When world leaders agreed to a net-zero target by 2050 under the Paris Agreement, it seemed there was a broad consensus on protecting the planet. However, the reality of implementing these commitments has been one of divergence, resulting in red tape that risks suffocating the transition it was designed to support.
Now, green finance is at a crossroads. Regulatory landscapes are shifting worldwide: the EU is simplifying rules with its Omnibus proposals, the UK is defining ‘sustainable’ with a new taxonomy, and Trump’s administration in the US is rolling back climate commitments at pace. As geopolitical change deepens divides in an already fragmented space, green finance must find a way to thrive amidst the churn.
The burden of misalignment
Existing reporting frameworks – created with the best intentions of effectively mobilising investment – are out of sync. Investment managers in the EU, for instance, must adhere to the Sustainable Finance Disclosure Regulation and if they have operations in the UK, the Sustainable Disclosure Requirements. These are different rule books, with inconsistent metrics and diverging demands for data. This lack of global regulatory coordination fuels fragmentation, driving up costs and creating friction in capital markets.
For many investors, sustainability compliance isn’t just complex – it’s a barrier. Regulatory fragmentation may hamper efforts to demonstrate authentic green stewardship, by producing excessive compliance burdens that do not necessarily translate into better investment outcomes.
For green finance to function effectively, global investors need consistent, comparable data to make informed capital allocation decisions. However, differing jurisdictional priorities and regulatory approaches often result in frameworks that are neither interoperable nor easily comparable. A lack of alignment increases compliance costs and administrative burdens, particularly for firms operating across multiple regions. It also creates uncertainty, making it harder for investors to assess the sustainability credentials of assets in different markets.
Policymakers have a chance to fix this. For instance, the UK Green Taxonomy classification system, which is currently under development and may be integrated into disclosure rules, must define sustainability in the same way that the existing EU Taxonomy does. Keeping parameters clear across jurisdictions is key to keeping capital flowing and maintaining investor confidence.
Trump’s decision to withdraw the US from global climate commitments is deepening global rifts in regulatory approaches further. The US regulatory landscape is not monolithic and trends supportive of sustainability do still exist. However, this federal-level tracking is a major development which makes it even more critical for UK and EU policymakers to maintain momentum on climate action.
The map is not the territory
Top-down directives from government policymakers are not the only force directing green capital, however. Even amidst deregulatory trends, asset owners in the UK and EU are increasingly doubling down on climate action and pushing investment managers to maintain their sustainability commitments. Driven by market demand and fiduciary risk considerations, this investor-driven momentum runs independently from regulatory mandates, and goes some way towards counterbalancing uncertainty in the regulatory space.
In the US, while government withdrawal from climate action has been abrupt and pronounced, it does not exist in a vacuum. When the first Trump administration pulled back from federal climate action, subnational actors – including states, cities, businesses and tribal nations – stepped up their initiatives.
The state of New Mexico, for instance, has proposed a bill to reach net zero by 2050, while Maryland’s renewable energy program mandates electricity suppliers to meet a minimum portion of retail sales through renewable sources. Meanwhile, New York’s Climate Change Superfund Act, signed in December 2024, requires fossil fuel companies to contribute $3bn to fund climate adaptation projects and infrastructure repairs annually for 25 years, totalling $75bn. Institutional investors such as pension funds and endowments also continue to push for climate-conscious investing despite federal policy shifts.
Smoother sailing ahead?
As the regulatory landscape shifts amidst geopolitical change, policymakers must seize the opportunity to build alignment across jurisdictions rather than deepen divergence. The recent rollback of US climate commitments risks widening global regulatory gaps, which places greater responsibility on the UK and EU to reinforce their leadership in green finance. A global regulatory framework that balances comparability, flexibility, and usability would help maintain the integrity of sustainable finance while ensuring reporting remains practical and effective.
However, high-level regulatory shifts do not tell the whole story. State-level policy in the US is evolving to fill the federal void in climate action, while investors and asset owners across the UK, EU and US are already demonstrating that they will continue demanding climate-aligned strategies regardless of political uncertainty. Principles aside, climate risk remains a financial risk, and market forces will work against it in pursuit of better outcomes for businesses. This decentralised commitment to sustainability offers cause for optimism, demonstrating that green finance will not solely be determined by top-down regulation.
