a key transmission mechanism: oil price volatility doesn't just reflect supply anxiety, it flows directly into inflation expectations, corporate cost structures, and consumer sentiment.

We have seen exactly this dynamic play out. Supply disruptions have kept energy markets volatile and directional. Currency markets have repriced on shifting capital flows and policy divergence. These are not peripheral markets - they sit at the centre of how geopolitical stress propagates through the real economy.

Systematic trend following is well-suited to precisely this environment. Not because it predicts geopolitical outcomes (it doesn't) but because it is built to detect and follow the price trends that geopolitical stress tends to produce. When energy trends, it captures energy. When currencies move on safe-haven flows, it captures that too. The strategy doesn't need to know why a trend is happening. It needs to know that it is.

The Diversification Assumption Worth Re-examining

Most portfolios carry an implicit assumption: that diversification across asset classes will provide protection when conditions deteriorate. In stable regimes, this assumption generally holds. In stress regimes, it often doesn't.

When a single macro force - geopolitical risk, an energy shock, a sudden policy reversal - moves through markets simultaneously, assets that appeared uncorrelated begin moving together. The diversification that looked sound on paper compresses exactly when it needs to expand.

This is not a flaw to be corrected with more asset classes. It is a feature of how modern markets behave under stress, and it requires a different solution: exposure to return streams that are structurally independent of traditional beta, rather than just spread more widely across it.

"True diversification isn't about just holding more assets," says Simone Haslinger, CEO of East Coast Capital Management. "It's about holding assets that behave differently when conditions become difficult. That's a higher bar -- and it's the bar that matters."

A Framework Built for Uncertainty, Not Despite It

At ECCM, we are often asked how trend following performs in "normal" markets. The reality is that trend following is designed for the full range of market conditions, but it tends to earn its keep most visibly in environments like the current one.

Geopolitical stress produces the extended, directional moves across commodities, currencies, and rates that trend following is built to capture. Elevated volatility, far from being a headwind, is the raw material the strategy works with. And because our approach is rules-based, it doesn't require us to take a view on how a conflict resolves, which policy will be enacted, or how long uncertainty will persist. The price action tells us what we need to know.

This matters in practice. When uncertainty is high, discretionary decision-making is most prone to error: anchoring to prior regimes, hesitating at inflection points, or seeking safety in familiar assets regardless of what the trends are telling them. A systematic process removes that vulnerability.

Conclusion

Geopolitical uncertainty is not a phase to be endured while waiting for markets to normalise. For investors with the right framework in place, it is a productive environment - one that generates the kind of clear, sustained trends that systematic strategies are built to capture.

At ECCM, our ECCM Systematic Trend Fund is designed to do exactly that: to respond to what markets are doing, wherever the opportunity arises, and to deliver return streams that remain genuinely uncorrelated to traditional portfolios through periods of stress and stability alike.

Wholesale clients can find more information on ECCM and the ECCM Systematic Trend Fund at Australian Fund Monitors and ECCM's website.

The prevailing narrative in infrastructure favours scale. Large funds, large assets, and large ambitions dominate the conversation. Yet, as Europe's energy transition continues and policy reforms reshape the investment landscape, it's increasingly clear that meaningful progress is being driven by the small- and mid-cap segments. Transactions below €500 million account for the majority of European infrastructure deals. This is the centre of gravity for new investment and innovation.   

Our experience over more than a decade - with around €3 billion invested across energy, transport and digital infrastructure - consistently points to the same conclusion. The lower mid-market is where policy ambition, operational delivery and investor returns align most effectively. There's less need for intermediaries, and it's materially less competitive. This gives space for genuine value creation, rather than simply financial engineering.

This is not a question of taking more risk: it's about operating closer to the assets, closer to local stakeholders and closer to the decisions that determine whether Europe's economic and decarbonisation objectives are delivered in practice.

Policy tailwinds and competitive advantage

Recent reforms in the EU's market design for electricity, quicker permit approvals, and the Net-Zero Industry Act have shifted the balance in favour of assets that can adapt quickly and align with local policy priorities. Small- and mid-cap platforms have a structural advantage. In practice, this means utilities that work constructively with municipalities, transport assets embedded within national and regional strategies, and energy platforms that can adapt business models as subsidy regimes and security-of-supply priorities evolve. Large, centralised assets often struggle to respond at this pace.

