Dismantling sustainability and the responsible investment pendulum

Responsible Investing (RI) is far from a new concept, but its market importance has risen dramatically over the last decade, driving change in many investment decisions. Ethical investing, exclusionary screening and socially responsible investment (SRI) were terms first coined in the eighties, nineties and noughties as RI started to gain traction in the minds of professional and individual investors alike.

Then, in the late 2010s, we saw the steady rise of what we now know as “ESG” (Environmental, Social and Governance) investing, as the impact of investment decisions on the environment, social outcomes and high (or indeed low) quality governance became more material to the financial performance of companies.

ESG saw a rapid evolution in the early 2020s into what looks set to be a core factor determining future market outcomes. As ESG enters its mature years, now in a formalised framework, we have seen the terms sustainability, engagement, impact, and transition become more mainstream in anticipation of the next evolutionary phase of RI.

This recent maturation was in response to valid investor criticisms and concerns relating to greenwashing, performance volatility, and portfolio concentration risks from earlier approaches. Continual adaptation and improvement were firmly on the agenda. Responsible investment professionals and regulators were – and are still – keen to deliver products and services which met the demands of clients in an ever-changing world.

This demand has predominantly been driven by more visible climate-change impacts, greater interest driven by a younger generation, and a prioritisation of mitigating adverse performance outcomes for long-term investment horizons such as those found in pension funds.

The rise of ‘anti-ESG’

Broadly, the move towards RI approaches was happening across most developed markets, with the European Union being the largest supporter of these efforts. Other countries were making strides too. For example, the UK progressed its ‘sustainability’ regulation for investments, and US asset managers were using ESG research efforts as standard practice.

However, there was also growing dissent from a range of critics resulting in the emergence of terms “anti-ESG” and “decarbonisation collusion”. The largest criticisms were heard in the US and were picked up by politicians, resulting in a snowball effect – and a subsequent association with what was deemed in some quarters as “wokeism”. Rather than focusing on real-world climate risks, criticisms surrounding “destructive environmental agendas” were suggested and aggressive litigation efforts were initiated on collusion accusations, as highlighted in a 2024 lawsuit against three large US asset managers for attempting to coerce companies into cutting coal production.

In the wake of the re-election of Donald Trump to the US presidency, this negative sentiment has rapidly scaled – and countries around the world have begun strongly diverging in their RI efforts. Within the US, we are witnessing what has become known as “greenhushing” – where companies refrain from communicating about their environmental efforts and achievements – to the outright removal of a range of responsible-investment approaches. These include ESG research, exclusionary investing/divestment, effective corporate engagement and even stewardship efforts such as voting related to environmental considerations.

Although outflows in RI within the US have been steady for the past two years, predominantly due to political blowback, climate-related efforts are now under deeper scrutiny as shown by a step back in commitments and funding.

So far, we have not witnessed an aggressive pullback in RI flows outside of the US, but there are concerns about the global implications of US policy. While Europeans are reassessing their sustainability reporting standards – which arguably needed some changes – client expectations relating to minimum standards of governance, stewardship, and climate-risk mitigation broadly remain unchanged.

Within the UK, inflows to sustainability-related investments have remained positive, but there are fears that these flows may slow as sentiment for sustainability comes under threat. Despite this concern, we are continuing to see support for RI initiatives within the UK and the government released incredibly ambitious climate targets in February, demonstrating their support for climate efforts.

As RI continues to mature in markets outside of the US, the shift from long-term risk mitigation towards short-term profits seems to dominate in the US itself. The impact of this shift could have long-lasting implications for US investors.

For example, it is estimated that US pension funds will experience the most significant impact from both transition and physical climate risks in the coming years, with the potential of investment return declines of up to 50% by 2040 if climate policies remain unaddressed. Therefore, while other countries are focusing on mitigating and/or adapting to climate risk and investors continue to aim to engage with companies and invest for positive impact, the US is potentially leaving itself at risk due to a shift in policy, led predominantly by political motives.

Based on the current direction of travel, the existing US approach towards RI is likely to continue and intensify for the duration of the Trump presidency. The impact on the RI intent of the rest of the world has been minimal (outside of negative sentiment) and so our expectation is that we will witness profound bifurcation in the coming years. Where responsible investment has been maturing into adult status this side of the Atlantic, for now it seems to be stuck in teenage angst, battling its parents in the US. This is likely to have a deep effect on US corporates, which may start to trail their non-US counterparts over the medium to long term.

Look beyond the Trump presidency

As long-term investors, our key focus is on how the growth and maturation of RI develops over a time frame much longer than four years and invest accordingly. Thus, looking beyond the short term, we expect that a focus on climate issues is highly likely to be reintroduced after the Trump presidency ends. The RI pendulum is expected to swing back, and an acceleration of policies is likely to be required to tackle the range of systemic issues related to climate change that have been left unaddressed by President Trump’s administration. The potential effect on US companies is likely to be costly, as the removal of strategy then its reintroduction is not a simple process.

The argument that RI (and associated ESG research, climate-risk analysis etc.) is unimportant, or even destructive, is certainly at odds with an overwhelming amount of scientific, economic and demographic research – as well as an increasing amount of empirical evidence. The US insurance industry has already faced significant financial strain due to climate-related extreme weather events, resulting in record-breaking insured losses and rising premiums in 2024. So, making sure this type of assessment is incorporated into investment approaches is increasingly vital. Consequently, while the rest of the world continues to press forward in developing and improving RI products and services, the US is probably going to have to play catch-up when, as is likely, the pendulum swings aggressively back the other way.