1. Introduction: War as a Climate & ESG Shock
Modern geopolitical conflicts increasingly function not only as security crises but also as structural shocks to global decarbonisation pathways and ESG risk landscapes. Military escalation, infrastructure destruction, and energy supply disruptions create both immediate emissions spikes and long-term distortions in transition investment incentives (ScienceDirect, 2025a).
The ongoing United States-Israel conflict with Iran demonstrates how fossil fuel geopolitics and national security priorities can override climate commitments and reshape capital allocation decisions across markets (World Economic Forum, 2025; ScienceDirect, 2025b)
Over recent weeks, tensions around the Strait of Hormuz – through which a significant share of globally traded oil and liquefied natural gas transit – have triggered supply chain disruptions, rising energy prices, and financial market volatility, highlighting the systemic link between geopolitical risk and energy transition uncertainty (Carbon Brief, 2026a)
Simultaneously, military threats targeting energy infrastructure have raised the possibility of irreversible damage to regional production capacity, reinforcing the securitisation of energy systems and exposing vulnerabilities in global decarbonisation strategies (Al Jazeera, 2026).
In this context, the war represents not only a humanitarian crisis but also a multidimensional ESG disruption affecting decarbonisation, environmental stability, social resilience, economic performance and governance credibility.
2. ESG Dimension of War Impacts on Decarbonisation
Geopolitical conflicts increasingly interact with sustainability governance frameworks. For instance, the European Union and the United States already pursue structurally different approaches to decarbonisation and transition governance; however, rising geopolitical tensions and energy security concerns tend to amplify these pre-existing policy divergences, making regional differences in transition strategies more evident (European Commission, 2025).
While the EU continues to pursue ambitious emissions reduction targets and climate finance commitments aligned with long-term neutrality objectives, security-driven policy responses in conflict environments risk delaying regulatory convergence and weakening multilateral climate cooperation (European Commission, 2025).
The conflict also demonstrates how decarbonisation pathways can become subordinate to short-term energy security considerations. Governments may prioritise stockpiling fossil fuels, securing shipping routes or expanding domestic hydrocarbon production, thereby slowing renewable deployment timelines despite long-term transition commitments (Carbon Brief, 2026a).
2.1 Environmental Dimension – Emissions Shock & Ecological Damage
The environmental consequences of the war are both immediate and cumulative. Military operations involving aircraft, naval fleets and missile systems generate substantial direct emissions, while the destruction of civilian infrastructure releases significant embedded carbon and toxic pollutants into the atmosphere (Observer Research Foundation, 2026).
Large-scale strikes on military and industrial infrastructure across Iran and the wider Gulf region have reportedly involved more than 8,000 military targets and the destruction of approximately 130 naval assets – further intensify conflict-related emissions by triggering material loss cycles and carbon-intensive replacement processes.
Attacks targeting ballistic missile production facilities, fuel processing plants and strategic storage infrastructure indicate the potential emergence of a conflict-driven industrial emissions cycle, in which material destruction leads to carbon-intensive replacement, reconstruction and defence manufacturing expansion (Anadolu Agency, 2026).
Initial estimates suggest that the first 14 days of conflict generated approximately five million tonnes of greenhouse gas emissions, driven by bombardment, refinery fires, transport disruptions and the collapse of urban infrastructure systems (The Guardian, 2026).
Damage to an estimated 20,000 buildings alone has been linked to roughly 2.4 million tonnes of CO₂ equivalent emissions, reflecting the substantial carbon footprint associated with demolition, debris management and reconstruction cycles (NDTV, 2026).
Beyond emissions, ecological degradation represents a long-term sustainability risk. Attacks on oil infrastructure, desalination facilities and marine transport routes threaten biodiversity, soil fertility and water quality across the region, with potential impacts lasting decades (Greenpeace, 2026).
2.2 Social Dimension – Human Security, Labour Disruption and ESG Responsibility
Beyond environmental consequences, the conflict has triggered severe social disruptions that directly influence ESG risk exposure for both governments and corporations. Armed escalation across the Middle East has resulted in significant civilian casualties, displacement pressures and the breakdown of essential public services such as water supply, sanitation and healthcare systems, demonstrating how warfare reshapes societal resilience structures (Greenpeace, 2026).
Social instability generated by conflict environments also increases the probability of climate-related migration, workforce displacement and disruptions in global supply chains, particularly in sectors reliant on energy-intensive logistics or regionally concentrated production capacity (Observer Research Foundation, 2026).
At the financial system level, heightened geopolitical tensions have contributed to market volatility and risk-premium adjustments, with investors increasingly pricing humanitarian and operational risks into ESG investment decisions (Carbon Brief, 2026a).