The Draghi competitiveness report and the ongoing debate about Europe's cost of capital highlight the importance of bilateral, primary deals that avoid auction-driven premia and that can deliver better-timed execution. This matters in an environment where value is increasingly created through operational decisions rather than multiple expansion.

Risk, value and evidence

The notion that smaller assets are riskier doesn't stand up to scrutiny. In regulated sectors, risk is defined far more by framework stability and governance quality than by asset size. Our utility investments in Finland, for example, operate under the same regulatory regimes as larger peers, yet benefit from more conservative capital structures and greater scope for hands-on asset management.

This difference in governance and capital discipline translates into outcomes. And the results are measurable through financial key performance indicators that capture both short-term returns and long-term sustainability-driven resilience. In 2024, our energy assets generated nearly 900 GWh [1] of renewable electricity, avoiding 274,000 tonnes of CO₂e [2]. In the same year, our district heating platforms delivered 1.4 TWh [3] of reliable, low-carbon heat to over 88,000 customers; our electricity distribution assets supported security of supply through a harsh Nordic winter; and our trains were among the most reliable on the UK network.

Agility, local solutions and systemic change

Small- and mid-cap assets move at a different pace. Development timelines are shorter, adaptation is faster, and innovation is less encumbered by bureaucracy. In Finland, this has enabled the rapid deployment of electric boilers to exploit periods of low-cost renewable power, the co-location of data centres to capture waste heat, and the diversification of fuel sources within district heating networks to improve resilience. These initiatives were delivered through close engagement with management teams and local authorities, and implemented within months rather than years.

In Italy, a similar logic underpins the development of biomethane platforms, which are focused on upgrading existing biogas assets rather than pursuing greenfield development. This approach leverages existing infrastructure, shortens delivery timelines, and aligns decarbonisation objectives with energy security and local agricultural systems.

European energy policy is rightly ambitious, but the practical work of decarbonisation and resilience is local. Electrifying transport, decarbonising heat, and building digital infrastructure are challenges that play out in villages, towns and municipalities. Small- and mid-cap investors are embedded in these contexts. By working directly with management teams, local authorities and communities, we can deliver solutions that are tailored, rapid and enduring.

This strategy prioritises essential services, high barriers to entry and predictable cash flows, while preserving the ability to actively influence outcomes through majority or co-control positions and long-term partnerships. It also shapes exit options. Assets that have grown and de-risked within the lower mid-market naturally transition into a broader buyer universe over time. This includes larger infrastructure funds, strategic buyers and long-term holders. Liquidity is enhanced rather than constrained.

Final thoughts...

The infrastructure required to support Europe's changing economy won't be delivered solely by megaprojects or flagship assets. It will be built incrementally, through thousands of local decisions across infrastructure systems. It will also be shaped by those who can combine agility, results, and local insight to deliver measurable outcomes - especially as policy and competitiveness trends continue to evolve.

Small- and mid-cap investors operate at the interface between policy ambition and practical delivery. As such, they're uniquely positioned to support European competitiveness and decarbonisation.  

2025 Wrap-up and 2026 Outlook

2025 closed as another strong year for the European and Australian ABS markets despite intermittent macro uncertainty. Investors continued to demonstrate robust demand, supporting spread compression amid record issuance volumes. For 2026, we expect elevated funding needs and stable performance across core collateral types, alongside ongoing innovation in new and esoteric asset classes. Regulatory changes in Europe may further encourage issuance and broaden the investor base. Overall, floating rate securitised assets remain a compelling component of diversified fixed income portfolios, continuing to offer an attractive spread pick up to similarly rated corporates, floating rate protection, and structural resilience.

Issuance and Market Technicals

As we mentioned in our European and Australian ABS 2025 Q3 update, a strong start to 2025 was halted when broader markets faced uncertainty in early April given President Trump's tariff announcements. The ABS markets recovered relatively quickly and despite continued macro and tariff related uncertainty, demand across the capital structure continued to be strong, leading to spread compression across global ABS markets.

