By: Marian Macindoe, Managing Director for Sustainable Investment Strategy at Parnassus Investments

Sustainability is at a crossroads. Today’s environment will test corporate sustainability commitments, the direction of responsible investing, and the regulatory momentum behind environmental and social progress. Investors who navigate these challenges thoughtfully may stand poised to not only mitigate risk but also uncover potential opportunities for long-term value creation.

Some of the key issues that will help shape the landscape moving forward may include: potential backsliding on climate action, the rapid expansion of artificial intelligence (AI), and the heightened scrutiny of hazardous chemicals in consumer and medical products. Each present both risks and opportunities for investors seeking companies that are prepared for the future.

Climate Action at a Tipping Point

The new U.S. presidential administration has already triggered rollbacks in key environmental policies, including emissions regulations and climate commitments. Efforts to weaken the Inflation Reduction Act (IRA) could slow the transition to clean energy, while other countries, particularly China and the European Union, work to position themselves as global sustainability leaders. These changes will reshape market dynamics, impacting companies that benefit regulatory incentives for emissions reduction and green innovation.

For investors, the question is no longer whether climate risk is material, but how businesses will respond, especially in the face of continued losses from extreme weather events. Some may scale back their efforts to transition to a low-carbon economy as regulation is rolled back. For example, some high-emitting companies may feel emboldened to increase emissions or reduce or eliminate transition-related activities. However, others will recognize this moment as an opportunity to lead, investing in clean energy, supply chain resilience, and emissions reduction. As extreme weather events continue disrupting industries, companies integrating climate risk into their long-term strategies may be well-positioned to outperform their peers.

Beyond direct policy impacts, financial institutions are adjusting their risk assessments. Insurers have been retreating from high-risk areas, and lenders are incorporating climate resilience into credit decisions. Companies that ignore these risks may face higher borrowing costs, limited insurance options, and operational disruptions. Investors should look for businesses that see climate action not as a regulatory burden, but as a competitive advantage.

The AI Reckoning: Navigating Ethical Risks

Artificial intelligence is evolving at an extraordinary pace, already transforming key sectors of the global economy. From financial services and healthcare to logistics and retail, companies are using AI to unlock efficiency and streamline operations. Yet as adoption accelerates, so do the ethical and material risks associated with accuracy, misinformation, bias, and data privacy, among others. These concerns have sparked global regulatory scrutiny, with new AI legislation expected to shape corporate governance and ethical standards.

For investors, it is important to understand how companies view and manage the opportunities and risks of AI within their business. Technology’s growing influence on critical business decisions, such as access to healthcare, housing, insurance, credit and education has individual implications, which makes transparency, safety, and fairness not just ethical concerns, but imperatives. Companies integrating privacy protections into AI systems will likely gain competitive advantages, while those that rush adoption without safeguards may face reputational damage, lawsuits, and consumer backlash.

Responsible AI is fast becoming a marker of long-term resilience. Companies that conduct public risk assessments, maintain transparent product lifecycles, and uphold human rights in their AI policies are better equipped to earn trust and sustain value. In contrast, firms that prioritize “growth at all costs” may expose themselves to backlash and litigation and risk serious fallout.

AI is also increasingly driving progress in sustainability, with leading companies using it to improve energy efficiency, cut waste, and streamline supply chains. Those aligning AI strategies with environmental goals like carbon tracking and smart resource management are positioning themselves for long-term relevance.

Companies that lead with fairness, accountability, and foresight in their use of AI are more likely to thrive in a shifting landscape. Investors should closely evaluate whether firms are not only innovating with AI but doing so in a way that is built to last.

The Chemical Reckoning: Investors and Consumers Demand Safer Products

Public and regulatory scrutiny of hazardous chemicals, including PFAS and other synthetic substances, continues to rise. Some synthetic chemicals are necessary in products but can be used more responsibly and potentially replaced by sustainable alternatives. Hazardous chemicals, found in everyday consumer goods, medical devices, and industrial applications, have been linked to cancer, endocrine disruption, and environmental contamination.

Although some federal regulations have stalled, some individual states and global markets are pushing forward with stricter chemical safety laws. Notably, in April 2025, the EPA announced a broad suite of actions to combat PFAS contamination, including new testing strategies, industrial discharge guidelines, and efforts to strengthen enforcement.

Consumer awareness is also growing. Transparency is no longer optional, as demand continues to increase for clean-label products free from harmful substances. Companies that fail to address chemical risks may face lawsuits, recalls, and reputational damage, while those that proactively reformulate products and disclose chemical ingredients may stand to gain market share.

From an investment perspective, chemical mismanagement can represent a financial liability. High-profile lawsuits and multimillion-dollar settlements over chemical exposure have demonstrated the risks of weak safety policies. Investors should seek out companies with clear chemical management strategies that go beyond compliance to future-proof their business against evolving regulations and consumer expectations.

What This Means for Investors

It’s important for investors to look at sustainability as a forward-looking investment strategy that identifies businesses built for resilience and long-term growth. Climate policy reversals will test corporate commitments, AI will challenge ethical boundaries, and chemical safety will redefine consumer expectations.

As regulatory landscapes shift and consumer demands evolve, businesses that prepare for a low-carbon future, integrate responsible AI, and address chemical risks may not only avoid pitfalls but can create new growth opportunities.

The challenge for investors is to cut through short-term market noise and identify companies taking sustainability seriously. Whether through proactive climate planning, responsible AI adoption, or safer product innovation, businesses that embrace these shifts will be the ones driving the market forward. Sustainability is clearly at a crossroads, but for investors who remain engaged while navigating these key issues, the opportunity to build stronger, more resilient portfolios, is now.