Sarah Thompson
Welcome to Powering Sustainable Ideas, a podcast series from RBC Capital Markets where we capture insights on the companies powering the sustainable future. I'm Sarah Thompson, Global Head of sustainable finance. Surging energy demand, geopolitical tensions and shifting regulations made 2025 a challenging year for sustainable finance. Despite these headwinds, the sustainable finance market didn't retreat. It recalibrated. Sustainable assets under management grew to 2.7 trillion, and annual sustainable bond issuance reached 1.1 trillion, on par with previous years. Meanwhile, investors increasingly prioritized climate risk management, credible transition plans and projects capable of competing on economic fundamentals, signaling a maturation of the industry.
Today, we're exploring three transformative themes that are expected to shape sustainable finance and capital allocation in 2026 and beyond. First, electrification and energy security are catalyzing the energy transition, reflecting a shift from energy substitution to energy expansion and a recognition that energy security, affordability and sustainability can complement each other rather than compete. Second, defence priorities are reshaping responsible investment. As global military spending reaches a historic inflection point, responsible investors are actively reconsidering their stance on the defence sector. And third, climate adaptation is emerging as a critical investment opportunity. With extreme weather now defining baseline operating conditions for businesses and communities worldwide, investors across all asset classes are allocating capital toward climate adaptation and resilience solutions.
I'm joined today by my colleagues, Moses Choi, Head of U.S. Sustainable Finance, and Stefano Vitali, Head of Europe and Asia Pacific Sustainable Finance, to discuss these themes and the shift they represent towards strategies grounded in economic fundamentals, energy and national security priorities and physical risk realities. Moses and Stefano, welcome.
Stefano Vitali
Thank you for having us.
Moses Choi
Thanks for having us.
Sarah Thompson
Let's start with our first theme, which is really two separate but interconnected themes, electrification and energy security and let’s talk about how they're catalyzing the energy transition. We know that data centers, air conditioning and the electric electrification of transport, buildings and industry, are expected to drive a structural increase in electricity demand that will require significant additional supply from all energy sources, including natural gas, including nuclear and including renewables. At the same time, trade uncertainty and geopolitical instability have prompted governments to focus on energy independence, affordability and industrial competitiveness, with many adopting distinct strategies to achieve these objectives. As a result, we're seeing a more fragmented approach to the transition and climate action is really no longer the shared global priority it once was. And yet, despite this reorientation, the energy transition continues to progress. So, Moses, starting with you, can you share some observations on how this is manifesting in the U.S.
Moses Choi
Thanks, Sarah, that's a great tee up for our conversation today, and I think your framing gets the heart of what many of us are grappling.
Moses Choi
What we're seeing in the U.S. is energy expansion full stop, fueled by what's viewed as a once-in-a-generation technology artificial intelligence. The demand is being driven by AI infrastructure, data centers and hyper scalers, companies such as Amazon, Google, meta and Microsoft, house the large language models, computational power and data stores to train these AI models and operate cloud based services that most of us rely on today. As a result, these companies need access to base load power, and they need it as quickly as possible. The U.S. federal government has viewed winning the AI race as a strategic priority and paramount to its long-term competitiveness. The Trump administration in July last year, published America's AI Action Plan, which outlined over 90 federal actions to accelerate AI, comparing this to the space race and fully acknowledging the power grid, and as I quote, the life blood of the modern economy. With that being said, hyperscalers are driving what feels like an insatiable thirst for clean energy technologies. The rapid build out of AI-driven data centers in the U.S. is projected to increase electricity demand by between 200 to 400 terawatt hours by 2030. At the same time, hyperscalers have voluntarily adopted ambitious corporate sustainability goals and real commitments to decarbonize as they grow.
As a result of this, hyper scalers are investing in next generation technology such as small modular nuclear reactors, advanced geothermal, long duration energy storage, natural gas with CCUS. In addition, and technologies like energy efficiency hardware, load shifting solutions and liquid cooling.
Something that caught my eye last year was, in December 2025, Alphabet, which is Google's parent company, announced a $4.75 billion transaction to acquire Intersect Power, a renewable energy power project developer and operator. To sum it up, in the U.S., there is a growing recognition that the economy needs all of these sources simultaneously. You need natural gas for flexibility, renewables for cost competitiveness, nuclear for reliable base load power and massive grid infrastructure investment to tie it all together. Cleaner energy in every form, becomes part of the solution.
Sarah Thompson
Stefano, maybe over to you. How are electrification and energy security driving decarbonization in Europe? What are some of the opportunities and what are some of the challenges?
