A turbulent year for sustainable finance is set to continue this year as the return of Donald Trump as US president heralds more regional divergence on everything from fund flows to legal cases and market regulations.
Despite record-high temperatures and more extreme weather events across the planet last year, the policy response by governments still remains too slow to meet the world’s near-10-year-old goal of limiting global warming.
While regulators everywhere are gradually toughening up the rules that govern finance and companies in the real economy in an effort to cut climate-damaging carbon emissions faster, the pace of change is uneven, with the US already lagging Europe.
A turbo-charged US political backlash over environmental, social and governance-related (ESG) policies under Trump means that gap could widen even if, in many cases, the economics, companies’ near-term emissions reduction pledges and the rising costs of climate events keep the broad direction unchanged.
“We anticipate that in 2025, we’ll see a resilience for sustainable investment globally, although it’s likely that there will remain core differences between the US and Europe’s approach,” said Tom Willman, regulatory lead at sustainability tech firm Clarity AI.
“In the US, we can expect a more conservative approach, with investors prioritizing long-term risk-adjusted returns to avoid potential political or reputational risks,” Willman said.
While just over half of US executives expect new or expanded sustainability regulations this year, in Britain that figure is 60 percent and Singapore 80 percent, a survey last month of 1,600 executives by Workiva showed.
The US political reality has already spurred some US firms to curtail their climate and diversity efforts to avoid censure. In the latest sign of corporates changing tack, the biggest US banks recently left a sector coalition aimed at cutting emissions.
Legal pressure is also building on the world’s climate efforts. One in five climate litigation cases were not aligned with policies to reduce emissions, analysis last year by the Grantham Research Institute on Climate Change and the Environment showed. The majority of these were in the US.
The regional split was evident among sustainable investment last year to the end of September, with US funds seeing clients withdraw a combined US$15.9 billion as European funds took in US$37.3 billion, data from industry tracker Morningstar showed.
Meanwhile, the number of new ESG-focused funds launched in the US fell to just seven against 189 in Europe.
Across the world, more sustainable funds were closed than launched for the first time, hit by the US backlash, increasingly tough EU rules aimed at forcing funds to evidence their sustainability credentials and market consolidation.
Demand for sustainable funds lagged the broader market in part because of mixed performance, concerns around whether some funds were as green as they purported to be, regulatory uncertainty and the ESG backlash, said Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics.
Despite an uncertain outlook given the potential for Trump to water down some ESG initiatives, for example government support for electric vehicles, many of the underlying market drivers of demand for sustainable finance, such as the need for green energy, remained, Bioy said.
Charles French, cochief investment officer at Impax Asset Management, said that despite Trump’s negative view on climate change — he has called it a hoax — companies in sectors from healthcare and industrials were eyeing climate tech solutions to cut costs.
“The era of tech-inspired transformation is not coming to an end. In many areas, it’s just getting started,” French said.
The amount of money raised through sustainable bonds also continued to rise in the Americas, up 16.9 percent, and Europe, up 10.7 percent, last year, data from LSEG showed.
Given the competing pressures, Leon Kamhi, head of responsibility at asset manager Federated Hermes, said he expected investors to “mature” and focus on the impacts being achieved in the real economy.
“For the transition to be successful, it is essential that such investments yield economic returns for both companies and investors alike,” Kamhi said.
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