This reinforces the notion that ESG practices function not only as proactive sustainability instruments but also as reactive risk-mitigation mechanisms during systemic geopolitical shocks. Firms with stronger ESG governance structures and stakeholder engagement capacity may demonstrate higher financial resilience during such crises compared to firms with weaker sustainability integration (ScienceDirect, 2025c).
From a corporate perspective, the conflict environment complicates supply-chain due diligence obligations, particularly regarding human rights exposure, worker safety and operational continuity in adjacent or affected regions. This increases expectations from investors and regulators for enhanced transparency and crisis-responsive ESG reporting.
2.3 Economic Dimension – Energy Price Shocks, Inflationary Pressure and Transition Cost Escalation
The war has also produced substantial macroeconomic effects that influence decarbonisation trajectories. Disruptions in shipping through the Strait of Hormuz – a critical chokepoint for global oil and LNG trade – have triggered sharp increases in fossil fuel prices and amplified concerns about global energy security (Carbon Brief, 2026a). In addition, potential threats to critical export hubs such as Kharg Island – responsible for nearly 90% of Iran’s oil export flows – displays how damage to fossil fuel logistics systems can reinforce energy security concerns and slow the pace of global decarbonisation efforts.
Oil prices surpassed USD 100 per barrel during the escalation period, raising fears of a renewed energy crisis comparable to historical supply shocks and prompting emergency responses such as strategic reserve releases by International Energy Agency member countries (Carbon Brief, 2026a).
Rising energy costs are simultaneously affecting electricity prices, fertiliser markets and food supply systems worldwide, creating inflationary pressures that may reduce fiscal space for climate investment and delay corporate decarbonisation capital expenditure (Observer Research Foundation, 2026).
- Energy-intensive industries may postpone transition investments due to higher financing costs.
- Governments may reallocate budgets toward defence spending and consumer energy subsidies.
- Reconstruction demand following infrastructure destruction may generate short-term GDP growth but contribute to carbon lock-in dynamics.
Moreover, geopolitical instability can redirect capital flows within financial markets. ESG-labelled fixed-income instruments and transition finance structures remain sensitive to systemic risk shocks, potentially increasing funding costs and altering investor behaviour during periods of prolonged conflict (ScienceDirect, 2025b).
These developments demonstrate that war can simultaneously accelerate certain structural economic adjustments – such as energy diversification – while undermining near-term decarbonisation progress due to cost inflation and uncertainty.
2.4 Governance Dimension – Policy Fragmentation, Climate Leadership and Trump Scenario Risk
Wartime policy responses often prioritise national security, energy sovereignty and industrial protectionism, potentially weakening climate governance coherence and delaying regulatory implementation timelines.
In the United States context, recent policy signals regarding withdrawal from multilateral climate institutions and reduced participation in global climate cooperation frameworks have raised concerns about the credibility of international decarbonisation commitments (Carbon Brief, 2026b).
The potential withdrawal of the US from institutions such as the UNFCCC and IPCC could reduce transparency in emissions reporting, weaken climate finance contributions and shift the balance of climate leadership toward other major economies, particularly within the European Union and China (Carbon Brief, 2026b).
Simultaneously, geopolitical conflict environments encourage energy nationalism and sanctions regimes that may distort ESG disclosure practices and increase regulatory fragmentation across jurisdictions. Diverging policy approaches between EU taxonomy-driven transition frameworks and more security-oriented energy strategies in the US illustrate how war can reshape governance incentives and corporate transition planning (European Commission, 2025). Key governance uncertainties emerging from the conflict include:
- Possible weakening or delay of net-zero legislation.
- Reclassification debates around defence sector ESG eligibility.
- Increased protectionism affecting clean technology supply chains.
- Higher policy volatility impacting long-term transition investment planning.
Ultimately, the war reinforces a core governance thesis: geopolitical conflict increases policy uncertainty, making transition risk pricing more complex for both firms and investors.
3. Scenario Analysis – Duration Risk, Carbon Lock-in and Global Transition Pathways
The duration and geographical expansion of the United States–Israel–Iran conflict will play a decisive role in shaping global decarbonisation trajectories. While short-term conflicts tend to generate temporary emissions spikes and financial volatility, prolonged wars can structurally reshape energy systems, policy priorities and climate investment flows (ScienceDirect, 2025b).
Scenario 1: Short Conflict (1–2 Months)
In a limited-duration conflict scenario, the primary impacts are expected to include temporary disruptions to global energy markets and short-term increases in greenhouse gas emissions. Military operations and infrastructure destruction generate immediate emissions surges, while shipping rerouting and precautionary fossil fuel stockpiling increase logistics-related carbon intensity (Observer Research Foundation, 2026).