Sustained investor demand and relatively attractive funding levels continued to keep the asset class attractive for issuers for both funding as well as for credit risk transfer.

So...another record-breaking year for issuance? Indeed, although slightly less dramatic than in 2024. European ABS issuance closed the year just over €95bn and Australia continued momentum with another year of strong issuance for the market at just under  €41bn, the second highest year of issuance, and a little short of the record set in 2024 of €46.5, according to JPM research figures.

The supply we have seen in Europe and Australia over the last couple of years has led to an outstanding market size of just under €700bn publicly available/distributed bonds excluding CLOs. This underlines ABS as a significant sector within fixed income markets. Similarly, since the GFC, the Australian securitisation market has demonstrated steady, consistent growth, but the recent acceleration signals robust investor appetite combined with increased supply from a growing non-bank issuer base. In addition, JPM research notes that both the European and Australian markets finished the year with not just record issuance but also positive net supply: net distributed European and Australian ABS issuance reach +€19.3bn and +€6.4bn, respectively, for FY 2025.

A healthy securitisation market is one where innovation and new asset classes emerge, and 2025 did not disappoint. Europe has continued to see stable issuance from traditional mortgage and consumer collateral sectors but there was also a significant number of new deals and issuers which debuted in the market, giving investors a good source of diversity across platforms and collateral types. In Australia, while RMBS continued to dominate supply last year, non-RMBS issuance has grown significantly with sizeable volumes of auto/equipment issuance over recent years and more non-bank lenders in the consumer and SME space adding greater diversity.

Liquidity in the asset class, globally, continued to show resilience, demonstrated by secondary market depth and investor demand even through significant bouts of market volatility such as that seen in April. Some examples of this:

• April secondary volumes totaled €1.9bn in European ABS; more than double the average monthly volume during the year, demonstrating a healthy trading market while new issue markets were less active.
• European ABS (inc. CLO) trading volumes in 2025 significantly increased during 2025 - with a European year end trading desk noting this was up to 30% higher than 2024 - partly due to an increase in supply via auction lists, particularly during the April and October periods of volatility, and increasing volumes across some specific asset classes such as European Auto and Consumer ABS.
• CLO markets continue to demonstrate significant daily liquidity, particularly in the US. Weekly average trading volumes show significant activity, at €1.0bn and €0.3bn in the US and EUR markets respectively, while ETFs in this asset class have grown from €0.3bn to >€40bn over the past 5yrs, mainly focused on US AAA CLO investments.

For 2026, we anticipate the need for funding and reinvestment to continue and issuance to remain elevated. If the current environment persists all signs are pointing to the potential for another record year! We expect strong demand for the asset class to persist and increased origination in traditional consumer underlying assets as well as newer types of collateral to support growth in the asset class. Despite potential macroeconomic volatility, the sector's resilience and the stable investor base make it well placed for the sector to continue.

Asset Performance

Headline fundamentals stayed healthy in 2025 year but were accompanied by a side of tiering - both for consumer as well as levered corporate performance. Capital market volatility, macroeconomic uncertainty and credit stories such as Tricolour emerging in the US kept investors on their toes but structured finance ratings were largely stable through 2025 maintaining a stable to positive ratings drift.

Looking forward, the performance outlook for most collateral types is expected to be stable but we remain mindful of macro and interest rate uncertainty for consumer and corporate borrowers. Despite global central bank rates continuing to reduce from their 2024 peaks during 2025, interest rates are persisting in a higher for longer phase compared to pre-Covid levels, particularly as inflation has remained somewhat "sticky" during 2025. Investors should be focused on limiting risks around macro-led shocks to borrowers by analysing collateral through the interest rate cycle, keeping in mind the key issue of affordability for customers and the importance of strong, effective underwriting by issuers. Unemployment indicators continue to drift upwards and remain front of mind for investors looking for read across into consumer credit performance.

Esoteric and new asset classes were a key theme in 2025

Clearly, securitisation continues to be a key funding tool for traditional consumer and mortgage asset classes, but the past few years have seen exciting developments in new collateral types coming to market. Funding levels in structured finance are attractive for issuers and these new sectors have generally been received well by the market. Additionally, through 2025 we noted a number of new issues in sectors with positive ESG characteristics and considerations. These include solar and heat pump ABS as well as later life mortgages and transactions described as shariah compliant RMBS on the social side. EV auto financing continues to be a growing segment within Auto ABS portfolios.

