The off-again and on-again sentiment by governments and capital markets toward fossil fuel-based investments since Russia invaded Ukraine in February 2022 has left the market wondering if all former bets are off when it comes to environmental, social and governance (ESG) investing. With a lot of companies now doing the previously unheard of and pushing back against an ESG focus, Azzet went in search of clues as to where ESG is currently at. Here's what we found.
To add to current confusion, the cold shoulder treatment dished out to renewables by the new Trump administration has given the market renewed reason to question whether the ESG investing framework is still being taken seriously. Mounting scepticism towards ESG, after all, is a 180-degree flip from market sentiment only a decade earlier.
Due in part to the commitment governments around the world originally made to the 2016 Paris Agreement and carbon emission reductions, institutional investors and lenders started progressively turning away from fossil fuels.
Five years later, banks, asset managers and insurers were hell bent on showing off their green credentials by joining global initiatives that sought to speed up climate action. This crescendoed at the COP26 - the United Nations climate summit in 2021 - where the Glasgow Financial Alliance for Net Zero was introduced to bring together firms that collectively controlled $130 trillion in assets.
The rise of ESG
This catapulted ESG investing momentum with many banks and major lenders saying no to projects they previously fell over themselves to lend money to. Consequently, many major projects in the resources sector got relegated to a broader basket of unethical business activities, including gambling, arms trading, alcohol and tobacco.
With fossil fuels looking like they had a limited shelf life, big resource companies became understandably reluctant to commit billions of shareholder dollars to capex on projects they thought might take decades to return the cost of capital, let alone a profit.
After reading the market mood, ESG quickly became de rigueur with companies big and small, with many organisations jumping onto the green-wash bandwagon, hoping it would curry favour with the broader market and potentially lead to new revenue streams.
The fall of ESG
Then along came Russia’s invasion of Ukraine which acted as another major turning point for ESG, this time in the wrong direction. Suddenly, heightened attempts by governments everywhere to scramble for scarce resources, by default, relegated climate change and ESG back to an addendum at the back of the annual report.
Fast forward three years to 2025 and according to the scientists who created the Doomsday Clock - a gauge of how close humanity is to destroying the world – we’re now 89 seconds to midnight.
Without putting too fine a point on it, midnight represents the moment at which people will have made Earth uninhabitable.
Aussie super fund fallout
Here in Australia some of the country’s biggest super funds appear to be preparing to hedge their previous commitment to climate targets in the wake of growing political and corporate backlash against ESG. Like the rest of the market, these funds are trying to digest the tectonic shift in sentiment which is amplified by the realisation that with Trump at the beginning of a four-year term, sentiment towards ESG could turn progressively worse.
CEO of the Association of Superannuation Funds of Australia Mary Delahunty recently noted that former climate goals have been shanghaied by the anti-ESG movement with many corporates now unravelling the green agendas they once championed.
While super funds remain invested in meeting climate targets, Delahunty admitted that movements against climate change mitigation are creating serious headway to these goals being met. She suspects changes in United States policy settings may undermine funds' attempts to meet their green targets. While providing risk-adjusted returns to members.
Meanwhile, Paul Schroder who runs AustralianSuper, the country’s biggest fund with $350 billion in assets under management, is turning a much braver face to market noise. Despite current setbacks, Schroder is quick to remind the market that politicians come and go and that money will inevitably follow the move to a net zero global economy.
While AustralianSuper has a 2050 target for net zero carbon emissions in its investment portfolio, there is no corresponding 2030 emissions target.
Despite Schroder’s eagerness to talk down the current hype, the fund’s annual report claims that achieving its net zero commitment is contingent “on policymakers and portfolio companies making and delivering on their own net zero commitments.”
Then there’s the Australian Retirement Trust, another large fund with over 2.4 million members, which made no secret of admitting its climate targets could be adjusted “based on updated information”.
“Numerous risks, including the financial implications of climate change, form part of our risk management approach,” ART’s head of sustainable investment, Nicole Bradford, said.
“ART monitors its climate-related targets on a regular basis and any adjustments will be based on updated information we have at the time and in line with our members’ best financial interests.”
