Most asset managers still rosy on sustainable investing

President-elect Donald Trump has promised a deregulatory agenda in his forthcoming term, but sustainable investing advocates say they are nonetheless optimistic about the near future.

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And asset managers, whether they’re ambivalent or pro-ESG, see the category growing over the next couple of years, according to a report published today by US SIF: The Sustainable Investment Forum.

Of a total US market size the group found to be $52.5 trillion, about 12 percent, or $6.5 trillion, falls into the sustainable investment or ESG categories. Among 250 asset managers and institutional investors US SIF queried, 73 percent said they expect the sustainable investment market to increase over one to two years.

“The survey suggests that respondents think there will still be growth in this industry,” said Maria Lettini, CEO of US SIF.

Asset managers and owners mostly said they continue to move forward with strategies that consider environmental, social, and governance criteria, in large part because that is what clients have asked them to do, she said.

Although some aspects of President Joe Biden’s signature Inflation Reduction Act are being threatened in the next Trump administration, many communities in the US are benefitting from it and have infrastructure needs that can’t be ignored, she said.

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“Most of the Inflation Reduction Act and the beneficiaries of that are pretty shielded,” she said. “Frankly it’s just infrastructure that needs an uplift. There is a lot of money in that.”

Having had ESG factors used in the mainstream for a number of years, investors are increasingly sophisticated about the risks those can address, which are often financially material in nature, proponents have said. Even oil industry leaders have publicly recognized a need for the transition to renewable energy sources, for example.

But that also comes at a time when the letters E, S, and G have fallen out of favor, being prime political targets, mostly by Republicans, some of whom have blacklisted asset managers in their states over that topic. Indiana, for example, is replacing BlackRock within its pension fund, in accordance with a state law that requires it to do so for financial services companies that it determines have made commitments around ESG. And recently, 10 states filed a lawsuit against BlackRock, Vanguard, and State Street, alleging that the companies engaged in anticompetitive trade practices to constrict the coal market.

That trend has led to what has become known in the industry as “greenhushing,” with fund companies continuing to consider material ESG factors in order to reduce risks and help returns, but not calling out that fact in marketing materials.

“I’m optimistic on what investors are actually doing, even if some of that might be behind the scenes and not couched as ESG investing, as it has been in the past,” Lettini said.

Although the recent crusade against ESG started at least as early as the first Trump administration, the category broadly did well for asset managers until 2022. Industrywide, sales had been positive for sustainable funds, and fund sponsors kept rolling out products.

That changed when performance declined, providing a tailwind for opponents.

There have been net outflows from US sustainable mutual funds and ETFs for seven quarters in a row, though that has slowed down in the past two.

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In response to that, as well as pressure by the Securities and Exchange Commission on greenwashing, asset managers have removed some of the ESG funds from their lineups, changed some of their fund names, or altered the strategies to remove references to those letters.

“We’ve gone from greenwashing – overstating your ESG credentials – to now not wanting to talk about it, even if in your process you are still using ESG data and integrating ESG factors in your analysis,” said Hortense Bioy, head of sustainable investing research at Morningstar.

Regardless, the backlash against ESG shows no signs of abating, and the outlook for fund sales is uncertain at best, she said.

Trump “is probably going to pull out of the Paris Agreement, so we don’t expect an environment with stricter policies to penalize companies that emit [carbon]. So, transition risk is probably not as high, but there is still going to be physical climate risk – investors will think about that and position themselves accordingly.”

Going into 2025, there is some uncertainty about the potential for strategies focusing on green technologies, in part because of the unknown trajectory for interest rates, she said. High interest rates have hurt clean energy projects because of the high cost of borrowing.

Still, there could be strong demand, particularly among younger investors for sustainable products, consultant Veerless said in a paper this week. That group also pointed to state-level initiatives that passed in the recent election supporting ESG issues, as well as European Union regulations that affect US companies doing business overseas, as additional reasons to be bullish on sustainable investing.

Further boosting that is the rising demand for energy surrounding artificial intelligence.

“The long-term outlook is very positive. Everyone knows we need more renewable energy to feed those tech companies and their AI datacenters,” Bioy said. “There are a lot of investment opportunities related to the low-carbon transition.”