This article first appeared in ETF Insider, to read the full edition, click here.
Donald Trump's victory in the US presidential election will return a determined climate change sceptic to the White House, a power shift that will fuel political opposition to efforts to strengthen environmental, social and governance standards across the corporate sector.
Following Trump’s win, Texas and 10 other Republican-led states this month accused BlackRock, Vanguard and State Street of conspiring together to rig the US coal market and driving up energy prices. The world’s three largest ETF managers are now being sued for allegedly breaking multiple federal laws after the Texas attorney general claimed that the three companies had formed an illegal cartel to pursue a “destructive, politicised environmental agenda”.
BlackRock said the lawsuit was baseless and defied common sense. Texas and West Virginia have previously withdrawn billions of dollars of assets from BlackRock for allegedly being hostile to fossil fuel producers, a criticism that many climate activists find risible.
The ferocity of the political attacks have already forced Larry Fink, founder and CEO of BlackRock, to drop his use of the term ESG. Fink complained this year that ESG has become “entirely weaponised” by both the far right and far left. Climate protestors have targeted BlackRock’s offices in Paris and New York because of its investments in fossil fuel producers while Vivek Ramaswamy, the failed Republican presidential candidate who has been appointed by Tump to lead the Department of Government Efficiency (DOGE) alongside Elon Musk, has described Fink as the “king of the woke industrial complex [and] the ESG movement.”
All asset managers’ chiefs pay close attention to Fink’s pronouncements and his retreat from overt support for ESG will not have gone unnoticed by competitors. Anti-ESG sentiment among Republican politicians will be sharpened even further by Trump’s pledge to withdraw the US from the Paris climate accord for a second time and the President-elect’s determination to reverse rules aimed at curbing environmental pollution along with ramping up US oil production.
Caroline von Celsing, an investment associate at Handelsbanken Wealth and Asset Management, said that "having a climate change sceptic in the White House does not change the need for the world to move to net zero emissions by 2050” – the globally agreed target required to avoid catastrophic planetary warming.
“While it is a concern that the US will again withdraw from global climate initiatives, investors in Europe understand that there are clear benefits from addressing climate change and attractive returns available by investing in the transition to a low carbon economy," von Celsing said.
Hortense Bioy, head of sustainable investing research at the data provider Morningstar Sustainalytics, said the anti-ESG sentiment building in the US is also gaining momentum in Europe.
“ESG is viewed as a burden on companies by populist politicians in Europe who worry that it could lead to a loss of competitiveness. But the long-term drivers of the shift to a low carbon economy remain intact. The transition process may slow down while Trump is in the White House but it will not stop,” said Bioy.
Political opposition to global climate change initiatives appears to have had a mixed impact on investor demand for ESG focused ETFs.
“Globally, investors have pulled money from low carbon focused ETFs, Paris-aligned ETFs and socially responsible ETF so far this year. But those withdrawals have been more than compensated for by a substantial rise in global inflows into broad ESG integrated ETFs which have more than doubled to $34.2bn so far this year,” said Deborah Fuhr, chief executive of the London-based consultancy ETFGI.
Europe remains the main driver of new business for ESG ETFs with net inflows reaching $35.3bn in the first 10 months of 2024, down by 13.7% on the same period in 2024, according to ETFGI. Some modest signs of an encouraging improvement in investor appetite are also evident in the US even amid the political noise surrounding ESG. US-listed ESG ETFs have gathered net inflows of $1.6bn so far this year, partially reversing the $5bn withdrawn over the whole of 2023.
Bioy suggested there is likely to be a growing divergence between the US and Europe on environmental objectives as Trump moves to deregulate more industries whereas the sweeping Mario Draghi masterplan for the EU published this year suggests more support by European governments will be needed to build new common energy infrastructure projects to achieve net zero targets.
Regulators in both Europe and the UK are well aware that far more support is also needed from private investors if the goal of reaching net zero emissions is to be achieved. Strengthening investor confidence in ESG is a key objective for both the UK’s Financial Conduct Authority and the European Markets Authority (ESMA).
Faced with damaging criticisms that many existing ESG strategies have failed to live up to their objectives and promoted “greenwashing” - unsubstantiated claims of environmental benefits – ESMA this year issued new rules covering fund names.
Asset managers that sell funds with names that include the terms ‘transition’, ‘social’ and ‘governance’ must ensure that that at least 80% of the investments are intended to meet with those objectives. The same 80% minimum investment target will also apply to funds that use the terms ‘environmental’, ‘impact’ and ‘sustainability’.
New funds must apply these rules from November 2024 onwards while existing funds have until May 2025 to comply with the new portfolio guidelines or change their names. These changes should end the confusion that has bedevilled the existing classification system covering Article 8 and Article 9 funds which can loosely be described as ‘light green’ and ‘dark green’ funds.
Investors have seen significant numbers of Article 8 and Article 9 funds change their names and rebrand these strategies by dropping key ESG terms in recent years, alterations that have heightened suspicions about greenwashing and criticisms that many of these products were designed as marketing tools to appeal to gullible buyers.
“More clarity regarding ESG fund naming rules along improvements in cli[1]mate disclosures by companies should make it easier for investors to understand the objectives and characteristics of sustainable investment strategies,” says von Celsing.
The ESMA rule changes are also welcomed by Bioy. “The improvements in fund transparency and disclosure standards should lead to less worries about greenwashing,” she said.