Risks and Opportunities in 2026:

Macro and geopolitical risks continue:

Writing this just a couple of weeks into 2026, political and geopolitical risks continue to be front-of-mind for market participants. We expect this dynamic to persist this year and for investor sentiment to remain sensitive to developments in geopolitics, global trade policy as well as the path of interest rates in the US and in Europe.

Consumer performance: Structural protection in ABS structures mitigate risks

In Europe, consumers continue to face structural and cyclical risks, being described as financially resilient but behaviorally cautious. However, expectations for unemployment to remain broadly stable maintains a base for low and stable credit card and ABS arrears performance. We do expect tiering to continue between better quality prime collateral and more non prime lenders who support underserved borrowers. Structural protections afford to investors in securitised structures, help mitigate risk, often with increasing protection over time as transactions or assets de-lever.

Housing Market Valuations:

Asset prices, in particular housing, in the UK, Australia and Europe remain on a stable or improving trend given the consistent undersupply seen in construction of housing seen across the major RMBS markets together with continued increase in demand.

Where there has been some slowing in segments of the market, in the UK for example, with London apartment valuations facing pressure, we note that the Buy to Let RMBS performance remains consistent given stable unemployment and rental streams. Any unforeseen shock to unemployment or regulatory impacts are key to performance but, post GFC affordability regulations and appropriate stress testing of borrowers' together with stability in underwriting gives investors comfort beyond the structural features of RMBS.

Amongst and despite the risks above we note some significant opportunities for experienced investors in Global structured finance markets:

New and Esoteric Asset Classes:

As noted above, we have seen issuance beyond traditional platforms over the last couple of years emerging. The use of securitisation as a funding tool beyond "on the run" platforms is valuable to investors. New issuers to the market, including those establish issuers that diversifying their funding via securitisation, and collateral types in Europe and Australia present opportunities to earn a premium over more traditional platforms and provide diversity to portfolios. That said, we should be cognisant of potential additional risks that may need to be considered relating to new lending types as well as the short historical performance available for some types of collateral which is needed to structure, rate and stress transactions appropriately.

European Markets give investors depth, diversity and Liquidity

We continue to see opportunities in the European ABS and CLO markets with an overall size of over €600bn now, the market gives investors good relative value where diversity of jurisdictional collateral risk alongside strong historical performance. This is all within the context of a dedicated investor base and proven liquidity in the asset class.

Regulation, regulation, regulation

Regulation will remain a key consideration in 2026, particularly in Europe, where the European Securitisation legislation aims to reduce barriers to issuance and investment in EU securitisation:

• Capital Requirements Regulation (CRR) updates aim to reduce capital requirements for bank investors.
• Simplified due�'diligence for EU investors in repeat ABS issuers could lower barriers to participation.
• Reporting template reforms may ease private deal reporting burdens.
• Solvency II changes could unlock greater insurer participation.

Collectively, these developments should improve funding conditions and make securitisation more attractive to a broader investor base albeit with a fluid timeline.

Implications of the motor finance commission rulings for UK Auto ABS

The FCA consultation on motor finance broker commissions is still ongoing, but any impact on ABS has been limited and if the redress scheme is as expected, focussed on discretionary commission arrangements, we expect little to no impact on new and outstanding UK auto asset-backed securities (ABS) transactions as a negligible amount of collateral in outstanding securitised bonds would be affected.

Secondary liquidity was more challenged until more clarity was reached. Issuance in UK Auto ABS across bank and non-bank lenders, was €3.6bn in 2024 compared to 2025 where no issuance at all was seen until September, when VW opened the market and priced well with strong demand. As we noted in one of our published articles at the time we expected this to be a positive signal for UK non-bank lenders, giving them confidence in execution. Indeed, Oodle came with a Dowson transaction soon after which was taken well by the market. That said, given lower origination volumes over 2025 for the UK non bank lenders, particularly in the non prime space, funding needs may be more muted in 2026. It is also worth noting, that used car prices fell as supply of cars normalised post covid, residual values have also corrected back down; stabilising for ICE vehicles but falling sharply for EVs, where residual values proved significantly over forecast.

