Sustainable funds have been badly hit by the US administration’s assault on all things related to ESG
History looks likely to record the Trump presidency as an anomaly in one respect at least. Setting aside Trump’s erratic tariff policies – doctoral thesis material for economics graduates for decades to come – this is the first time in the modern era that an American president has taken such an avowedly anti-science stand.
Donald Trump continues to celebrate tearing down America’s participation in the global effort to curtail catastrophic climate change. Instead, he and his administration are actively embracing climate scepticism, allowing companies to return to the exploitation of carbon energy sources.
Meantime, scientific facts pointing to the dangers of global warming and public opinion are scoffed at. He has dismantled the regulatory efforts of a succession of previous administrations which aimed to prevent environmental pollution by US companies.
This all matters because a lack of American leadership on this issue allows the Chinese, the world’s worst polluters, and the Middle East, where countries are still pumping oil and gas, to relax their climate credentials.
ESG investment funds
Unsurprisingly ESG (environmental, social and governance) investment funds have been negatively impacted by the US administration’s rhetoric and actions.
The first quarter of 2025 saw very significant outflows from global ESG Funds, largely driven by the Trump administration’s assault on all things ESG-related.
According to the investment data analytics firm, Morningstar, the global sustainable fund universe, comprising funds focused on ESG factors, endured their worst quarter on record in the first quarter of this year.
These funds saw net outflows totalling $8.6bn. To put this in perspective, that same universe of funds saw net inflows of $18.1bn one quarter earlier, before Trump’s assault on the whole idea of ESG investing had built up its present head of steam.
So, where does this leave global ESG funds, and where does it leave investors who want to bring an ethical dimension to their investing? Right now, that is an unanswerable question. There is little doubt, however, that the majority of individual investors favour the idea of investing in funds that lean towards ESG goals.
The Financial Conduct Authority’s financial lives survey underscores this point. According to the FCA: “Eighty one per cent of adults wanted their money to do some good as well as provide a financial return. Seventy six per cent would like to invest in a way that protects the environment. And 74 per cent would like to invest in a way that has a positive social impact.”
‘Greenwashing’
Criticism of ESG investing is not new. The terms themselves can be interpreted in a whole range of ways. This is precisely why the FCA launched its ‘anti-greenwashing’ regulations which came into force on May 31 last year.
Sacha Sadan, the FCA director of ESG, says that the changes the FCA was introducing were specifically designed to boost the integrity of the market and to ensure people can make informed decisions with their money.
“Consumers care about investing in products that have a positive impact on the planet and people,” he noted. “The reason the FCA has taken a hand in regulating the use of ESG-type labels on investment projects is to ensure that people are not misled.”
ESG labels
The fund management community’s response to all this seems to split into two diametrically opposed directions. One set of managers is diving for cover and removing any explicit ESG labelling from their funds. The other set is going all out to explain, in more granular detail, why what they are doing is worthy of the ESG label.
The Trump administration cannot be wholly blamed for fund managers rebranding away from ESG. As the FCA’s new focus on ESG labels shows, until recently the labels have been vague enough to be the source of endless confusion.
The FCA is not the only regulator taking a close look at how ESG funds are marketed. The European Securities and Markets Authority (ESMA) is also stepping up its scrutiny to prevent funds from ‘greenwashing’ themselves.
According to Responsible-Investor.com, the number of European funds with sustainability-related names has dropped by as much as 25 per cent since the ESMA published its ESG labelling guidance in May 2024. It follows that individual investors are now looking at a somewhat smaller universe of overtly ESG-labelled funds.
However, for those investors who really do want to ensure that their investments are doing some good for the planet or for society, or both, not only are there still plenty of explicitly ESG-labelled funds, there is also a plethora of funds focused on sustainability in some meaningful way.
Investing in infrastructure
Aberdeen Investment’s Ruairi Revell, head of sustainability, and Maciej Tarasiuk, head of investments for the firm’s economic infrastructure business, argue that investing in infrastructure can be a compelling sustainability investment.
Their point is that investing in transport, energy or utilities companies that are focused on low-carbon projects can deliver in terms of both sustainability and financial returns. “We’re not going to resolve big challenges like climate change without more and better infrastructure,” Revell argues.
In the past, this argument would probably have been presented in ESG terms. Now it is presented in sustainability terms. It is a more nuanced argument, but it is still an argument that could resonate with investors who have a social conscience or who want to do their bit to improve the world we live in.
We continue to integrate E, S and G considerations into our investment process as we believe it is part of our fiduciary duty
– Dan Grandage
Speaking of the investment imperative, Dan Grandage, Chief Sustainability Officer (CIO Investments), Aberdeen Investments, says: “We have been actively monitoring recent changes largely coming from the US but also the global geopolitical environment.
“Such changes have not changed our attitude towards sustainability in general; we continue to integrate E, S and G considerations into our investment process as we believe it is part of our fiduciary duty to consider these risks and opportunities,” he adds.
ROI
He says that since the inception of ESG funds there has been constant debate over whether investing in various funds improves or diminishes the prospects of making a ‘decent’ financial return.
“Many fund managers argue that it is hard enough to pick stocks that consistently make decent returns. Adding additional ESG-related requirements therefore runs the risk of eliminating a whole universe of stocks that perform well, but don’t fit the ESG criterion,” he says.
Some investors are happy to accept a lower return from a socially responsible fund. They would not be happy investing in a fund comprised of a combination of companies in the armaments sector, oil and gas giants, and the tobacco industry, even if that fund generated higher returns.
Peer performance
However, there is also an argument, and some good data, that says that companies focused on their ESG performance outperform their peers. Figures from MSCI, for example, which provides investment tools and services for the global investment community, show that ESG funds outperformed their peers in 2021 and 2023. They lagged behind last year, but the figures still show that having a conscience and caring about the planet need not mean accepting meagre investment returns.
