When Donald Trump first won the White House in 2016, his victory created one of the all-time best sales pitches for green-minded investment funds: If Washington wasn't going to push for a transition to cleaner energy to slow climate change, maybe capital markets could.
Now, as Trump returns to power, the movement for environmental, social and governance investing, or ESG, is in a much weaker position after years of Republican backlash and a stretch of rough performance.
"ESG is a dead man walking," says Will Hild, who runs Consumers' Research, a nonprofit backed by Leonard Leo, leader of the rightward shift in the Supreme Court during Trump's first term.
While Trump himself has barely mentioned ESG, his plan to embrace fossil fuels will inevitably undermine one of its key pillars, Hild says. He adds that the conservative attacks on climate finance groups are only going to get louder.
Trump is operating from the same playbook he used eight years ago, but the same can't be said of the investment industry. Among his signature acts after first taking office was dragging the U.S. out of the Paris climate agreement. That raised the hackles of a growing group of investors who — back then — viewed Trump as an aberration in a world shifting into an ESG age.
Investors turned to the power of the shareholder ballot box, privately met with company executives and formed climate alliances to encourage companies to shift away from fossil fuels. The argument was that this was good business — companies that stuck with dirty energy were in danger of being beaten by greener competitors or burdened with mounting legal and regulatory costs.
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At the time, BlackRock CEO Larry Fink devoted large parts of his annual letters to urging corporate bosses to pay attention to ESG issues such as fair wages and climate change. He equated climate and investment risk and said it was clear ESG drove corporate outperformance. In 2020, the US SIF Foundation reported that the market for ESG-related products had grown to about $17 trillion in the U.S. In short, Trump's first term had coincided with the golden age of ESG.
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But the end of the pandemic sparked soaring energy costs, inflation and higher interest rates. That cocktail, combined with the impact of Russia's invasion of Ukraine, proved lethal for many of the capital-intensive green energy companies that had thrived just a few years earlier.
When shares of wind and solar companies started to tank, Republican critics pounced. They cast ESG as a tool to channel money to liberal goals. Politicians keen to burnish their image in the party often do so by denouncing, banning or bringing lawsuits against Wall Street's ESG efforts.
In July, Jim Jordan, the Republican chairman of the House Judiciary Committee, joined a group demanding information from more than 130 firms about their ties to an alliance known as Climate Action 100+. Republicans called it a "woke ESG cartel." That coincided with high-profile departures from the alliance, including Pacific Investment Management, as well as the asset management arms of Goldman Sachs and JPMorgan Chase.
Meantime, Fink no longer refers to ESG in his annual letters. BlackRock and its biggest peers, Vanguard Group and State Street Global Advisors, have also slashed their support of environmental and social shareholder proposals after backing a record number in 2021.
Investors have been withdrawing money from ESG-focused funds in the U.S. for the past eight quarters, with outflows totaling roughly $26 billion since the end of 2022, according to researchers at Morningstar. In the same period, the ESG label was removed from more than 80 funds, while the pace of new product offerings has slowed dramatically.
Meanwhile, there are signs that Europeans also may be cooling to ESG in the face of increasingly complex regulations. The region's fund managers, which account for more than 80% of global ESG assets, liquidated or merged roughly 350 ESG funds in the first nine months of this year, Morningstar reported. But in Asia, the market — though relatively small — is growing.
Trump's second term will see the GOP's attacks on ESG take on a new intensity, according to analysts at Jefferies Financial Group. A day after the U.S. presidential election, they encouraged fund managers to have lawyers "on speed-dial," as they risk being accused of everything from antitrust violations to the dereliction of their financial duty, depending on how states choose to enforce anti-ESG laws, the analysts said.
Attorneys general in GOP-led states have launched probes of banks and fund managers. While those investigations are still underway, "what would have real teeth would be if the Department of Justice or the Federal Trade Commission believes there's enough meat on the bones of the antitrust theories of Republican politicians to pursue antitrust investigations," says Rob Skinner, litigation and enforcement partner at Ropes & Gray.
ESG was coined by United Nations staffers two decades ago as a way to analyze nonfinancial risks and opportunities. Yet it's confounded and confused people inside and outside the industry ever since. It mixes an array of concepts — from environmental protection to corporate governance matters like board election rules — that don't neatly fit together.
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The label has been added to funds whose biggest holdings are tech and finance stocks. Among the most popular today is Nvidia, which is held in roughly 70% more ESG funds than turbine maker Vestas Wind Systems A/S. In fact, the artificial intelligence behemoth currently sits in more than 3,600 ESG funds, according to data compiled by Bloomberg.
Critics, meanwhile, have noted that Nvidia and other companies developing AI are rapidly depleting natural resources as the data centers they rely on guzzle power and water. In April, Morningstar estimated that Nvidia is emitting greenhouse gases at a pace that would align with global warming of 3.8 degrees Celsius, more than double the critical threshold of 1.5 degrees.
For that reason, Republicans aren't the only ones bashing ESG. Sustainable investing purists criticize the label's application to everything from energy-guzzling data centers to Bitcoin to fossil fuels. Exxon Mobil, the biggest U.S. oil and gas company, is held by more than 1,000 ESG funds, and Glencore, the world's biggest trader of commodities including coal, sits in just over 400 ESG funds, according to Bloomberg data. More than 550 ESG funds also hold Germany's biggest military-equipment maker, Rheinmetall, the data shows.
"I think for the sake of marketing expediency, the term has been overused," says Rob Du Boff, a senior analyst at Bloomberg Intelligence.
Deregulation is one lever Republicans can use to kill ESG, according to Du Boff. The Trump administration is expected to try to block the Securities and Exchange Commission's rules for companies disclosing their emissions.
In other cases, new rules can create barriers to ESG. For example, Trump-appointed SEC leadership probably will clamp down on shareholder resolutions that focus on climate change and workforce diversity. The president-elect will probably also reverse a Department of Labor rule allowing pension funds to consider ESG factors when investing, like he did in his first term, Du Boff says.
The analyst says an industry correction may not be a bad thing, if it crystallizes the distinction between financial products that merely talk a green game and the real deal. A more precise application of ESG, he says, "makes it harder for opponents to dismiss it as political wokeness."
Investor Chat Reynders, co-founder of Reynders, McVeigh Capital Management, which oversees $4 billion, says he still sees a strong case for many of the companies that stand to benefit from a shift to a low-carbon economy. There was record global investment in the energy transition last year.
"In reality, electrification isn't going away," Reynders says. "Nor is demand for water infrastructure, and grid technology has been advancing dramatically."
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There's also a geopolitical argument that China is a powerhouse of green investment, leading the world in areas like electric vehicles and solar energy, says Nicolas Lockhart, an attorney at Sidley Austin who advises companies on ESG rules. If the U.S. checks out of the technological and manufacturing race toward a low-carbon future, China "may well seek to play a greater leadership role," he says.
Leslie Samuelrich, president of Green Century Capital Management, which runs about $1.3 billion of sustainability funds, plans to reach out to investors who are concerned about a second Trump term.
"We're trying to remind people that they can make a difference through their investments," she says.
—With Frances Schwartzkopff
