Is ESG Dead? Long Live Sustainability
The ESG journey in banking entered a more complex and introspective phase in 2025. Across markets, there was a quiet retreat from ESG rhetoric, driven by political polarization, marketing fatigue, and growing skepticism about greenwashing. The term ESG itself came under scrutiny, with some institutions using it less in public communication. This was not a rejection of sustainability, but a recognition that narratives without outcomes erode credibility.
Beneath that retreat, sustainability continued to strengthen its foundations. Regulatory momentum accelerated across Europe, Asia, and the Middle East through tighter climate disclosure norms, clearer transition taxonomies, and stronger governance expectations. Large corporates and institutional investors deepened transition commitments, acknowledging that climate and social risks are core business risks. Capital flows into sustainable assets, transition finance, and climate technologies remained resilient, signaling a shift from idealism to pragmatism.
In 2026, sustainability is no longer a brand amplifier or reputational shield. It is becoming an operating discipline embedded in credit decisions, risk management, data architectures, and customer engagement. Banks recognize that incremental disclosures or siloed ESG teams cannot meet the scale of the transition challenge. The focus shifts to financing models that fund transition pathways at scale, responsible AI that improves decision-making and inclusion, and stronger data infrastructures for measurement and accountability. Success will be defined by measurable outcomes that withstand regulatory, investor, and societal scrutiny.
Authors:
Ravi Venkataratna, Senior Industry Principal
Mehul Jayendra Shah, Lead - Product Marketing (ESG)
The Rise of Multiple Financing Models
Scaling Transition Finance Beyond “Green”
As banks move from aspiration to execution, the decarbonization agenda is reshaping how capital is structured, priced, and deployed. Traditional green finance, while relevant, cannot fund the scale and complexity of transitions across carbon-intensive sectors. In 2026, banks will offer a spectrum of transition financing models aligned with sector maturity, technology readiness, and real-world pathways rather than binary green classifications.
Transition-linked loans are also gaining traction. Unlike traditional green loans, these instruments reward borrowers for achieving validated milestones, such as emissions intensity reductions in hard-to-abate sectors like steel and cement. Sector-specific pathways, aligned with frameworks such as the EU Net-Zero Industry Act, are guiding financing decisions and helping banks distinguish genuine transition efforts from superficial claims.
At the portfolio level, banks are classifying clients by transition readiness and applying differentiated lending models and pricing strategies. With commitments rising and multilateral institutions urging rapid deployment, 2026 will mark the year transition finance shifts decisively from intent to action.
Blended Finance and Risk-Mitigated Capital Mobilization
Blended finance is emerging as a critical enabler. By combining public capital, private investment, philanthropic funding, and multilateral guarantees, these structures de-risk large projects that would otherwise struggle to attract commercial financing. Initiatives such as the ASEAN Catalytic Green Finance Facility and COP30’s Blue Entrepreneurship Breakthrough illustrate how blended pools are mobilizing billions for renewable energy and sustainable infrastructure in emerging economies.
COP30 reinforced that climate finance is moving from pledges to implementation, with targets to mobilize USD 1.3 trillion annually by 2035 and triple adaptation finance. These ambitions signal that scaling capital will depend on blended finance and innovative instruments to crowd in private investors. For banks, this means structuring risk-mitigated solutions that accelerate decarbonization, especially in emerging markets.
Responsible AI for Sustainability
AI Scales Climate and Social Risk Integration into Core Banking
Responsible AI is emerging as one of the most powerful accelerators of sustainability. The UN Global Compact urges the private sector to leverage generative AI to meet the 2030 Sustainable Development Goals while mitigating associated risks. By 2026, AI will no longer sit at the periphery of sustainability initiatives. It will become a foundational capability across retail, corporate, and institutional banking, improving decision accuracy, speed, and depth while reducing operational friction.
One immediate impact is in climate risk assessment. AI-driven models integrating satellite imagery, geospatial data, and historical loss patterns enable banks to move beyond manual, assumption-heavy approaches. These tools deliver granular, forward-looking insights at asset, portfolio, and sector levels, meeting growing regulatory expectations for credible climate risk integration into credit and risk frameworks.
AI is also reshaping the social dimension of sustainability. Inclusion scoring models powered by alternative data expand credit access for underserved populations, while continuous monitoring reduces bias. Also, AI-enabled fraud detection and financial crime prevention strengthen trust and resilience.
Embedding Sustainability into Customer Journeys, With Responsible AI Guardrails
On the customer side, banks are embedding sustainability into everyday financial interactions. AI-powered dashboards allow clients to track and mitigate emissions across operations, from card spending to supply chains, providing near real-time visibility into Scope 1, Scope 2, and selected Scope 3 emissions.
This acceleration brings new responsibilities. Scaling AI-led sustainability requires robust governance frameworks addressing explainability, transparency, and bias monitoring. Institutions that invest early in responsible AI will meet regulatory expectations and unlock confidence to deploy AI at scale, positioning it not as a technology upgrade but as a trusted engine for sustainable banking transformation.
Deeper Data, Richer Insights, and a Wider Sustainability Consciousness Radius
From Disclosure to Verifiable, Audit-Ready Sustainability
By 2026, sustainability regulation in banking will shift decisively from disclosure to verifiable outcomes. Regulators are no longer satisfied with static reports and high-level commitments. Banks must build robust data infrastructures, multi-layer verification processes, and audit-ready sustainability flows embedded across lending, underwriting, payments, and product design. Sustainability is moving out of annual reporting cycles and into the daily operating fabric of banking.
In Europe, the European Banking Authority is driving this shift through its ESG risk guidelines and alignment with the Corporate Sustainability Reporting Directive. Banks are now expected to demonstrate how sustainability risks are identified, measured, and managed at portfolio and counterparty levels, not just disclosed in aggregate. This is raising the bar for ESG data depth and quality, with granular client-level reporting becoming the norm.
Ecosystem and Value-Chain Risk Visibility
Regulatory momentum is also expanding the sustainability consciousness radius. Decision-making is moving beyond direct counterparties to ecosystem-level assessments. In supply chain finance, banks are evaluating Tier 1, Tier 2, and Tier 3 supplier emissions, energy intensity, waste management, and community impact. Lending and investment decisions increasingly factor in downstream climate impact, hidden social risks, reputational exposure, and lifecycle waste footprints.
Similar trends are visible in emerging markets. In India, SEBI’s Business Responsibility and Sustainability Reporting framework is influencing how banks assess SME borrowers in sectors such as textiles, logistics, and agriculture, where environmental and social risks are deeply embedded. Banks are now evaluating not only borrower practices but also the sustainability posture of entire ecosystems.
The cumulative effect is a more holistic, data-rich approach to sustainability. Regulation is pushing banks beyond compliance-driven disclosures toward measurable, defensible impact, making sustainability a core operating discipline rather than a reporting exercise.
Conclusion
The cumulative outcome of these shifts is a more holistic, data-rich approach to sustainability in banking. With regulation acting as the catalyst, sustainability is widening in influence, deepening in data requirements, and becoming more embedded in core decision systems. This evolution positions banks to drive real-world sustainability outcomes, moving decisively beyond compliance-driven disclosures toward measurable and defensible impact.
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