ESG in banking and investment means integrating environmental, social, and governance factors into credit risk, underwriting, lending, and portfolio construction, and disclosing those exposures under frameworks such as the ISSB’s IFRS S1/S2, the EU’s CSRD/ESRS and SFDR, and the Basel Committee’s voluntary climate-risk disclosure framework. The practice is now being reshaped by two opposing forces in 2025-2026: regulatory consolidation around the ISSB baseline globally, and a sharp US “anti-ESG” retreat that drove every major Wall Street bank out of the Net-Zero Banking Alliance (NZBA) between December 2024 and January 2025 and prompted the SEC to abandon and then move to rescind its 2024 climate-disclosure rules.
What does ESG actually mean for a bank or asset manager?
For financial institutions, ESG is not a marketing layer; it is a set of risk factors and a disclosure regime. On the banking side, ESG enters through credit risk: climate transition risk (stranded assets, carbon-pricing exposure), physical risk (flood, wildfire, and heat damage to collateral), and governance and reputational risk in counterparties. On the investment side, ESG enters portfolio management through screening, integration, thematic allocation, stewardship, and impact strategies. Both sides converge on one hard requirement: comparable, decision-useful disclosure. The dominant theme of 2025-2026 is that disclosure rules are simultaneously converging on the ISSB global baseline and being scaled back in scope, especially in the United States and the European Union.
How is ESG used in credit risk, underwriting, and lending?
Banks integrate ESG into underwriting primarily as a forward-looking risk overlay rather than a values screen. Climate transition risk can impair the creditworthiness of carbon-intensive borrowers as carbon costs rise and demand shifts; physical risk can destroy or devalue real-estate and infrastructure collateral. Supervisors increasingly expect banks to run climate scenario analysis, identify concentrations, and reflect material climate risk in their internal capital adequacy assessment. The European Central Bank, the Bank of England, and the US Federal Reserve have all run climate scenario exercises, though none currently impose an explicit climate capital add-on. In practice, ESG factors most often affect pricing, covenants, and concentration limits rather than the binary decision to lend.
What are ESG-linked loans and sustainability-linked bonds?
Two instrument families dominate sustainable finance, and they work differently:
- Use-of-proceeds instruments (green/social/sustainability bonds and loans): capital is ring-fenced for defined eligible projects (renewables, clean transport, affordable housing). Green bonds remained the largest single category, at roughly 53-57% of labeled issuance through 2024-2025.
- Sustainability-linked instruments (SLLs and SLBs): proceeds are general-purpose, but the coupon or margin steps up or down based on the borrower hitting predefined sustainability performance targets (KPIs/SPTs). These face the most greenwashing scrutiny because weak targets produce a label with little substance.
The labeled bond market hit roughly USD 1 trillion to 1.1 trillion in 2024 (World Bank and Climate Bonds Initiative data), with cumulative labeled issuance reaching about USD 6.2 trillion by December 2024. The sustainability-linked segment has cooled markedly: S&P Global forecast only about USD 35 billion of SLB issuance for 2025, far below the 2021-2023 peak, and labeled loan volumes fell roughly 52% from H1 2024 to H1 2025 as borrowers dropped labels whose pricing benefit (often just a few basis points of margin step-down) no longer justified the verification burden. On 26 March 2025, the loan-market trade associations (LMA/LSTA/APLMA) tightened the Sustainability-Linked Loan Principles, making post-signing verification by a qualified external reviewer mandatory (“shall” rather than “should”).
How do investment and asset-management firms integrate ESG?
Asset managers deploy a spectrum of approaches, often within the same firm: negative/exclusionary screening (e.g., excluding controversial weapons or thermal coal), positive/best-in-class screening, full ESG integration into financial analysis, thematic and impact investing, and active ownership through proxy voting and engagement. Post-2023, the industry has shifted language from “ESG investing” toward “sustainable investing,” “transition finance,” and “responsible investing,” partly to sidestep US political controversy and partly to comply with tighter fund-naming rules. Stewardship and engagement remain widely practiced even where firms have muted public ESG branding.
Which disclosure frameworks apply to financial institutions?
