Political pressures in the US have prompted fund outflows, greenhushing and a fall in support for shareholder resolutions – but views differ on how deep they run.
Last November, the trustees of Massachusetts Pension Reserves Investment Management (MassPRIM) gathered to discuss a sensitive question: should the public sector pension fund continue to use the term ‘ESG’, or drop it?
Republican lawmakers and commentators had successfully weaponised the initialism over the previous two years, turning it into a tool of the US culture wars.
Once an innocent concept developed to help investors better understand the financial impact of environmental, social and governance factors, ESG had come to signify that rising bogeyman of the right – ‘wokeness’.
“The board’s view was this work had nothing to do with politics,” says Mary Cerulli, Executive Director of non-profit Climate Finance Action and member of MassPRIM’s ESG Committee. “And because ESG has been politicised, it was in our interest not to take sides.”
A vote was held, and the board decided to rename its ESG Committee the ‘Stewardship and Sustainability Committee’. And just like that, the controversial initialism was gone.
Cerulli stresses the decision has had no impact on how the US$100 billion fund approaches environmental, social and governance risks. Rather, it has freed them up to get on with “the intentional and methodical work to state stewardship principles and priorities” without getting drawn into politicised debates, she says.
MassPRIM is not alone in its decision to drop the term ‘ESG’. One in five asset owners and managers in the US have stopped using it altogether in response to the anti-ESG backlash, according to a survey by research firm Cerulli Associates.
Most investors insist their fundamental approaches have not changed, even if they have stopped talking about ESG – a phenomenon known as ‘green-hushing’.
Yet, multiple indicators suggest the anti-ESG backlash runs deeper than this. Real money is coming out of sustainable funds by the billions. Major US investors are pulling out of climate groups like Climate Action 100+ (CA100+) and the Glasgow Financial Alliance for Net Zero (GFANZ).
In the political realm, Republican-held state governments are attempting to legislate against ESG, and there has been a marked drop-off in the willingness of big investors to take public positions on shareholder resolutions related to the subject.
ESG Investor spoke to a range of investors, analysts and activist groups to understand how far – and deep – the ESG backlash has gone. Most agreed it was a serious trend in the US, though much less so elsewhere. And many also agreed its longer-term implications would hinge on the result of November’s presidential election.
Flying high, sinking low
For Danielle Fugere, California-based President and Chief Counsel of NGO As You Sow, 2021 marked a high watermark for investor action on sustainability.
Back then, ESG was flying high. Money was pouring into sustainable funds like never before. In the first quarter, more than US$180 billion flowed into the sector globally, according to Morningstar Sustainalytics. By the final quarter of that year, the number of sustainable fund launches hit a record of nearly 350.
Quarterly Global Sustainable Fund Flows
Investors, meanwhile, were becoming bolder in their demands on companies. In the 2021 proxy season, environmental and social shareholder resolutions received on average a record 33% of votes in favour.
“[That] was a unique year,” says Fugere. “It was clear that shareholders were concerned about climate and wanted companies to be aligned with global goals.”
But while the ESG party was in full swing, the backlash was also beginning. In June that year Texas Republican Governor Greg Abbott signed into state law one of the country’s first pieces of anti-ESG legislation, requiring state entities – including pension funds – to divest from companies that boycotted fossil fuel and firearms.
Since then, anti-ESG legislation has become a craze among Republican-controlled states. Consultancy firm Pleiades Strategy has been tracking this activity since 2022, and currently counts 373 pieces of anti-ESG legislation across 39 states. Of those bills, 37 have been signed into law.
Over the two-year period since then, a stunning reversal in the fortunes of ESG has taken place, starkly illustrated by the amount of money flowing out of the sector.
Funding exodus
In the three months to 30 June 2024, US$4.6 billion were taken out of sustainable funds in the US, Morningstar Sustainalytics found. That was not as bad as the previous two quarters – in the three months to March, for example, nearly US$9 billion was withdrawn from sustainable funds – but it was still a sharp reversal from inflows earlier in the decade.
Global Sustainable Fund Launches per Quarter
The following quarter also saw the lowest number of sustainable funds launched in several years. Just 77 new products were launched in the quarter globally, half the number during the same period last year, and down from 350 in the last quarter of 2021.
In Europe by comparison, where the ESG backlash is not really a factor, US$11 billion flowed into sustainable funds that same quarter. The continent now boasts 84% of the world’s total assets under management in sustainable funds. Still, even in Europe, sustainable fund inflows are now only a fraction of what they were three years ago.
Hortense Bioy, Morningstar’s Head of Sustainable Investment Research, says entirely different forces are at play on each side of the Atlantic.
In Europe, there is no ESG backlash to speak of, she says. Instead, caution is coming from the lack of clarity on regulation of ESG funds under the EU’s Sustainable Finance Disclosure Reguations (SFDR).
But in the US, the politicisation of ESG is a major factor. “Asset managers are pushing their story less and less, so there is some green-hushing going on there,” Bioy says. “I think investors who want to invest sustainably are still doing it. But those who are unsure are holding off or pulling out.”