Stefano Vitali
Thanks, Sarah. So Europe is facing a genuine balancing act right now. On one end, you have binding climate commitments. The EU has committed to a 55% reduction in greenhouse gas emissions by 2030 but on the other end, Ukraine has showed us that Europe can't ignore where its energy is coming from anymore. What have shifted recently, however, is how Europe is tackling both topics at the same time. So, for example, last year, the EU updated its repower EU roadmap specifically to reduce dependence on Russian energy. And at the same time, it launched electrification Action Plan, which is targeting 32% of final energy consumption from electricity by 2030. So in my mind, the thinking is straightforward. Electrification gives you both decarbonization and energy autonomy, with the goal to ultimately eliminate dependency on imported fossil fuels. The real challenge is infrastructure. Right now, Europe is focusing its effort on so-called energy highways, which are interconnections between member states so electricity can flow where it's needed. But the reality is, several Euro countries won't hit the 15% interconnection target by 2030 and that's a bottleneck. Without that infrastructure, the bloc won't actually deliver on the electrification promise. So, the opportunity for Europe is very clear, electrification works as a solution to both climate mitigation and energy security, but the challenge is execution, getting the grid right, moving fast enough, and keeping costs manageable. That's where the real work is. Now let me spend just a few words on how capital markets will play a role in financing this. Roughly 60% of energy transition investments, especially towards grid and renewable deployment, are currently being covered by fixed income products. So, the debt capital market has a key role to play.
Sarah Thompson
Super interesting. Thank you both for those perspectives, maybe I can add a couple from Canada. So, in Canada, our federal government has put forward a vision to become an Energy and Natural Resources superpower. This includes investing in oil and gas alongside though carbon capture and methane reduction, and it also includes investing in things like hydrogen, geothermal, advanced biofuels, renewables and nuclear energy as scalable, exportable solutions that will help to diversify and strengthen our economy. And finally, it also includes investing in integrated electricity grids to deliver reliable, affordable, sustainable power, along with a secure, vertically integrated supply chain for the critical minerals needed in a low carbon economy. So this vision and these developments, in my view, really underscore the nexus between energy security, economic security and national security that we've all touched on in different ways. And in fact, speaking of Canada's most recent federal budget also included substantial commitments to defence, including over 80 billion over five years to rebuild, rearm and reinvest in the Canadian Armed Forces, and the establishment of a new defence investment agency to accelerate the procurement process. And this is maybe a good segue to our second theme, defence priorities reshape responsible investment. So, Stefano, staying with you, we're witnessing a similar increase in defence investment in Europe. How are sustainable investors responding to this?
Stefano Vitali
Thanks, Sarah. So, to your point, I fully agree. Canada's move really underscores a broader shift that we're seeing across the West. In Europe, for example, we're witnessing something similar, but with a particular twist around how defence spending is actually reshaping what investors actually care about. So, for example, historically, the defence sector in Europe was effectively avoided by sustainable investors. The sustainability question was a genuinely difficult one, how do you responsibly invest in defence? And frankly, there wasn't enough financial incentive to work through that tension, until now, that has actually changed recently, on the back of the EU commitment to unlocking 800 billion euros towards defence by 2030, we have seen a striking market response. Defence equities have delivered some of the strongest returns we've seen in the past year. What's particularly telling, in my mind, is that security has become one of the winning things among thematic funds. It actually attracted more inflows last year than the AI theme. That tells you something about investor priorities right now in Europe. On top of that, the establishment of a defence resilience security bank, which is a multilateral institution designed to provide long-term funding and guarantees for member states defence investments, is a key indicator of where the market is going. This tells you that it is not a temporary pivot, it's an infrastructure being built for the long term. So, the reality is geopolitical uncertainty is forcing investors to reckon with what responsible investing in defence actually means. Defence is no longer something you can opt out of. It's now a core portfolio consideration for European investors, and how investors will deal with the conundrum is the core of the debate at the moment.
Sarah Thompson
So Stefano, can you expand on that beyond the financial opportunity, is there, say, a moral or philosophical argument that can be made for investing in defence?
Stefano Vitali
Absolutely. On one end, you have the human right to security and self-defence that's enshrined in the human right charter, and on the other end, you have the implications and practical risks of investing in defence. However, the historical use of blanket exclusion on the defence sectors, which have been applied by certain sustainable investors may actually prove to be detrimental overall, because they removed the opportunity for engagement. In this respect, we are noticing that the investment community is already responding to these realities, with data showing increased uptake of defensive investments by sustainable funds, as well as the revision of some of the most stringent exclusions. So, in short, a successful relationship between defence and responsible investors will require the development of workable frameworks that enable, at the very least, transparency on one end and the opportunity for stewardship on the other.
