Come 2026, market forces will drive climate transition!
A deep and fundamental split defines the sustainability outlook for 2026. Political support for broad ESG and climate policies is slowing. In many regions, this political momentum is fragmenting or stalling entirely. However, commercial market forces are moving the energy transition forward. These economic forces are also rapidly repricing severe physical climate risk. This widening gap between politics and economics is the core theme for investors in the coming year.
The commercial engine of decarbonization:
New MSCI research shows that the energy transition has moved past its reliance on policy subsidies. For key sectors, like renewables and electric mobility, costs have fallen dramatically. They have now achieved cost parity with traditional energy sources. This competitiveness has become a structural market driver.
The report highlights the resilience of new-energy stocks. This strength is partly fueled by rising electricity demand. For instance, the rapid growth of data centers requires huge amounts of new energy. Liz Houston, Vice President, Sustainability Methodology & Policy, MSCI, noted a key distinction. Investors must separate technologies that can scale economically from those that still need regulatory momentum. The analysis clearly shows that companies generating revenues from proven, scalable low-carbon technologies have stronger performance potential. This is often better than performance from companies reliant on early-stage or policy-dependent innovations.
Escalation of physical climate risk:
The increasing severity and frequency of extreme weather events are quickly turning into financial losses. This risk is particularly high for fixed assets with long lifespans, such as infrastructure. Investors must change their focus. They can no longer look only at average losses over time. They must now focus on understanding catastrophic “tail risk.”
MSCI projects a significant change under a 3°C climate scenario. The share of private infrastructure assets exposed to catastrophic losses is expected to increase fivefold by 2050. Catastrophic loss is defined as exceeding 20% of an asset’s value. This surge in risk is already visible in the insurance market. Premiums for physical-risk and natural-catastrophe protection are expected to rise significantly. For high-risk regions, the total financial losses are much higher. This is because business disruption compounds the financial damage. MSCI’s previous work estimates business disruption costs to be approximately 14 times greater than the cost of asset damage alone.
Regulatory stick and state-owned drag:
While broad governmental sustainability mandates are stalling, financial regulators remain focused on stability. Central banks, especially in Europe, are increasing their oversight of climate risk. They view this risk as a structural macro factor.
The European Central Bank (ECB) has issued a warning. It suggests that climate-related natural disasters may lead to the repricing of loans and securities. This will affect assets held by financial institutions in higher-risk areas.
Separately, the research highlighted an ongoing challenge in global capital markets: increasing state ownership. An examination of corporate governance and performance shows a clear correlation. There is a link between the level of state control and shareholder returns.
Analysis of the MSCI ACWI Index found that widely held companies outperformed controlled companies by 14.9% over a 10-year period. State-owned enterprises (SOEs) often prioritize national or social policy goals. These goals can include maintaining employment stability. This usually comes before minority shareholder profitability. Therefore, investors should anticipate lower Total Shareholder Returns (TSR) in SOE equities. However, credit investors may benefit from the implicit government backstop. This backstop offers SOE bonds greater resilience and a lower default risk.
