Will Trump’s victory negatively affect ESG investing?

Global fund managers with a US presence may be forced to revisit how they present fund offerings as political polarisation persists around ESG investing amid a Trump victory.

Previously, a number of Republican politicians in the US have voiced criticism for what they describe as “woke” policies around ESG. 

President-elect Donald Trump has also demonstrated strong support for rolling back regulations around the oil and gas industry, and one of the outcomes of his approval vote could be the ESG impact with several climate and ESG-related regulations and disclosure rules potentially to be scrapped.

This includes investment measures from the Securities and Exchange Commission (SEC) around greenwashing, human capital management and corporate diversity.

According to the Morningstar Global Sustainable Fund Flows report for Q3, redemptions from sustainable funds by US investors totalled US$2.3 billion which was the eight consecutive quarter of redemptions. However, they are gradually lessening overall with outflows around half of what was recorded in the previous quarter.

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US fund managers with largest volume of sustainable assets 

Source: Morningstar, October 2024

Speaking to Money Management, Estelle Parker, co-chief executive at Responsible Investment Association Australasia (RIAA), observed ESG appears to have become a polarising topic in US investment circles.

“It seems the political polarisation has entered US offices and boardrooms and global investors with offices in the US have been treading carefully for a while,” she said.

“Investors in the US have been confronting accusations of ‘woke capitalism’ for years, with really counterproductive legislation introduced in states like Florida.”

Particularly, she highlighted how US-based investors have already had to adopt a slightly different vocabulary when it comes to their ESG offerings, given its seemingly divisive nature.

“What we have seen is US-based investors using slightly different language when they talk about wider risk analysis. They are no longer calling it ‘ESG’ or having an ‘ESG team’, which seems to have become a frowned-upon acronym in some spaces,” she explained. 

Asset managers are already being more cautious on these range of funds; Schroders has renamed funds to remove the “sustainable” name, while JPMAM closed two sustainable funds as they had failed to gain sufficient assets. 

Meanwhile, US asset manager BlackRock toned down its public commentary on ESG matters despite holding the largest volume of global sustainable funds under management at US$423 billion.

Still, Parker maintained this does not necessarily mean investors are turning away from ESG investments, noting there are signs they continue to incorporate these factors in their decisions, despite a more politically charged environment.

“We know that climate change and the destruction of nature pose huge medium-term risks to assets and portfolios,” she observed. “The real challenge remains – assessing opportunities with clear eyes and longer time horizons, which inherently requires sustainability factors to be considered.

“It’s mind-blowing that a party purportedly supportive of the free market would seek to tell investors which risks to consider in decision-making. 

“But this intrusion has not stopped investors from integrating ESG factors into their decision-making.”

Australian impact

In Australia, Morningstar said sustainable investments reported inflows of $0.6 billion compared to outflows in the US, and RIAA data shows 88 per cent of Australians said they expect their superannuation and other investments to be invested responsibly.

Parker noted the majority (93 per cent) of all professionally managed funds in Australia are being managed by investors with public commitments to responsible investing. 

“This will not change. It makes for better investment decision-making by directing capital to businesses and sectors which are more likely to exist in the long-term,” she told Money Management, adding that the consideration of ESG factors has become a “health check” for any investment portfolio. 

Last month, RIAA also unveiled its list of responsible investment leaders for 2024, which included a number of fund managers with a global presence, including abrdn, Russell Investments, MFS Investment Management, and Fidelity International. 

From an Australian perspective, she said Australia is further ahead than the US in its climate reporting and initiatives and ASIC is taking a strong enforcement approach towards greenwashing.

“Investors may shift more into examining climate adaptation opportunities in the US and mitigation opportunities in other geographies, like Asia. If the US does follow through with tariffs barriers, Australia can export climate-friendly products to markets other than the US.

“The Australian government has made significant headway in climate policy over the past few years, and investors have responded positively. I expect that finalisation of a taxonomy on transition financing, as well as efforts to reform regulatory barriers to investing in the transition will continue. Supporting sustainable finance makes good economic sense, and Australia has many other countries to collaborate with on this.

“We’re seeing strong inflows into RIAA-certified responsible investment products, with returns that continue to perform well, and as long as Australians seek ethical options, the market will keep delivering, regardless of who’s in the White House.”

Last month, Money Management explored whether fund managers are abandoning sustainability as product development in the space is trending downwards. There were just 77 launches in the past quarter compared to 325 a year ago.

Dugald Higgins, head of sustainable investment at Zenith, said: “Managers are realising that the journey is more complicated than they thought, and many hurriedly created solutions have turned out not to be fit for purpose. 

“Market evolution works both ways. Many funds are either getting relabelled, restructured or removed altogether. This makes sense as product proliferation often outpaces intelligent design and momentum tends to swing too far ahead and too far behind before reaching a steadier state.”