Donald Trump’s imminent return to the White House, with a vow to support the fossil fuel industry, could strengthen the hand of those leading a backlash against sustainable investment. But observers in the sector insist it is not “game over”, as funds continue to flow into renewable energy and green technology assets.
It is easy to see how investors aligned with long-term environmental, social and governance ideals can find it hard to hold that faith in an increasingly polarised political debate. In the US, dozens of anti-ESG laws have been enacted in Republican states, according to law firm Ropes & Gray.
The proponents of these laws have successfully argued that fund managers taking a sustainable approach have caused their investors to lose out. For example, they say that excluding fossil fuel assets from funds prevented investors from benefiting from the steep rises in the price of oil and gas that followed Russia’s invasion of Ukraine.
There has been significant fallout for these funds in the wake of the US election. The iShares Global Clean Energy ETF, which tracks renewable energy companies, plummeted on news of Trump’s victory and remains nearly 8 per cent down on where it was trading before the polling results.
Manufacturers are also putting renewable projects on hold in the US, reports suggest, while they wait for more clarity.
“I think there’s still a lot of pessimism [about sustainable investing],” says Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics. “I’m not optimistic about where this backlash is going. I think that we are not yet out of the negative news cycle about ESG.”
Across the Atlantic in Europe, even proponents of sustainable investing have been attacking ESG’s reputation. Many accuse asset managers of greenwashing: misrepresenting how “good” or “clean” their investment strategies are.
They argue that it can be confusing to find a fossil fuel company in a sustainable investment fund, even if it has been included for its progress on the “transition” to a lower carbon economy.
Regulators in all major markets have waded in to try to ensure investors are getting what they think they are paying for. They have introduced various rules on fund labelling and the quality of data that it relied upon.
But the rancorous political discourse has bitten deep. The latest report on global sustainable fund flows, from data provider Morningstar, shows that 74 sustainable funds in Europe closed or merged in the third quarter — bringing the total to 250 this year. In addition, 113 European products changed names in the year to September, 50 of which dropped ESG key terms. Meanwhile, in the US, a total of 12 sustainable funds were liquidated in the quarter, outpacing new launches for the fifth quarter in a row.
However, some of the gloom surrounding sustainable investing may have been overplayed. While it is true that flows are a long way off the record achieved in the first quarter of 2021, when Morningstar data shows that global sustainable funds attracted $184bn, they are still in positive territory. The Morningstar report notes that sustainable mutual and exchange traded funds attracted an estimated $10.4bn of net new money in Q3, a notable uptick from the restated inflows of $6.3bn in the second quarter.
Large institutions — where strategic planning must stretch beyond the terms of most political incumbents — have shrugged off some of the bad media coverage surrounding sustainable investment.
Two-thirds of large asset owners globally, including pension funds and sovereign wealth funds, told Morningstar that ESG had become more material to their investment decision-making over the past five years. And the percentage of those with more than half of their total assets reflecting ESG considerations has increased, from 29 per cent in 2022, when they were first asked, to 35 per cent in 2024.
Bioy says the picture from the wealth management sector is also positive. “There’s lots of private money flowing into renewable strategies,” she says, adding that these additional opportunities were only available to investors with “big money” and asset owners such as pension funds.
Joshua Lichtenstein, partner at US law firm Ropes & Gray and head of its employee retirement security act fiduciary practice, says: “I definitely don’t think it’s a matter of ‘game over’ for sustainable investing.”
He points out that President Joe Biden’s initiatives unleashed a huge boom in green technologies, which provided thousands of employment opportunities that incoming president Trump would be unlikely to want to take away. “I don’t think they would want to pull the plug on new sources of jobs,” he says.
Lichtenstein does think it possible that the new Trump administration will bring in more restrictive rules to limit ESG exposure at the federal level and that, in consequence, Republican states would take more draconian stances.
But, like Bioy, he points out that not all large investment sources were bound by such rules. Wealthy investors, endowments and not-for-profit organisations are not affected by current federal laws, he notes.
Bioy says she expects sustainable investment to continue but that there would be a low-key approach to such initiatives.
“We can expect a greater attempt to ‘de-woke’ institutions and the corporate world,” she predicts. “In practice, this will lead to more ‘greenhushing’ as companies will continue to consider ESG factors they think are material to their business.”
Bioy cites the increasingly common practice of companies failing to report their ESG initiatives, because they do not want to attract criticism from anyone on either side of the political divide.
“Investing in climate-related projects that make business sense will continue,” she argues.