Looking forward to 2026:

The depth and diversity of the European and Australian markets continue to support the role of global securitised products as a strategic allocation within fixed income portfolio; enabling diversification across jurisdictions, collateral types and issuer profiles while maintaining liquidity.

Looking forward, regulatory developments, continued innovation in collateral and an expanding issuer base should reinforce market depth and opportunity, making securitised credit not merely a tactical allocation but a durable, scalable and resilient cornerstone of fixed income portfolios in 2026 and well beyond.

The investment outlook this year remains shrouded by uncertainty, accompanied by elevated volatility in expected returns. Markets are searching for direction, and investors are navigating an environment where conviction feels harder earned.

Volatility, of course, wears many faces. We can observe it in the lived experience of asset price return variability across securities, sectors and markets. Or we may deduce the anticipated range of returns over the next week, month or quarter from options prices. Either way, the direction, size and interdependencies (correlations) of movements in market pricing at all frequencies can provide important signals for astute investors. Volatility is not simply noise, it is information.

Right now, equity prices, cryptocurrencies, and precious metals are relatively more volatile. Yet in contrast, most bond markets remain curiously subdued. Yields remain broadly rangebound, only tentatively challenging the edges of recent ranges, reticent to enter an elusive new regime or steady state. That restraint in bond markets is notable, and perhaps more revealing than the visible turbulence elsewhere.

After hiking rates earlier this month, RBA Governor Michelle Bullock stopped short of offering explicit forward guidance, indicating that the Monetary Policy Board is heavily data dependent. This suggests further policy restriction may have limited efficacy in controlling persistently above-band inflation back to the target range. Australian government bond yields decreased markedly in response, and the market is paring back pricing for hikes and beginning to tentatively pre-empt future rate cuts next year. The tone has shifted, from further restriction to a growing debate about how long policy will need to remain restrictive at all.

More broadly, attention is turning to the Government for direction ahead of the upcoming Federal Budget. There is growing recognition that boosting labour productivity through innovation, enhanced competition and meaningful structural and tax reform remains the only sustainable path to higher national income and improved living standards for all Australians.

Meanwhile, across the Pacific in the U.S., economic activity continues to show surprising resilience. January brought unexpectedly strong employment growth, thanks in part to seasonal factors (despite large historical downward revisions). Price pressures, meanwhile appear to be cooling, although the data remains messy and influenced by lingering U.S. federal government shutdown-related disruptions. The result? Short-dated Treasury yields have drifted to multi-year lows, reflecting cautious optimism among investors.

The market has almost priced for three U.S. Federal Reserve rate cuts this year under U.S. Federal Reserve Chair nominee Kevin Warsh, although the upcoming midterm elections loom large over the U.S. macro outlook and the Trump administration's near-term policy priorities.

In Europe, inflation appears to be well controlled and the European Central Bank comfortably on hold, but recent geopolitical events have raised existential questions around the protection and advancement of national and regional interests, and defence and security strategy. While this may be the quintessential European moment to rebalance the world order away from U.S. dominance if traditional allegiances like NATO are set to be dissolved, there have been fundamental disagreements between Germany and France around policy priorities to restore competitiveness and how to fund quickly growing defence expenditures. Yields on German government bonds have also dropped materially in recent weeks.

In Japan, the Liberal Democratic Party lead by Sanae Takaichi has emerged victorious from lower house elections. Takaichi's expanded mandate and firm command over political and economic power (for instance, Japan's central bank is not independent of government) after her historic win, combined with a sense of renewed optimism across global markets that the realisation of her vision for Japan will not unduly impact interest rates and exchange rates beyond what is already envisaged, has led to a relief rally in Japanese Government Bonds after a tumultuous January.

What signal can we draw from the subdued historical measures of volatility across bond yields, especially when viewed against the domestic and global macro backdrop? There are three key takeaways.

First, periods of volatility and uncertainty (whether obvious or hidden) can bring significant opportunity to generate attractive returns for those who act thoughtfully. Second, fortune rewards the diligent and there are only downside risks to complacency. And third, and most importantly, diversification, both within and across asset classes and sectors is the primary means with which to dampen the effects of volatility and protect long-term investment outcomes.