A bank or asset manager operating across major markets faces an overlapping stack of frameworks. The single most important shift is that the ISSB’s IFRS S1 and S2 have become the global baseline, formally consolidating the legacy TCFD recommendations (the IFRS Foundation took over TCFD monitoring in 2024).
| Framework | Issuer / jurisdiction | Status (2025-2026) | Relevance to financial institutions |
|---|---|---|---|
| IFRS S1 / S2 (ISSB) | IFRS Foundation (global) | Global baseline; adopted or being adopted by 35+ jurisdictions representing more than half of global GDP | Entity-wide sustainability and climate risk disclosure; absorbs TCFD; basis for UK, Hong Kong, Singapore, Brazil, Nigeria, Malaysia regimes |
| CSRD / ESRS | EU | In force but scaled back by the 2025 “Omnibus” simplification package | Mandatory double-materiality reporting for large EU banks and insurers; scope sharply reduced |
| SFDR | EU (ESMA/EC) | Under “SFDR 2.0” overhaul (proposal Nov 2025) | Product-level disclosure and de facto fund labeling for asset managers |
| TCFD | FSB (legacy) | Disbanded 2023; monitoring absorbed by ISSB | Still referenced in many national rules; superseded by IFRS S2 |
| Basel climate-risk disclosure | BCBS | Published 13 June 2025 as voluntary, not Pillar 3 | Bank-specific climate-risk disclosure template; adoption left to national regulators |
| SEC climate rules | US SEC | Stayed since April 2024; SEC moved to rescind in 2025-2026 | Effectively defunct for US registrants |
What changed with the EU’s CSRD “Omnibus” package?
In 2025 the EU enacted an “Omnibus” simplification that dramatically narrowed the Corporate Sustainability Reporting Directive. The final deal raised the mandatory threshold to EU companies with more than 1,000 employees and over EUR 450 million in net turnover, cutting the in-scope population by an estimated ~90% versus the original 250-employee threshold. EFRAG delivered simplified ESRS that reduce mandatory data points by roughly 60-70% (from about 1,073 to around 320). The Commission is expected to adopt the revised ESRS by delegated act around mid-2026, with effect potentially from FY2027. Large EU banks and insurers remain in scope, but value-chain data requests from smaller counterparties are now capped.
How do SFDR’s Article 6, 8, and 9 categories work, and what is “SFDR 2.0”?
The EU Sustainable Finance Disclosure Regulation (SFDR) was designed as a disclosure regime but was used by the market as a labeling system. Almost half of EU assets under management sit in Article 8 or Article 9 products.
| SFDR classification | Plain-language meaning | Market nickname |
|---|---|---|
| Article 6 | No sustainability focus, or ESG risks merely considered; baseline disclosure | “Non-ESG” |
| Article 8 | Promotes environmental or social characteristics | “Light green” |
| Article 9 | Has sustainable investment as its objective | “Dark green” |
In November 2025 the European Commission proposed “SFDR 2.0,” replacing the Article 8/9 regime with three formal product categories – broadly Sustainable, Transition, and ESG (collection/basics) – each anchored by a roughly 70% portfolio threshold, common exclusions, and short-form disclosures. The legislative process is expected to run through 2026-2027, with application unlikely before 2028. Until then, the Article 6/8/9 framework remains in force.
What do fund-naming and greenwashing rules require?
Two regimes police the gap between a fund’s name and its holdings. In the EU, ESMA’s fund-naming guidelines took effect in 2024 with a compliance deadline of May 2025: funds using ESG, “sustainable,” “impact,” or environmental terms such as “green” must invest at least 80% of assets in line with the relevant characteristics and apply Paris-Aligned Benchmark exclusions. The effect was immediate – per an ESMA study of 924 funds, about 64% changed their names ahead of the deadline, with many simply dropping ESG terminology rather than greening portfolios.
In the United States, the SEC’s amended Names Rule (adopted September 2023) extended the longstanding “80% investment policy” to fund names suggesting “particular characteristics,” explicitly capturing ESG and sustainability funds: a fund whose name implies an ESG focus must hold at least 80% of assets consistent with that focus. The SEC began reviewing the rule’s application to ESG names in 2026, leaving its long-term future uncertain.
What is the “anti-ESG” backlash, and what did it actually change?
