Sure, Sustainable Investing Seems Doomed

Investors who set interim climate targets for 2030 now have less than five years to achieve them. And let’s face it, beating that doomsday clock won’t be easy. Because even as the frequency and severity of extreme weather events have increased, investors have faced a growing backlash against sustainable investing, especially in the US in recent months.

It’s not all bad news: demand for sustainability strategies worldwide is actually still pretty strong, with financial institutions demanding real solutions and backing up their big talk with equally big money.

What’s this divide all about?

Europe and the US have been heading in opposite directions on the sustainability theme for a while. In Europe, investors have mostly held their ground on their climate commitments. But in the US, political pressures have led some folks to beat a hasty retreat.

And, look, it’s a tricky moment for investors. President Trump plans to dismantle his predecessor’s measures to promote sustainability, and has recently signed executive orders to increase coal, oil, and gas exploration on federal land. He has also weakened the Environmental Protection Agency and pulled the US out of the Paris climate agreement. That shifts where the money is going. And with all that going on, some US asset managers – many of them facing legal challenges – have turned their backs on climate targets and have withdrawn from international climate initiatives, such as the Net Zero Asset Managers and the Climate Action 100+ initiatives.

Meanwhile, across the Atlantic, it’s mostly business as usual in Europe – a region that’s long been at the forefront of global efforts to promote sustainable investing. Just six months ago, regulators started applying the European Union’s (EU) new “green bonds” rules, which aim to clarify what qualifies for the label as a way of protecting investors from exaggerated environmental claims, or “greenwashing”.

But even in the EU, it hasn’t all been smooth, sustainable sailing. In an attempt to boost economic competitiveness, Europe recently signed a big “omnibus” package that rolls back some flagship sustainable investment policies. And that just highlights how tricky it is to push forward in a space where “doing good” and “doing well” are often at odds.

What role are the big-money investors playing in all this?

It hasn’t always been obvious, but institutional investors have continued to demand sustainable investing strategies, and that’s been an important, stable driver.

Earlier this year, 27 asset owners – representing British, European, Australian, and US investors – signed the “Asset Owner Statement on Climate Stewardship” to reinforce their support for sustainability principles and to spell out what they expect from fund managers. They’ve been fueling a rising demand for tailored investment solutions, too. While these are predominantly focused on investors who want to meet their climate targets, there is also interest in deploying strategies to protect natural environments in certain bespoke areas. Lots of global firms – including Aberdeen Group – have seen sustainable assets under management grow in the past few years, thanks largely to those areas.

What’s more, there have been cases in which asset owners have punished fund managers for turning their backs on sustainability goals. To cite two major examples, the UK’s People’s Pension and Denmark’s Akademiker Pension pulled mandates from a US fund manager over climate stewardship.

What’s the big takeaway?

Recent headlines have painted a grim picture for sustainable investing. (I’ve seen a few with eyebrow-raising phrases like “sustainability in crisis”.) And maybe it’s fair to say the honeymoon’s over for sustainability and investing, but that doesn’t mean the marriage itself is doomed.

There’s no question that a hostile political environment in the US has made it more difficult for American fund managers to follow sustainable investment principles. That being said, the demand for sustainability strategies is still strong – especially from institutional investors who remain committed to achieving sustainability targets and finding investment solutions.

And, let’s be honest, once you strip away the marketing hype, sustainable investing has always been fundamentally about financially material matters. And those things continue to be important regardless of the political whims of the day. That’s why asset owners, as long-term investors, have held their ground. And that’s why there are opportunities for those who can navigate this complex landscape.

Sustainable investment isn’t a thing of the past – it’s reforming and evolving to meet the demands of a changing world. Look at it this way: it took over 100 years to secure an agreement on globally accepted accounting principles. The investing world is trying to achieve the same thing with less time and as the planet gets hotter. It’s no wonder there have been a few bumps in the road.