ESG Investing in Turmoil: Navigating Challenges in the Trump Era

ESG investments are facing a period of unprecedented challenges. The arrival of Donald Trump to the White House has in fact overturned the global political and economic scenario, imposing a new approach to sustainability, with which investors around the world cannot fail to confront themselves.

The most critical issues for sustainable investments concern energy, diversity and defense. More generally, the White House’s intolerance for rules – think, for example, of the exit from the WHO or the relaxation of anti-corruption regulations – raises questions of governance and stability of the regulatory framework.

One of Trump’s first acts was to withdraw from the Paris Agreement, accompanied by the elimination of incentives for renewable energy, especially wind energy, introduced by his predecessor Joe Biden.

The choice to focus on hydrocarbons as the main energy source – considering that the United States is already the largest producer and emitter globally – is motivated by the desire to further lower the cost of energy, already lower than that of European counterparts, including Italy. It remains to be seen how other economies and companies will react to these challenges and what the response of asset managers will be.

On the diversity front, another area on which Republicans have also launched an offensive in the courts, there has been a significant adjustment by many companies and asset managers.

For example, in February, Vanguard scaled back its commitments to DEI (Diversity, Equity & Inclusion) in its voting policy, while voting rights consultancy ISS decided to exclude diversity factors – such as gender and race – from its voting recommendations for US corporate boards.

Citi, BlackRock and many others have also complied. Apple appeared to be an exception, with its management and board reaffirming its commitment to diversity.

And what about defense? In an increasingly unstable geopolitical context and with pressure from the United States for EU countries to increase military spending to 2% of GDP, managers are divided: on the one hand, companies like Etica SGR continue to completely exclude investments in the military sector, while other operators adopt selective criteria, limiting exclusion to only certain types of armaments.

Despite the headwinds, asset managers are not abandoning ESG, here’s why

Risk Mitigation

Taking into account the effects of climate change and promoting the decarbonisation of the economy is not an ideological choice, but a concrete strategy for risk mitigation. Climate risk is, in effect, a financial risk. In Europe, the average cost of extreme weather events reached €44.5 billion in the three years to 2023, more than double the €17.8 billion recorded in the previous decade (EIOPA data).

According to Munich Re’s analysis, natural catastrophes will have caused losses of 320 billion euros in 2024, less than half of which are covered by insurance. The cost of climate change is already a reality and ignoring it is not an option. It is no coincidence that extreme weather events are the most feared risk for the next decade, according to the World Economic Forum’s report on global risks.

Investors in ESG don’t back down

According to Morgan Stanley’s Sustainable Signals 2024 report, more than three-quarters (77%) of global investors are interested in sustainable investing. Fifty-seven percent say their interest has increased over the past two years, while 54% plan to increase their sustainable investments in the coming year. Drivers of this growing interest include new climate science and the performance of sustainable investing.

Even on the institutional front, the request to include environmental, social and governance factors does not diminish. As regards Italian foundations, for example, the 2024 survey by Itinerari Previdenziali, ASviS – Alleanza Italiana per lo Sviluppo Sostenibile and FeBAF – Federazione Banche Assicurazioni e Finanza reveals that 53% of the entities in the panel already apply the principles of responsible investment to their assets.

Of those that have not yet done so, 75% have already discussed the topic within the board and intend to adopt such criteria in the future. As a result, the share of institutions that will consider ESG parameters in investment decisions will rise to 90%.

Transparency against greenwashing

One of the factors that has held back the spread of sustainable investments in the past, fueling skepticism, has been the fear of inaccurate statements on ESG issues and the lack of data to verify companies’ strategies and commitments. However, this phase is about to be overcome thanks to increasingly rigorous legislation, focused on transparency.

A key example is the Corporate Sustainability Reporting Directive (CSRD), whose first reports will be published with the 2025 shareholders’ meeting season. Clearly, the decision by the European Commission to limit the scope of application to companies with more than 1,000 employees reduces the number of those that will be required to draw up a Sustainability Report, but it will leverage the awareness acquired by companies on the importance of transparency.

Also on the financial products front, the revision of the Sustainable Finance Disclosure Regulation (SFDR) and the introduction of new rules on fund naming will help clarify investment strategies, protecting investors from the risk of greenwashing. In particular, minimum standards will be introduced for funds that use terms related to ESG criteria in their names.

According to Morningstar, following this regulation, between 30% and 50% of ESG funds in the European Union will change their names by mid-2025. Other products, however, will adapt their investment objectives and/or portfolios to continue to use ESG references in their names.

Investments in the real economy

To achieve the goals of the Paris Agreement and limit the temperature increase to 1.5°C by 2050 compared to the pre-industrial era, emissions must be reduced by at least 42% by 2030 compared to 2019 levels, according to the Emissions Gap Report 2024 of the United Nations Environment Programme.

However, global economies are completely off course: the current trajectory leads to a temperature increase of between 2.6°C and 3.1°C by the end of the century. To reverse this trend, massive investments in infrastructure, innovation and renewable energy are essential. According to the Energy Transitions Commission, the energy transition will require a global investment of 3.5 trillion dollars per year to reach a net-zero emissions economy by 2050.

This scenario not only opens up significant ESG investment opportunities, but also calls on investors to mobilize resources through financial instruments with a long-term perspective. So-called patient capital will be essential to align the timing of investments with the objectives of the ecological transition.

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(Featured image by History in HD via Unsplash)

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First published in ESG NEWS. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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