Volatility may rattle markets, but it also sharpens our focus, driving better portfolio construction and smarter asset allocation decisions.

In 2025, with credit spreads normalising, and in some segments moving below long-term averages, a number of yield hungry credit investors responded by adding risk to meet investment objectives. These additional risks to sustain portfolio yields of 6%+ varied from increasing credit risk, interest/spread duration and/or leverage.

While mostly still at manageable levels, increased debt funding of credit securities is nonetheless a throwback to the heady pre-GFC era where synthetic and physical leverage was more commonplace. Indeed, we are now also hearing of less sustainable practices once again creeping into the credit investment lexicon.

From our discussions in the marketplace towards the tail-end of 2025, the use of leverage is principally occurring through the use of repurchase agreements (repo) of eligible collateral up to an eye watering 15-times for AAA rated securities, as well as via placement of senior secured leverage to enhance portfolio yields in both private and public credit portfolios.

New levered investment products that have recently entered the market offer a floating rate running yield from a portfolio likely comprised of major bank T2 hybrids (T2s) and investment grade (IG) corporate bonds. Products such as these typically seek to enhance yield by deploying 3-3.5-times leverage.

Leverage enhances yields and amplifies performance (both positively and negatively) from changes in spreads and any impairments/defaults. Working off current pricing, an IG portfolio yielding ~5.0-5.5% p.a. with ~3-times leverage moves what is an already enhanced yield into a yield in the 7%+ range (refer Chart 1).

Chart 1: YCM estimate: Levered IG portfolio yields

Source: Yarra Capital Management Feb 2026.

The use of leverage to enhance returns can work very effectively in environments of stable or contracting credit spreads. It is a double-edged sword, however, with the combination of widening credit spreads and leverage usually resulting in significant drawdowns.

For instance, working off an estimated credit spread duration of ~5 years, a widening spread environment would quickly overwhelm underlying yields, with a ~100bp spread expansion on 3-times leverage generating a negative total return in the range of 10-15% from what is an underlying low risk IG credit portfolio (refer Chart 2).

Chart 2: YCM estimate: Levered total returns and widening credit spreads

Source: Yarra Capital Management Feb 2026.

Given fixed income investors generally have a low tolerance for negative returns over a 12-month period, the use of significant leverage to enhance returns could be somewhat of a dubious exercise, especially when you consider today's starting point. As evidenced by major bank T2s, credit spreads have performed over the last 2-3 years and now sit around their long term averages across most segments of Australian credit and significantly below the previous peak in 2022 (refer Chart 3).

Chart 3: Major Bank Tier 2 5-year FRNs (credit spreads and yields)

Source: Yarra Capital Management Feb 2026.

At current spread levels, the probability of a +/-100bp move is weighted to the positive and in the current macroeconomic environment is entirely possible over the near to medium term. In such an event, which can occur two to three times each decade, the prospect of equity like drawdowns from levered credit funds should give credit investors pause for thought.

Put more simply, credit investors in these levered structures should be thinking hard about whether they are comfortable taking what is effectively equity drawdown risk for a miserly 1-2% in additional yield. We would suggest that this represents incredibly poor compensation for the risk assumed at this point in the cycle.

In contrast to levered credit funds, both the Yarra Enhanced and Higher Income Funds are still providing attractive 6-7% yields with precisely zero leverage. Moreover, while it is true that a 100bps widening in credit spreads would lead to value diminution for both these funds, high unlevered yields combined with active management should protect against negative returns over any 12-month period. We do not believe the same can be said of levered credit funds running a similar mix of underlying credit assets.

In the five years since the Glasgow-based COP26, sustainable investment initially surged. Expectations were high, pledges were ambitious, and many believed capital markets could play a decisive role in addressing climate change and broader environmental and social challenges. But more recently, geopolitical shocks, legal scrutiny and market realities have tempered that optimism. 

In its place, a more durable approach is emerging, which we describe as grounded sustainability. It's a framework for incorporating sustainability factors into investment decisions, where those factors are financially material and aligned with client mandates. It's evidence-led and recognises inherent trade-offs. Importantly, it's clear about the limits of what investors and companies can achieve within the constraints of public policy. 

