So far, 2025 is starting with a distinctly anti-sustainable mood. Donald Trump is about to re-enter the White House and has threatened to roll back the Inflation Reduction Act that spurred huge investment in clean energy.
US banks and investment managers keen to curry favour with the new administration — or at least avoid being targeted — are ditching net zero alliances. While the political mood in the UK and Europe remains supportive of sustainable investment, trust among the public is low and concerns over greenwashing are still high.
Yet money continues to flow into sustainable funds, with a further global net inflow of $10.4bn in the third quarter of 2024, according to data from Morningstar. And the sector is reshaping itself: regulation is clamping down on greenwashing and funds are being forced to explain more clearly to investors what they are trying to achieve.
The new world of sustainable investment will be characterised by greater focus on the energy transition, better regulation and less virtue signalling, say fund managers and analysts interviewed for FT Money.
One thing that the industry does agree on in 2025, though: the term ESG has been weaponised and is confusing for investors. That means that ESG as a synonym for sustainable investment is likely to die away, but the trend itself — in its revamped form — will continue.
“The global commitment to reach net zero has significant enough momentum to sustain capital flows through the next four years of Trump’s presidency,” says Emma Wall, head of platform investments at Hargreaves Lansdown.
“While US corporates are rowing back on public climate and diversity targets, it is unlikely management will take on unnecessary risk or fail to take advantage of growing opportunities — including those associated with environmental, social and governance factors.”
However, the second Trump administration is already exacerbating the difference between Europe and the US when it comes to attitudes on sustainable investment. This month, ahead of the new president’s inauguration, BlackRock, the world’s largest money manager, said it was leaving Net Zero Asset Managers, a group committed to climate action. The six largest banks in the US have also quit the Net-Zero Banking Alliance in recent weeks.
Yet in Europe, the mood is different. While US-based asset managers including State Street Global Advisors, JPMorgan Asset Management and Pimco have quit the Climate Action 100+ group, European investment giants such as Amundi, UBS Asset Management, and BNP Paribas Asset Management have not.
Europe is the centre of sustainable investment, making up 84 per cent of global sustainable funds, with just 11 per cent in the US, Morningstar data shows. While net inflows into US-based sustainable funds turned negative at the end of 2022, their relatively small share of the market did not lead to net outflows globally, which are held up by continuing inflows in Europe.
That means that global asset managers face the problem of threading the needle to satisfy different clients. While Allianz Global Investors remains a member of Climate Action 100+, its US-based subsidiary Pimco withdrew. Similarly BlackRock withdrew from the group, but transferred its membership to its international subsidiary.
Dominic Rowles, an ESG analyst at Hargreaves Lansdown, says asset managers that have withdrawn from such groups have reassured him that they have only done so for fear of legal action in the US, where some fund groups have faced lawsuits from Republican states due to their “environmental agenda”.
Their message to European investors, he says, is that their in-house teams are now good enough to pursue action on climate goals without needing to rely on a third party.
The backlash against ESG is certainly present in Europe, too. One key change is that European investors are quietly dropping the term in their marketing material.
“ESG is probably not a selling point any more,” says John William Olsen, a sustainable fund manager at M&G. “It is probably time for a rethink in terms of how it’s approached and how it’s explained to investors.”
Performance has not helped. In the first big wave of ESG investment at the end of the last decade, investors were often promised financial returns on a par, if not better, than mainstream funds, partly because ESG funds tended to be overweight tech and other growth stocks in a decade of near-zero interest rates that helped such companies thrive. But they were underweight in oil and gas companies as the oil price spiked after Russia’s invasion of Ukraine — as rising interest rates hurt growth stocks — and their performance fell.
Yet the reason in Europe to be wary of the term ESG is less a reaction to the US political climate and more due to the fact it was never that clear in the first place.
Fears over greenwashing in recent years have led regulators in the US, UK and Europe to implement new rules over what funds can call themselves. In part, greenwashing was the result of the desire of certain fund managers to jump on the bandwagon as a new market exploded. But the fact that ESG was often used wrongly as a synonym for sustainable or even environmentally friendly meant that retail investors could be very surprised to find an oil company or even arms manufacturer in their fund.
Companies could receive a high ESG score from a ratings provider because they had a strong board structure, or treated their employees well. But they might not have a particular environmental bent at all. A decision by S&P to drop electric vehicle company Tesla from its ESG index, but keep oil company ExxonMobil led Elon Musk to tweet in 2022 that ESG was a scam.
In 2025, analysts and fund managers say the term should be better understood as a risk management measure.
“ESG has definitely become a divisive term, but I think some of the debate around it has been misguided,” says Rowles. “We differentiate it from sustainable investing; we see it as a risk management technique. When you explain that to people they generally see the benefits.”