Anna Väänänen , Head of Listed Impact Equity at French group AXA Investment Managers, agrees that the politicisation of ESG has not reached Europe yet, where the firm does most of its business.
“I think it comes from the US now being so polarised,” she says. “In Europe, we are getting more polarised, but we are not there yet. The people we work with, our potential investors, really do care about ESG factors. ”
What’s in a name?
Ask any US asset owner or manager whether the ESG backlash has changed the way they consider environmental, social and governance factors, and they will likely deny it.
“No,” was the concise response provided by Californian public pension giant CalPERS when asked this question by ESG Investor.
Still, Cerulli Associates found investors have significantly changed what they say about ESG, and a small but growing number have abandoned ESG considerations altogether.
“They are more cautious about their messaging,” Michele Giuditta, Cerulli’s Director of Institutional Practice, tells ESG Investor.
A common frustration among investors is that politicians tend to conflate what ESG is and isn’t. “They are lumping all the different methods under one umbrella,” Giuditta says.
For example, certain sectors can be screened for purely moral reasons, while ESG integration is about financial risk and returns. However, politicians often fail to recognise such distinctions.
Cerulli Associates’ survey also asked both asset owners and managers if the anti-ESG backlash had led them to stop considering ESG factors. Managers said “no”.
“Some may not talk about it as much, or disclose publicly exactly what they’re doing unless it’s required,” says Giuditta. “But for their clients, they are providing more transparency around exactly what they’re doing, why they’re doing it, and how they’re doing it.”
For asset owners, the impact was greater: 10% of those polled in 2024 said they had stopped incorporating ESG considerations into investment decisions, compared with 3% in 2023.
Asked why, their top response was “fear of litigation”. “They also find responding to the backlash time-consuming and costly, they feel pressure from stakeholders, and a small percent say they no longer believe in the merits of ESG,” Giuditta adds.
Overall, Cerulli’s survey showed the backlash is chipping away at US investors’ willingness to take bold, open stances on ESG. This is also observed through waning membership of investor initiatives like CA100+.
Not worth the bother
In the late 2010s, CA100+ emerged as a force to be reckoned with. Backed by some of the world’s biggest investors, the initiative forced many companies to improve their climate targets and reporting.
But then came the ESG backlash, and in February this year, CA100+ confirmed three of its most powerful US members – JP Morgan Asset Management, State Street Global Advisors, and PIMCO – had withdrawn. BlackRock, the world’s biggest asset manager and previously a loud supporter of climate action, transferred membership to its smaller international arm.
Speaking to ESG Investor, a spokesman for CA100+ downplayed the impact of this trend, saying there remained “well over” 600 signatories representing more than US$50 trillion in AUM, and that momentum behind the initiative remained.
Since July 2023, 81 signatories have joined, and only around 20 have voluntarily withdrawn. “This includes some US-based asset managers that have unfortunately departed in part due to misguided political pressure on investors to leave global initiatives that support them in addressing climate-related financial risk,” the spokesperson adds.
Fugere cautions against reading too much into the string of high-profile investors leaving the initiative. “Most of those companies have said they haven’t changed their polices around climate – they just don’t want to be targeted for being a member of CA100+,” she says.
Still, investors’ willingness to vote on shareholder resolutions has dropped since the glory days of 2021. On average, just 21.5% of investors backed pro-ESG resolutions in the 2024 proxy season, down from a high of 33.3% in 2021, according to Proxy Review.
Trump 2.0
So is the US anti-ESG backlash a flash in the pan, or is it here to stay?
From a climate perspective, where it really matters the negative trend has not yet flowed through to the real economy. In the 12 months to March 31, a record US$265 billion of new investment flowed into low-carbon technology in the US – up 39% on the previous year, according to Clean Energy Monitor.
Of that amount, a record US$71 billion came in during the first quarter of 2024, helped by the hundreds of billions of dollars in cleantech subsidies provided by President Joe Biden’s Inflation Reduction Act.
By that metric, the US energy transition is charging ahead. But a return of former president Donald Trump to the White House would almost certainly stall that positive trend. Among various anti-ESG measures, Trump has indicated he would attempt to pull back spending on clean energy, and leave the Paris Agreement.
Meanwhile, Project 2025, the radical right-wing manifesto that conservative groups led by the Heritage Foundation want Trump to implement, explicitly targets ESG and vows to “stop the war on oil and natural gas”.
“The political environment is going to have a lot to do with [the future of ESG],” says Giuditta. “A Trump presidency would definitely have implications on government spending and legal requirements.”
According to Fugere, a worrying trend is the conservative-dominated US Supreme Court’s recent rulings that have disempowered official bodies like the Securities and Exchange Commission and the Environmental Protection Agency from regulating everything from pollution to reporting requirements – a move Trump has indicated he would accelerate.
Fugere is gloomy about the prospects of a second Trump presidency, warning it would turn the US into a country “like Russia or Brazil, where you have strong laws but no enforcement”.
A Democratic victory, on the other hand, would likely slow these trends – even if the Supreme Court rulings cannot be reversed.
But Fugere urges ESG-minded investors not to despair if Trump wins. “Shareholders are still owners of companies: they have the ability to vote,” she says.
