The changing face of ESG: How sustainable investing will survive Trump’s second term

This content was originally published by BusinessGreen

The debate around the term ‘ESG’ has once again dominated the media following President Trump’s announcement that he will withdraw the US from the Paris Climate Agreement. Trump has made his feelings towards green initiatives clear, and we have already seen reactions from several key players in asset management – including BlackRock, J.P. Morgan, and Bank of America – in departing from the Net-Zero Banking Alliance. But will the swing away from ‘ESG’ materially impact sustainable investing? Continued investor sentiment in favor of sustainable investing suggests not. Policy prescriptions from the Trump administration may prompt debate around sustainable initiatives, but the fact remains that the regulatory architecture for green investing remains strong. The label ‘ESG’ may come under increasing scrutiny, but this will not spell the end for sustainable investing.

According to a report by Morgan Stanley, assets under management (AUM) in sustainable funds rose to $3.5 trillion in the first half of 2024, up 3.9% from the end of 2023 and up 7.7% year-over-year. This trend suggests that LP demand for sustainable investing remains strong, and that capital allocation by investment managers will likely continue. Indeed, many tier 1 and 2 asset managers have well-embedded sustainability teams to ensure dedicated resources to managing data sourcing, analysis, and reporting. These structures are unlikely to change. Likewise, many asset managers adhere to strict client mandates when investing – these now regularly include sustainability requirements in their investment policies. As such, it is unlikely that investor appetite for green portfolios will change drastically despite the current political sentiment.

However, Trump’s anti-ESG rhetoric comes amidst wider industry discontent around the inconsistency and complexity of sustainability regulations for asset managers. Confusion and contradiction within regulations, rather than sustainable initiatives themselves, are a pain point for asset managers. The SEC alone reviewed more than 20 new climate disclosure regulations in 2024. The cycle of proposal, review, consultation, and enactment of regulations is extensive and costly. It’s manageable for larger firms but can be extremely challenging for smaller firms or individual asset managers to ensure their operational infrastructure remains compliant amidst changing regulations. Reforms to regulatory frameworks have been under discussion for some time. These aim to streamline rather than water down sustainability compliance, and reporting expectations.

In Europe, the center of sustainable investment, there has been discontent among asset managers regarding the challenges of reporting and due diligence under the Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD). In response to intensifying calls to streamline confusing and often fluctuating regulations, the European Commission has announced it will include a simplification proposal for these regulations within an omnibus report due to be released in late January. The body has stated it will work to deliver an “unprecedented simplification effort”. Changes to European regulations will thus look to strengthen efficacy and improve adherence in the coming years.

In the US, there will be more nuance to the question of ESG investing than President Trump’s executive orders and commanding rhetoric, not least because asset managers invest internationally. Adherence to cross-market regulations is critical, and Europe’s reforms will hold significant sway in managing day-to-day compliance checking and reporting. The same is true of state versus federal legislation. Over the past two years, activity at a state level may be contrary to the new President’s federal environmental reforms. California has led the way in ESG regulations, introducing new reporting expectations on climate-related financial risk for businesses operating within the state. Many red states, too, may quickly find themselves at odds with Trump’s anti-ESG rhetoric. According to E2 data from August 2024, around 85% of the announced investments in clean energy projects resulting from Biden’s Inflation Reduction Act have come in Republican areas. As state legislation and global initiatives, rather than federal directives, increasingly set the agenda, we are likely to see climate disclosure and sustainability investing legislation remain a key feature of the regulatory architecture.

Political posturing will undoubtedly continue to drive much debate around ‘ESG’ in 2025. However, investor sentiment in favor of sustainable investing remains strong and will continue to be a key driver for investment in ESG funds offered by asset managers. While firms may choose to market funds differently to avoid the headache and costs associated with the ESG debate, LPs will continue to demand transparency regarding where their money is invested. Much operational, regulatory, and legal infrastructure has been laid to embed and consolidate sustainable investment strategies – it is unlikely that this work will be reversed, even if the label ’ESG’ remains outwardly contentious.