One of the notable features of the latest Trump administration has been its vocal opposition to environmental, social, and governance (ESG) investment, as well as diversity, equality, and inclusion initiatives.
“That opposition has been very vocal and it is also having real-life impacts,” says PwC’s Munro O’Dwyer. “You’re seeing initiatives around alternative energy sources having their funding chopped off, so that’s where you see the political agenda translating very quickly into the investment outcomes for investors who have sustainability at the heart of their agenda.”
Davy director of responsible investment Eileen Rowsome agrees and says that flows into dedicated sustainable investments and thematic ESG products definitely slowed in the first half of the year on the back of poorer performance, rising rates and uncertainty about policy changes in the US before and after the election, albeit they have recovered somewhat in recent months.
The opposition to ESG hasn’t all been one way, however, and Rowsome sees a distinction between attitudes in Europe and the US. “It’s partly about the nature of how we view things in Europe, but also because I think Europe is clearer about the direction of travel in regulation than the US at the moment.”
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One of the more dramatic examples of the differing attitudes across the Atlantic arose earlier this year when The People’s Pension, one of the UK’s largest pension funds, pulled £28 billion from State Street, switching business to rivals in Amundi and Invesco. This was one of the more extreme cases of an asset owner opposing the retreat from ESG among the biggest US asset managers.
Mark Condron, chairman of trustees for The People’s Pension, noted that in selecting Amundi and Invesco, “we have chosen to prioritise sustainability, active stewardship and long-term value creation”, which aim to “balance strong financial performance with responsible investment principles”.
It points to a very clear difference in approach by US as opposed to European institutions and investors but also to another truth: ESG investment doesn’t necessarily have to come at the price of poorer performance, provided there is a good balance.
Rowsome says there’s a clear difference between article 8 and article 9 investments, sometimes referred to as Light Green and Dark Green: “An Article 8 Fund would consider ESG factors in the investment process and research into the companies it invests in. Article 9 Funds state that they have a sustainable objective, with investments that would align with sustainable investment goals.”
Article 8 funds, therefore, tend to be more diversified and less exclusionary, she adds, whereas Article 9 funds tend to be more concentrated. “In a pension fund, you want a broad diversified range,” she says.
“From an overall capital allocation policy, they are still predominantly in the Article 8 area. It’s tricky to incorporate the effects of climate change into your asset class modelling so therefore moving away from what have been traditional benchmarks, where you have decades and decades of data is challenging. For that reason, people are nervous about going fully into that thematic space.
“A lot of pension funds have the ability to invest in private assets so, for example, if you own a portfolio of renewable assets as a form of long-term capital and you are not subject to the day-to-day moods of public markets, that can smooth the returns over time.”
The fluid nature of the political landscape is another key consideration. The fallout from the conflict in Ukraine has meant that European states have ramped up their commitment to defence spending, with implications for stocks in this sector and pension funds that, ordinarily, may have shied away from this area.
In the longer run, O’Dwyer believes ESG investments will have their rightful place in pension and investment portfolios. “Institutions remain committed to sustainability-themed investments. They think it’s good business to deal with businesses that adopt and adhere to these criteria.”