Australia to pivot away from ESG
Mandatory climate reporting laws came into effect on 1 January 2025 for Australian companies with at least two of the following: Consolidated revenue of $500 million or more; consolidated gross assets of $1 billion or more; or employees of 500 or more. The group’s entities required to participate in climate reporting will decline in 2026 and again in 2027, which will effectively push an increasing number of companies towards climate and net-zero policies.
However, Jarden highlights challenges with such policies due to high costs, a lack of demand, and the absence of “green premiums,” causing issues for companies like Fortescue (ASX: FMG), Origin (ASX: ORG), and Woodside (ASX: WDS) to reduce their green hydrogen commitments in 2024.
Air New Zealand (ASX: AIZ) has also removed its 2030 emissions target, due partly to the cost of sustainable jet fuels.
The broker expects more companies to unwind their targets as 2030 approaches due to costs and technological issues. Jarden also highlights environmental issues, including pollution, impacts on nature, water scarcity, and plastics, as growing concerns for regulators and communities. Jarden believes AI is also playing an increasingly important role in ESG data collation, reporting, and supply chain management.
Major policy changes in a Liberal coalition
A Liberal coalition has vowed to repeal these new laws if it wins the federal election in May, and according to one ESG industry insider, in the absence of oversight the ASX’s Governance Council’s attempt to update its Corporate Governance Principles and Recommendations has descended into a headline-grabbing debacle. According to Macquarie’s analysis, a Coalition party victory at the next federal election (due before 17 May) could lead to the potential for major policy changes in Australia.
The Coalition remains committed to net-zero ambitions by 2050. But under a Coalition party victory, the broker also suspects Australia will see a revised 2030 emission reduction target of -43% on emissions against 2005 levels, which would limit the impacts on the mining, agriculture, and energy sectors.
The Coalition’s proposed nuclear strategy coincides with plans for growing support for new natural gas production and infrastructure such as storage and pipelines. Given the expected timeline for coal-fired plant closures, AGL Energy (ASX: AGL), Origin Energy (ASX: ORG), and other energy utilities have been advocating gas as a transition fuel.
As a result, Origin's Eraring plant could have its life extended to 2029 from 2027.
Meanwhile, AGL’s Bayswater plant is due to close between 2030 and 2033 and Loy Yang A Power Station by June 2035. The Coalition is also expected to examine the safeguard mechanism, which could involve more “flexibility” for emission-intensive industries, including delaying timelines for emission reductions.
Overall, the ASX has 27 companies that are subject to the safeguard mechanism, including BHP Group (ASX: BHP), Fortescue (ASX: FMG), and Wesfarmers (ASX: WES). Assuming there are major policy changes in Australia, Macquarie sees greater interest around EV tax credits and home-energy rebates than in carbon capture and storage, hydrogen, and clean fuels.
In light of these developments, Jarden expects changes in Australian energy policy and uncertainty around regulations and political changes, including the Trump administration, which will likely impact ESG and the Inflation Reduction Act, only to create more uncertainty for local companies.
ESG risk
Even before Trump took office, the six largest U.S. banks, including JPMorgan and Goldman Sachs, abandoned their Net Zero Banking Alliance, and BlackRock, the world’s largest asset manager, exited a similar initiative. In light of the changing macro backdrop the alliance structure is being reviewed to ensure it remains “fit for purpose”.
While the Net Zero Banking Alliance still has more than 130 members, most members are now European banks. Then there’s the Federal Reserve (The Fed) which recently withdrew from a network of regulators that studied climate change risk.
Due to the radically changing policy environment, Shivaram Rajgopal, a professor at Columbia Business School told the New York Times that CEO’s of large banks that remain aligned to one of these alliances are exposed to litigation risk.
Last November, BlackRock and two other large asset managers were sued by Texas and 10 other Republican-led states on the pretext that “anticompetitive practices” were conspiring to use the net zero groups to restrict coal production and push up electricity prices.