Mandates and market realities 

Over the past five years, conflicts, the global energy crisis, and the resurgence of populist politics have created a more fragmented, unpredictable and idiosyncratic environment. For example, coal use rose during the energy crisis, even as renewable deployment consistently exceeded expectations. This highlights the growing regional and thematic divergence. With this complex backdrop, sustainable investment must balance long-term systemic goals with the constraints imposed by mandates, markets and regulation. Ambition alone isn't enough. It must be combined with pragmatism. Importantly, it must also align with clients' financial objectives and constraints, otherwise commitments risk becoming empty promises - or worse, reputational liabilities.

A similar dynamic is playing out in collaborative industry groups like the Net Zero Asset Managers (NZAM) initiative. Initially, in the post-COP26 momentum, there was strong pressure to sign up to firm-wide climate targets. But as geopolitical and market realities set in, many asset managers found themselves unable to deliver on those commitments across all mandates. This wasn't a failure of ambition, but a mismatch between system-level objectives and mandate-level authority. The practical lesson is that real-world outcomes must align with the client promise. To be clear, where clients want outcome-led objectives, this should be reflected in mandates.

Climate law gets real: from global duties to corporate liability

Legal frameworks are catching up with climate ambition. The International Court of Justice's (ICJ) recent advisory opinion [1] clarifies that states have a legal duty to prevent environmental harm, including to the climate system. It also clarifies that a lack of regulation doesn't absolve other actors - whether companies, asset managers or investors - from managing foreseeable risks. This shifts climate accountability from voluntary action to legal risk.

However, it also raises a hard question: what happens when governments fail to act, or act too slowly? Can companies and investors be expected to fill the gap? In theory, both public and private actors share responsibility. But in practice, companies and investors operate within legal and commercial boundaries. In particular, asset managers' decisions are shaped by what clients ask for, legal responsibilities to act in clients' best interests, and market competition. Expecting companies or investors to sacrifice value by absorbing costs not required by law is difficult to justify - particularly in hard-to-abate sectors like steel or aviation. This challenge is heightened where government incentives can often support conflicting goals across energy security, affordability, and economic growth.

Policy as a catalyst 

This is where effective policy matters. Recent European initiatives to align climate objectives with industrial competitiveness and energy security reflect growing recognition that markets alone cannot deliver the transition at scale. Together, they signal a shift from fragmented initiatives to coordinated, state-backed action, while offering companies and investors the long-term policy clarity that has been missing. This is why we are calling for greater long-term policy certainty, which retains strategic intent while limiting unnecessary complexity.

This is the essence of grounded sustainability: integrating environmental and social factors when they are material to value, and doing so with clarity, discipline, and alignment to mandates.

What does this mean for investors?

Sustainability concerns need not be sidelined in financially focused mandates. Forward-looking considerations of material environmental and social risks are fully consistent with long-term value creation. What cannot be justified is pursuing sustainability outcomes that are disconnected from financial objectives, unless explicitly agreed with clients. This is the essence of grounded sustainability: integrating environmental and social factors when they are material to value, and doing so with clarity, discipline, and alignment to mandates.  Policy is the missing link. Without it, companies struggle to act without breaching fiduciary duties or losing market share. With it, sustainability themes become investable, scalable, and defensible.

Looking forward 

We expect that the rise of climate risks - coupled with increasing energy and mineral demands to facilitate technology advances and the energy transition - will mean that sustainability themes will remain at the heart of many geopolitical tensions. This will apply whether they are presented as energy transition, resilience or strategic government objectives (such as economic competitiveness or national security). Overall, we expect the policy landscape to remain uneven, with less support than previously. But where outcomes align with strategic government objectives, policy support will surely follow.

Final thoughts...

A recalibration is needed to find an equilibrium, where sustainability is seen as a fundamental tool for making better investment decisions, rather than being wrapped up in unrealistic expectations. The sector needs to evolve from idealism to pragmatism, grounded in legal clarity, mandate alignment and financial materiality. Despite the potentially gloomy outlook, we've seen record investment in the energy transition - twice as much as in fossil fuels. So it's not about abandoning sustainability themes. Rather, it's about doing it deliberately and within real-world constraints.