When Blackrock’s Larry Fink put the kibosh on the very term ESG in July 2023, suggesting that it had been weaponized and showing remorse at ever having been involved in such a political debate, it seemed likely that this form of investing would dwindle somewhat. But a year and a half on and the firm still has sustainability on the balance sheet. In fact, in that period even one of the most vocal advocates of the anti-ESG movement, Strive Asset Management, indicated a softening of its anti-woke agenda in order to broaden appeal to a wider audience.
Nonetheless Fink’s words have pull. Over the course of the last 18 months there has been a clear redefinition of how the nascent sector works even as asset managers worked to stay far away from attacks that came largely from a few U.S. states. ESG investing never went away, it just took on a new form.
According to Tom Kuh, head of ESG strategy at Morningstar Indexes, the shift is in some ways a useful correction. “I don't think the term is going to go away. ESG is a form of analysis and an important way of identifying certain types of risks and opportunities for long-term investors,” he said. “At BlackRock for example, they're now talking about climate transition, on the one hand, and the risks associated with it, and on the other the opportunities that come from the fundamental economic transformation.
“That is a much more effective way of tying the implications of ESG analysis to concrete investment problems, and really where the narrative is going.”
Kuh explained that the move has not been aimed at environmental, social and governance issues themselves, but at solving the long-term problems associated with the systemic risks and economic externalities that come from climate change.
In some ways it worked.
Until, the Election Results Came in
Following the re-election of President Trump this week, there is a sea change on the horizon that could go well beyond this redefinition. Despite cozying up to the inventor of the most widely sold electric car, Trump has made no secret of his disdain for all things ESG in the past and during his campaign, and if those promises are anything to go by the sector is in for a rocky ride over the next four years.
During Trump 1.0, he removed the U.S. from the Paris Accords, and although Biden reaffirmed the country's commitment, it had a lasting impact.
Although this would be bad news for the climate, it is Trump’s deregulatory agenda and overarching anti-ESG sentiment that will likely have more of an impact on the financial landscape. Although neither candidate focused heavily on mitigating climate change, ESG issues surfaced throughout the campaign.
Similarly, Republican-dominated states that proposed or enacted rules and laws to prohibit pensions, some endowments, and other institutions to invest in ESG will likely seek similar changes at the federal level. The new administration also has pledged to repeal President Biden's Inflation Reduction Act, which brought a historic level of investment in climate change mitigation, clean energy, and environmental justice, But many sources point out that the Act could be saved by its success in spurring economic development in several red states.
An executive at one law firm said they are doing all they can to avoid wasting any time on ESG and is advising investors to do the same, be it pro- or anti-, instead arguing that it will “snare you up in maneuvers that will consume time and energy” that ultimately won’t lead to better performance.
During discussions following the elections, sources all pointed to the likelihood that the Securities and Exchange Commission would lead a deregulatory push. As Institutional Investor wrote earlier this week, the Biden-era SEC has set a record breaking pace of introducing new rulesets, including most notably its climate disclosure rules. In response to investor demand, these rules standardize how companies report the financial effects of climate-related risks on operations and what they are doing to reduce and manage mitigating costs. The rules have been tipped to be on the chopping block, with some sources suggesting they may even be reversed to the point where reporting such data could be banned.
Igor Rozenblit, partner at Iron Road Partners, and former co-head of the private funds unit at the SEC, said that the incoming administration will obviously not be very supportive of ESG investing.
Depending on who is appointed to be the chair, the commission may choose to ignore ESG or go further and introduce negative rules. "There are multiple techniques that could be used to generally encourage the industry not to consider ESG in their investment criteria,” said Rozenblit.
ESG might be low hanging fruit for Trump's SEC, alongside the rules governing the cryptocurrency industry.
Keep Your Voice Low When talking about ESG
Despite the probable attacks on the SEC, its rulesets, and the very essence of ESG investing in the forthcoming administration, the implication is that all is not lost. Changing rules and regulations may alter what companies must do but may not necessarily reduce their desire to consider the greater implication of actions and investments.
According to Jeff Glitterman, partner and CEO at Glitterman Wealth Management, an ESG focused firm, removing the SEC disclosure requirements would only have a limited impact, despite the shift in priorities.
Managers are likely to change approach in response.
“An SEC that all of a sudden goes from having climate goals to having rules that don't hurt fossil fuel companies will be a whole different story,” he said, suggesting that defending yourself against anti-ESG attacks and lawsuits is too expensive for most small firms to warrant. “You are going to see ESG managers backing off more on how they market and publicly speak about what they are doing. But most of the managers that we talked to will continue to use the process for diligence in the background, but not have it in the foreground.”