The 2024-2026 US backlash combined state-level legislation, litigation threats, and political pressure that materially changed institutional behavior even where the underlying risk analysis did not change. The clearest signal was the collapse of the Net-Zero Banking Alliance (NZBA): between December 2024 and January 2025, Goldman Sachs, Wells Fargo, Citigroup, Bank of America, Morgan Stanley, and finally JPMorgan Chase (7 January 2025) all exited, and the alliance subsequently paused operations and moved to restructure into a looser framework body. Major US asset managers similarly stepped back from net-zero investor coalitions such as Climate Action 100+ and the Net Zero Asset Managers initiative, which suspended activities in early 2025.
Crucially, most institutions framed these as departures from coalitions and public commitments, not from risk management. Banks continued climate scenario analysis, transition-risk modeling, and sustainable-finance underwriting where commercially driven. The same period saw regulators retreat on mandates: the SEC stopped defending its climate rules in March 2025 and proposed full rescission; the Basel Committee downgraded its bank climate-disclosure framework to voluntary in June 2025 after US pressure, dropping the requirement to disclose financed and facilitated emissions regardless of materiality. The net effect is a bifurcated world: a tighter, ISSB-anchored disclosure regime maturing across the UK, EU, and Asia-Pacific, and a deregulatory, depoliticized posture in the United States.
Frequently asked questions
Is ESG investing legally required for US banks?
No. There is no US federal mandate requiring banks or asset managers to “do ESG.” US disclosure of climate risk via the SEC’s 2024 rules was stayed and is being rescinded. ESG-relevant obligations for US firms now flow mainly from fiduciary duty, the Names Rule for fund branding, and exposure to EU rules when operating in Europe.
What replaced the TCFD framework?
The ISSB’s IFRS S2 absorbed and superseded the TCFD recommendations. The Task Force on Climate-related Financial Disclosures was disbanded in 2023, and the IFRS Foundation took over monitoring climate-related disclosure progress in 2024. National rules built on TCFD are migrating to the IFRS S1/S2 baseline.
Did banks abandon climate risk management when they left the NZBA?
Generally no. Leaving the Net-Zero Banking Alliance removed a public coalition commitment but did not switch off internal climate-risk analysis, scenario testing, or sustainable-finance lending, which banks largely retained as commercial and prudential disciplines.
What is the difference between a green bond and a sustainability-linked bond?
A green bond ring-fences proceeds for specific eligible green projects, so its “greenness” is in how the money is spent. A sustainability-linked bond can fund anything, but its coupon adjusts based on whether the issuer meets predefined sustainability targets, so its integrity depends entirely on how ambitious those targets are.
Does a fund called “sustainable” have to hold a minimum percentage of sustainable assets?
Yes, in both major markets. Under ESMA’s EU guidelines, ESG/sustainability-named funds must hold at least 80% of assets aligned with those characteristics and apply benchmark exclusions. Under the SEC Names Rule, an ESG-named US fund must keep at least 80% of assets consistent with the name.
Is the EU still requiring CSRD reporting after the Omnibus changes?
Yes, but for far fewer companies. The 2025 Omnibus package raised the mandatory threshold to roughly 1,000 employees and EUR 450 million in net turnover, cutting in-scope entities by an estimated 90% and reducing required ESRS data points by 60-70%. Large EU banks and insurers remain in scope.
Is the Basel climate-disclosure framework mandatory for banks?
No. The Basel Committee published its climate-related financial-risk disclosure framework on 13 June 2025 as a voluntary standard outside the Pillar 3 mandatory requirements, leaving adoption to individual national regulators.
Sources & further reading
- IFRS Foundation – Use of IFRS Sustainability Disclosure Standards by jurisdiction
- Basel Committee on Banking Supervision – Disclosure of climate-related financial risks (June 2025)
- US SEC – Proposed rescission of climate-related disclosure rules
- Norton Rose Fulbright – European Commission proposes SFDR product categories (SFDR 2.0)
- ESMA – Impact of the guidelines on ESG/sustainability terms in fund names
- Climate Bonds Initiative – Sustainable bond market reaches new highs
- ESG Dive – Major US banks exit the Net-Zero Banking Alliance
- Gibson Dunn – Omnibus simplification of EU sustainability rules (CSRD/CSDDD)