America in Transition examines the implications of the 2024 election on climate policy, sustainable investing, and energy markets. This series explores how investors can navigate the shifting landscape while maintaining focus on long-term climate risks and opportunities. This is part two of the series.
With the start of COP29, and in the wake of Donald Trump’s return to the U.S. presidency and a Republican sweep of Congress, questions abound regarding the future of global climate policy and the landscape of sustainable investing. The outcome of this election underscores critical themes explored in part one of this series and in our previous posts: The Widening Gyre and Bridging the Atlantic Divide. This blog expands on these topics, focusing on the future of ESG (Environmental, Social, and Governance) investing in the U.S., the potential impacts of this ongoing political shift to the right, and the prospect of unbundling climate from ESG.
Revisiting The Widening Gyre and Bridging the Atlantic Divide
In The Widening Gyre, we explored the deepening polarization in the United States and the resulting ideological clashes that have spread even into the realm of sustainable finance. ESG, initially a framework for evaluating non-financial risks in investments, has been swept into broader cultural and political divides. What began as a means of integrating non-financial risks into investment decisions has now become a symbol of ideological conflict, making ESG a battleground in the “culture wars” of U.S. politics. This polarization has made it difficult for the investing community to pursue meaningful climate action without facing accusations of “wokeness” or progressive overreach.
Bridging the Atlantic Divide examined the distinct divergence in how the U.S. and Europe approach ESG and climate policies. Europe’s regulatory frameworks, such as the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD), require companies to integrate broader societal goals into their business operations, underscoring a stakeholder-driven approach. In contrast, U.S. companies, guided by the Securities and Exchange Commission (SEC), have a mandate to focus almost exclusively on shareholder value and financially material risks to investors. With Trump’s victory, any remaining hopes for U.S.-EU regulatory convergence on sustainable finance are dashed, solidifying a shareholder-centric model in the U.S. that contrasts sharply with Europe’s focus on social and environmental responsibility.
The Accelerated Retreat of ESG
The retreat of ESG was underway even before the election. Notably, as Bloomberg recently observed, the term itself has become “hopelessly entangled with the culture war agenda,” exacerbated by political attacks on high-profile asset managers like BlackRock, for its ESG stance. U.S. investors are increasingly skeptical of ESG funds, viewing the concept as mere marketing. Morningstar data reveals a waning enthusiasm for all sustainable funds, with declines in flows for clean energy funds as well.
“While the 2024 election will likely hasten the retreat of ESG in its current form, this shift could lead to more purposeful, results-driven investing. The ESG label may fade, but the underlying principles remain.”
The incoming Trump administration is poised to accelerate this retreat, favoring deregulation that may roll back ESG-focused policies, especially those impacting corporate disclosure of non-financial risks. A narrower focus on U.S. economic interests may diminish the role of climate considerations in investment mandates, potentially rolling back SEC climate disclosure rules. This shift will inevitably force asset managers to reshape their approach to sustainable investing, pulling back from the broad “ESG” label and related marketing.
Unbundling ESG: A New Era of Climate-Focused Investing
The diminishing use of the ESG label presents an opportunity, particularly for climate-focused investors, to concentrate on environmental factors, divorced from the social and governance issues that often blur its purpose. The bundling of “E,” “S,” and “G” into a single framework created a catch-all term that may have done more harm than good. Environmental risks and social outcomes are no doubt linked, as the most economically disadvantaged will suffer most from climate change. But investors need not be made to bundle social outcomes (or corporate governance practices) with climate considerations. Physical and transition risks along with the opportunities arising from climate change deserve independent consideration based on financial materiality. For investors focused on financial performance, the unbundling of environmental concerns from ESG, may eliminate layers of virtue-signaling and politicization.
With this unbundling, asset managers may prioritize climate risk as a standalone factor over marketing ESG products. Investors seeking to integrate climate-related risks and opportunities will likely perform greater due diligence on managers and companies, aiming to isolate the financial impact of environmental considerations without the ideological baggage that ESG has accumulated.
Freeing Impact Investing from the ESG Label
Unbundling ESG also opens new doors for impact investors. Freed from the polarized connotations of the ESG label, they can focus on deploying capital for specific environmental or social outcomes. This sharper focus allows for measurable progress on climate and governance goals without being conflated with broader ESG debates. The distinction provides clarity and avoids diluting impact-driven strategies.
Looking Forward: The Practical Implications of ESG’s Retreat
The retreat of the ESG label under Trump’s administration may ultimately benefit investors. As political and cultural tensions surrounding ESG subside, the virtue-signaling elements embedded in ESG practices will fade, allowing for more targeted and effective approaches to risk management. Investors who find financial merit in integrating climate considerations will continue to do so, as the material risks of climate change remain relevant, irrespective of regulatory shifts.
The trend toward an unbundled approach to ESG could, in the end, restore focus to pragmatic, risk-based decision-making. Investors focused on climate-related financial impacts can pursue climate-conscious strategies unburdened by the “ESG” label. Meanwhile, those interested in social or governance outcomes can pursue these goals in dedicated, purpose-driven strategies. This evolution allows for more precise application of environmental, social, and governance factors as individual elements within investment frameworks.
In closing, while the 2024 election will likely hasten the retreat of ESG in its current form, this shift could lead to more purposeful, results-driven investing. The ESG label may fade, but the underlying principles remain. Investors retain the choice to consider these factors, and without “ESG” as a catch-all term, may do so with renewed clarity, precision and purpose.
Chris Ito
CEO
FFI Holdings