A company with a good ESG rating shouldn’t be doing too much damage to the environment, shouldn’t be treating its workers too terribly and shouldn’t have a terrible corporate structure, because these things could constitute financial risks. (The idea that “climate risk is financial risk” has been adopted by the Climate Action 100+ but is more controversial in the US).
Leaving aside the environment as a consideration, being sued over an oil spill is not good for shareholders. It is in this spirit that fund managers say the term ESG should be viewed, and why many professional investors say that they always consider ESG factors when choosing to invest in a company.
But this does not make their funds sustainable in the way we would understand the term in 2025. In the UK, under new rules from the Financial Conduct Authority, known as sustainability disclosure requirements (SDR), to be adopted by April at the latest, any fund that wants to call itself sustainable must use one of four labels. “Sustainability focus” funds mainly invest in assets such as solar or wind energy. “Sustainability improver” funds are focused more on companies on a credible path to net zero. “Sustainability impact” funds invest in solutions to problems such as renewable energy generation. “Sustainable mixed goals” funds can invest in a mix of all three.
Funds that simply make exclusions or take a best in class approach will no longer be able to call themselves sustainable.
“SDR should make things a lot easier for investors and give them confidence managers are doing what they say they’re doing,” says Rowles.
Yet greenwashing fears are still high in the UK. A report by the Association of Investment Companies last year found that 67 per cent of private investors were concerned about greenwashing. Nick Britton, research director at the AIC, says that while the damage done to the sustainable industry’s reputation was “not irreparable”, it “might take some time to repair”.
The new regime is likely to significantly shrink the number of “sustainable” funds in the UK, according to Hortense Bioy, head of research at Morningstar. She predicts that from a recent universe of about 400 funds there will be a maximum of just 150 in a year’s time.
One big shift in sustainable investors’ thinking in recent years has been on the energy transition. Traditionally, investors who first become aware their funds might cause harm want to ditch their oil and gas stocks. But the new class of improver funds, also known as transition funds, is expected to be a growing area of interest, with greater awareness that polluting companies need backing from shareholders to change.
M&G’s Olsen says that engagement is becoming a much larger part of what investors are looking for. A few years ago, engagement might have been more reactive: calling a company if there was a blow-up in the supply chain to ask if they were handling the crisis, for example. Now, engagement is more nuanced and tied to the impact a fund is trying to achieve.
On climate, this can take the form of steps: first convincing a company to disclose their emissions, then to set out credible plans to reduce them, and then to incentivise board members to achieve those targets. There are rare exceptions when Olsen does decide to divest. A mid-cap company in the US that already has relatively low emissions might not take kindly to being asked to set climate targets, he says. “They would typically be happy to see us go as we can be quite annoying.”
Transition funds will still require a level of education among retail investors, suggests Bioy, as they need to understand that companies in such funds may not score well on sustainability metrics now. Here, too, regulation is catching up with what investors want. Fund managers now have to provide more information on how they are engaging with companies. Those are expected to become more detailed in the future. Rowles at Hargreaves Lansdown predicts that AI will play a role, with personalised reporting for sustainable investors giving them specific feedback on what matters to them the most.
Sustainable investors are also moving beyond just using carbon emissions as a metric. There is more interest in biodiversity and natural capital — the value of assets in nature such as protection from soil erosion and flood risk, or habitats for wildlife. Assets in open-ended biodiversity funds and ETFs have more than doubled in the past three years, though they remain a sliver of the climate fund market, according to Morningstar.
Issues around natural capital “feel more tangible to a lot of our clients” than carbon emissions, says Stephen Metcalf, head of sustainable investing for RBC Wealth Management. “I think it’s not really understood very well across the industry how big [an impact] nature risk will have on the value of investments over the long term.”
Trump’s administration remains a question mark for European-based sustainable investors. But many are looking past the hot air. Some point to the fact that Republican states have been the biggest beneficiaries of the IRA, which also created jobs. Others note a subtle under-the-radar approach to clean energy in the US — rather than calling it sustainable investment or the dreaded ESG, it can be renamed “energy security”.
That picks up on the interest from governments around the world in moving away from fossil fuel energy. “The capital going into sustainable solutions to power economies is massive,” says Marisa Drew, chief sustainability officer for Standard Chartered. “I see the private sector just getting on with it.”
Britton at the AIC thinks the Trump effect has not really reached UK investors when it comes to views on ESG. Most respondents in their survey associated the term with sustainability, with only 9 per cent saying it was pointless. Their caution has more to do with false advertising, he says, something that better regulation could turn around.
Metcalf says that while the vast majority of clients want to know their investments are at least responsible, a smaller set of around 10-20 per cent actively want to create positive change. That is less than might have been expected five years ago. But he says: “I think the backlash makes those clients more entrenched in their decision to have more positive change.”
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