Sarah Thompson
Great, thanks, Stefano. Maybe switching gears from geopolitical risks to physical risks, I'd like to discuss our third theme now, climate adaptation emerges as a critical investment opportunity. So, Moses, bringing you back in, can you set the scene for us and talk about how climate change has shifted from future risk to present day operational reality for businesses, insurers and communities worldwide?
Moses Choi
Yeah, absolutely, Sarah. Extreme weather events such as wildfires, flooding and hurricanes, due to climate change, are no longer distant threats. In 2024 and 2025 costs from extreme weather event disasters was approximately $600 billion. The Los Angeles wildfires last year constituted the costliest natural disaster, burning over 50,000 acres, impacting over 20,000 structures and causing 30 fatalities. Overall, in LA losses were around $50 to $60 billion. Insurers and reinsurers fully acknowledge this, and it's not a surprise that 2025 was one of the hottest years on record.
As a result of bigger and more frequent disasters, we are seeing a growing number of investors treat adaptation, not simply as an optional ESG check the box, but as an essential part of capital allocation.
Sarah Thompson
How could any of us forget those Los Angeles wildfires? So, Moses picking up on that point, what investment opportunities does this create across asset classes?
Moses Choi
Absolutely. I'll refer the listeners to the year-ahead piece, which I think does a really good job outlining what we see as three sleeves for investment opportunity.
First, in fixed income and infrastructure, we see near term capital deployment opportunities. In December last year, RBC served as lead book runner for Battery Park City Authority’s $657 million tax-exempt sustainability bonds, which funded critical climate resilience infrastructure across Lower Manhattan, storm surge barriers, flood defences and resilient systems. That's institutional investor capital deployment to withstand future events like Hurricane Sandy. And the market signal is clear, sovereigns and municipalities need to deliver resilient infrastructure, and corporates, especially power utilities, need to deliver on grid resilient and grid hardening solutions. We see Debt Capital Markets as critical enablers for mobilizing capital required to finance this infrastructure imperative.
Second, in private markets, we are seeing green shoots that signal a growing opportunity. In December last year, our team published some primary research on private markets, innovation and climate adaptation and resilience. And in the report, listeners will find 10 private companies offering context-specific solutions. One of our key takeaways is that there really is no one-size-fits-all. You need asset-light technologies for risk modeling, companies like Tomorrow.io using satellite technology to deliver hyper local weather intelligence. You also need physical infrastructure hardening. TS conductor is tripling grid capacity by advanced power line technology, and you need financial recovery mechanisms, companies such as Adaptive Insurance and Floodbase who are enabling parametric insurance to deliver rapid payouts for customers who are impacted by things like power outages and flooding.
Lastly, in public equity markets, we see an untapped opportunity. Only about 11% of public companies offer technologies or solutions to address climate adaptation. And our very own sustainability research colleague, Sarah Mahaffey observed that 118 adaptation resilience-focused companies outperformed the Russell 3000 index during a specific observation period. Public equity investors are using quantitative tools and are beginning to integrate adaptation resilience into investment product design. One such example is Wellington Climate Strategy Fund. The fund focuses on, quote, identifying material climate mitigation and adaptation solutions that they believe offer compelling financial returns. In summary, we're seeing fixed income opportunity in infrastructure as executable today. We're seeing green shoots in private markets and an untapped opportunity in public equity markets.
Sarah Thompson
That's a great summary of the opportunities across asset classes, and maybe a great place to end. Thank you, Moses, and thank you, Stefano, for this substantive conversation.
After exploring these three transformative themes, it's clear to me that sustainable finance in 2026 is no longer about choosing between competing priorities. It's about scaling low-carbon technologies that deliver energy security and decarbonization simultaneously, balancing defence priorities with the accountability standards that responsible investors demand. And it's about mitigating climate change while building resilient communities and strong economies. Issuers and investors alike are taking a more pragmatic approach, focused less on marketing labels and more on execution, credibility and long-term value creation. And I look forward to seeing what the year ahead holds.
Thanks to everyone for listening to Powering Sustainable Ideas, brought to you by RBC Capital Markets. This episode was recorded on February the 12th, 2026. Please remember to subscribe to get more great content and be alerted about future episodes. If you'd like to learn more about the topics discussed in this episode or continue the conversation, please visit rbccm.com/poweringsustainableideas, or contact your RBC representative. See you all next time.
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