However, historical evidence suggests that once market stability returns, renewable deployment momentum may resume, particularly as policymakers seek to reduce exposure to fossil fuel volatility. The recent crisis has already prompted several governments to emphasise electrification and renewable energy as pathways toward energy sovereignty and price stability (Carbon Brief, 2026a).
In this scenario, decarbonisation pathways experience delay rather than reversal.
Scenario 2: Prolonged Regional Conflict (2–6 Months)
If the conflict extends beyond initial expectations and evolves into a sustained regional confrontation, structural impacts on the energy transition become more pronounced. Oil prices could remain elevated, inflationary pressures may increase financing costs for clean energy projects and governments may prioritise defence spending over climate finance commitments (ScienceDirect, 2025a).
Furthermore, the destruction of urban infrastructure and industrial facilities would significantly expand the embedded carbon cycle associated with reconstruction. Early estimates illustrated how prolonged warfare can lock economies into high-carbon recovery trajectories (NDTV, 2026).
Prolonged maritime disruptions around the Strait of Hormuz – through which roughly a quarter of global seaborne oil trade flows – could also reshape global supply chains and encourage fossil fuel diversification strategies rather than rapid decarbonisation (Carbon Brief, 2026a).
In climate modelling terms, sustained geopolitical conflict increases the probability of a higher global temperature pathway, particularly if transition investment slows while fossil fuel consumption rises to ensure energy security.
Scenario 3: Globalised Energy Crisis and Transition Fragmentation
A more severe scenario involves the internationalisation of the conflict through trade fragmentation, sanctions escalation or supply chain block formation. In such a context, decarbonisation efforts risk becoming regionally fragmented rather than globally coordinated.
- Energy nationalism may drive domestic fossil fuel expansion.
- Trade disputes could restrict access to critical minerals and clean technologies.
- Sustainable finance flows may shift toward defence or energy security investments.
Simultaneously, reliance on renewables may increase in some jurisdictions as governments seek long-term insulation from geopolitical chokepoints. Renewable energy has been increasingly framed as a strategic asset capable of reducing exposure to supply disruptions and fuel price shocks (Carbon Brief, 2026a).
This dual dynamic – fossil fuel lock-in in the short term combined with accelerated electrification in the long term – shows the complex interaction between geopolitical risk and climate transition pathways.
4. Conclusion – War, ESG Systemic Risk and the Future of Decarbonisation
The Iran–Israel–US conflict highlights how modern warfare operates as a systemic ESG shock that simultaneously affects environmental integrity, social resilience, economic stability and governance credibility.
While the immediate climate impact of conflict is visible through emissions spikes and ecological damage, the more profound risk lies in its capacity to reshape incentives for investment, policy coordination and technological deployment. Geopolitical instability can weaken multilateral climate cooperation, distort capital flows and delay the scaling of low-carbon infrastructure, thereby increasing long-term transition risk (ScienceDirect, 2025a).
At the same time, the crisis reinforces the strategic importance of decarbonisation as a pathway toward energy sovereignty and economic resilience. As reliance on fossil fuel supply chains exposes economies to volatility and conflict-related disruptions, renewable energy systems may increasingly be perceived not only as climate solutions but also as national security assets (Carbon Brief, 2026a).
Ultimately, the conflict demonstrates that resilient decarbonisation strategies must be capable of withstanding geopolitical shocks.
From a corporate perspective, the conflict environment underscores the need to integrate geopolitical risk considerations directly into sustainability governance frameworks. ESG is increasingly functioning as a crisis-response architecture rather than solely a long-term reputational or compliance instrument (ScienceDirect, 2025a). Key strategic responses include:
- Risk Management Integration
- Conduct scenario-based carbon pathway stress testing.
- Map supply chain exposure to geopolitical chokepoints.
- Diversify energy sourcing and logistics routes.
- Governance Adaptation
- Integrate conflict risk into sustainability and risk committees.
- Strengthen ESG disclosure regarding war-related operational exposure.
- Monitor regulatory divergence across jurisdictions.
- Decarbonisation Strategy Protection
- Avoid delaying transition capital expenditure where possible.
- Prioritise energy efficiency and electrification as defensive decarbonisation measures.
- Maintain access to sustainable finance instruments despite market volatility.
Companies capable of aligning decarbonisation strategies with geopolitical resilience may outperform peers during periods of systemic instability, reinforcing the financial materiality of ESG integration in conflict-affected global markets.
CGE Evaluation, April 2026
Written by Oğuz Er.
References
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