Under the hood, companies continue to buy data sets, and most managers have found that information beneficial. Some managers may be relieved at dropping some ESG analysis as it has been "very difficult time to prove that companies that have bad governance are hurting the environment or are not treating their employees well. So Glitterman does not “see companies backing away from using ESG” factors to sift through potential investments; he instead suggests that companies are more likely to back away from naming their funds ESG. “ESG is best done as a diligence process, not as an investment selection process,” he added.
The most likely outcome of a Trump presidency is not the end of ESG but it may curtail the regulations and structure around how that data is disclosed. Investors will continue to use this data in varying ways and across products.
For Rob Day, partner and co-founder at Spring Lane Capital, while the election may have been cause for alarm, things are just the same as they were yesterday. “I have been telling clients that no matter who wins, 2025 will be a year of even more investment into the sector, people have been sitting on their hands this year and there has been so much uncertainty,” he said, suggesting that the certainty of the election will only prove to be a good thing. There is a lot of dry powder in the infrastructure sector, for example, and “everybody still agrees that climate and sustainability is still a megatrend”.
Enthusiasm would have been higher had Harris won election, but at least now the reality is clear and investors can start to allocate their investments.
ESG will continue to be governed under other rules. The SEC implemented amendments to the Names Rule in 2023 which said that fund names can't mislead investors about what securities a fund contains and the risks it carries. The changes meant funds had to invest at least 80 percent of their portfolios in securities that their name implies they invest in. “Terms such as ‘growth’ or ‘value,’ or certain terms that reference a thematic investment focus, such as the incorporation of one or more Environmental, Social, or Governance factors,” wrote the Commission at the time.
Rozenblit said that ultimately some will be hesitant to enforce this rule in the Trump administration, and that other outstanding rules for asset managers will likely not be adopted. “The SEC is no longer going to be focused on using moral suasion to promote ESG,” he said. “I doubt they will unpick the Names Rule, but the SEC marketing rule requires... material facts to be substantiated, so they could launch an ESG initiative on the exam side focused on identifying misstatements around ESG. In that way, they can reduce the amount of ESG marketing that happens.”
He added that during the previous Trump administration there was a view among Republican commissioners at the SEC that investment managers were not doing their fiduciary duty if they considered ESG in their investment criteria, because they should instead be focused on pecuniary considerations. Managers are there to make money, not tell companies to invest in social projects, he added.
Enforcement is likely to be scarce during the Trump administration.
Another aspect that might impact ESG investments are diversity and inclusion measures within the corporate world. Although strictly enforced across the country now, these are unlikely to be supported by the Trump administration. “From a regulatory perspective, there's been pushes to decrease that sort of guidance,” said Alex Cote, portfolio strategist at Align Impact.
“But at the same time, there is still a push socially for these companies to continue to be responsible. We'll see how it washes out; it might come back to the way society evolves over these next four years.”
ESG Is Still Good Business
For Cote too, who is active in the public markets, ESG is not going anywhere. He suggests that there are “three layers to the waterfall of ESG”, regulatory, disclosure, and how it is used. The latter being what is most in jeopardy following the election.
“At the corporate level we foresee companies continuing to do what is in the best interest of their profitability, and there are a lot of enhancements to margins in sustainable initiatives and continuing to streamline operations to be more sustainable,” he said. “And on the flip side of that, there's still a significant amount of demand from retail and institutional investors on disclosure around how they're doing that.”
But any early indicators of how Trump and his new cabinet may approach ESG in the coming years is speculative, and it is too early to make definitive decisions, despite well-grounded concerns about potential policy shifts. Climate will not be a political priority, and it is unlikely to be among the first things the President-Elect addresses during the early days of his term.
Last week at an impact investing summit held by Phenix Capital, just days before the election, there was almost no discussion of the election around the event or on any of the panels or presentations. The atmosphere suggested that it was business as usual, regardless of the result, and there was no mention of the possible existential threat that was knocking on the door.
Ryan Malloy, an attendee and sustainable investing research analyst at Fiduciary Trust International on the allocator side, agreed that everyone at the event just seems to be rolling their sleeves up and getting on with it. “Like many asset allocators, sustainability factors are key inputs within the fundamental analysis process,” he said. “At the end of the day it is simply good business.”
He added that recent pushback has helped hold practitioners to account regarding the importance of financial materiality.
The coming four years are likely to see an increase in the attack on ESG investing in the U.S., and on climate action in general, but that does not mean that investors with a green thumb should turn their back on the space. Sources pointed to vice president Harris's comments in her concession speech that this should not be the end, but the beginning. People who have pushed for ESG for decades summed it up: the fight is more important than ever because the financial sector and responsible investing can have a tangible, positive impact on the environment, social and governance.