Unsurprisingly, Macquarie expects sustainable investing to be under an even greater spotlight in 2025 with U.S. fund managers progressively moving away from sustainability collaborations due to antitrust concerns and rising litigation around climate-related policies.
Antitrust concerns are also on the minds of investor group Climate Action 100-plus, which has resulted in several investment firms running for the exit, including Alliance Bernstein, JPMorgan, and Goldman Sachs. However, the organisation still has more than 600 remaining members.
Fear of potential political backlash is also evident within the insurance sector. In 2024 the net zero alliance for insurers closed its doors after losing about half of its members.
Fund outflows
ESG fund inflows have also been a casualty of growing green-washing concerns, red-state boycotts in the U.S. and heated boardroom debates. A recent report suggests US$13 billion was withdrawn last year from funds investing in companies with ESG principles.
But that’s not all. The term ESG is allegedly so on the nose today that it was recently wiped from the World Economic Forum’s official program in Davos, Switzerland, after being on the conference program for many years.
By the end of 2023 investors had pulled $5 billion out of ESG-focused “sustainable” investment funds citing greenwashing concerns and the absence of clear, cross-border regulation for ESG investing.
The brunt of the outflows were from a single iShares E.S.G. fund managed by BlackRock, which despite being an early adopter of ESG standards, also stopped using the term in fear of it becoming too politicised.
Clean-Tech Sector
While higher interest rates and negative sentiment toward the clean-tech sector weighed on stock performance in 2024, Deirdre Cooper, Head of Sustainable Equity at Ninety believes policy uncertainty following the U.S. election has only exacerbated negative sentiment. However, she reminds investors that history suggests periods of extremely negative sentiment towards clean-tech sectors often represent some of the most compelling entry points into decarbonisation companies.
While this part of the equity market may be out of favour, she believes most investors still ascribe some probability to a transition to net zero, not least because of the increasing frequency of extreme weather events.
“And if we are going to address carbon emissions and move along the net-zero pathway, that will be a tailwind for companies enabling decarbonisation,” said Cooper, an active global investment manager with GBP130.2bn in assets under management.
“We think investors are likely underappreciating the future growth [of] decarbonisation companies, making this an attractive, countercyclical entry opportunity.”
Cooper reminds the market of a likely gulf between headline statements from the U.S. administration and actual policy decisions. As a case in point, while withdrawal by the U.S. from the Paris Agreement will likely impact sentiment, it may not impact company forecasts. She believes the Inflation Reduction Act is more significant, with bipartisan support likely making it harder for it to be fully dismantled.
Even if the Act is repealed, Cooper notes the largest renewables producer in the U.S. has secured four years of tax credits, which will provide protection against potential impacts.
Have we come full circle?
Unsurprisingly, after recently unveiling bumper profits and record orders of close to £78 billion, Charles Woodburn CEO of munitions giant BAE Systems said investors who spurned defence stocks in the name of ‘ESG’ causes have ‘swung back to a more sensible position’.
This is a major reversal of ESG investing trends which have seen industries like defence, Big Oil and tobacco fall out of favour in recent years. This may also help to explain why inflows into global sustainable funds hit a low of $36 billion in 2024 after peaking at $645 billion in 2021.
According to a new report from Morningstar 115 funds dropped ESG from branding in 2024 citing difficulty complying with the Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements.
However, a group of investors representing €6.6 trillion ($6.8 trillion) of assets is calling on European officials not to cave in to mounting pressure to scale back the bloc’s ESG regulations.
The warning coincides with mounting pressure from Germany and France, the European Union’s two largest economies, to scale back planned ESG regulations on concerns the requirements are preventing companies in the bloc from competing freely with their peers in the U.S. and Asia.
Meanwhile, according to Morningstar Sustainalytics, poor performance, strong EU regulation and an intense anti-ESG campaign in the U.S. are driving investors and managers away from this asset class.
While 351 sustainable funds closed or merged in 2024, Morningstar expects between 30% and 50% of ESG funds to rebrand by mid-2025.
Ironically, Responsible Investment Association-certified funds have generated 10-year returns of 13.2% per annum compared to 9.19% for the rest of the market.
