Tough times ahead for US sustainable investors

With Donald Trump’s return to the White House, anti-sustainability sentiment is set to intensify at the federal level, forcing investors to navigate an increasingly polarised landscape

Sustainable investors based in the US face a bumpy road ahead for the next four years, as anti-environmental, social and governance sentiment re-enters the White House in the form of Donald Trump and his team.

President-elect Trump has long been disdainful towards ESG, insisting he will ban the “insidious” investment practice he brands “radical left garbage”. Project 2025 — which has been broadly accepted as a blueprint for Trump’s presidency — mentions the term 32 times, with detailed suggestions of ways to block investors from considering ESG factors in investment decisions.

“The safe bet is that the anti-ESG fervour that was displayed in red states is likely to make its way into the Trump administration, significantly at the Department of Justice,” former Washington, DC attorney-general Karl Racine told Sustainable Views the day after the 2024 election.

But while some investors have already retreated from ESG initiatives, and some likely to, others are holding firm.

“Policy is not the only driver of the energy transition, and the US is not the only market for companies across the space,” Schroders portfolio manager Alex Monk wrote in the days after the election. “While the shifting US policy landscape is undoubtedly unhelpful, it should not distract from the strength of other forces encouraging investment in the space.”

Anti-ESG goes federal

Like Racine, Bryan McGannon, managing director of the non-profit US Sustainable Investment Forum, believes anti-ESG sentiment will move beyond red state level and into the federal government.

“Until now there’s been a lot of noise in the system, as opposed to actually punishing sustainable finance,” he tells Sustainable Views. “But now that [Republicans] have all three levers of power, they have a pathway — whether it’s through legislation or appointing new heads of agencies to rewrite rules.”

One near-guaranteed shift is an amendment to the ERISA investment duty rule, which currently states that retirement fund fiduciaries can consider ESG factors in investment decisions. Trump is highly likely to amend this to say that they can no longer include these considerations.

However, according to lawyers writing in 2022, the state of this rule has “ping-ponged” between administrations for at least the past 30 years, and its actual impact is “quite small” compared with other possible rule changes.

State-level divide continues

Lawmakers in heavily Democrat-leaning California have long gone against the grain of the federal government on environmental and climate policy. In October 2023, the state passed the country’s first mandatory climate disclosure rule, which will catch an estimated 10,000 companies across the US in its scope.

Michael Littenberg, head of ESG at law firm Ropes & Gray in New York, tells Sustainable Views he expects most state-level bills already in place — both pro and anti-ESG — to remain. “Once a law is on the books, it’s very hard to get rid of. People just tend to move on to the next thing,” he says.

However, Littenberg expects pushback against these state-level rules from the administration and Republican attorneys-general. Business groups have already sued California for its disclosure rule and the case is still ongoing. And in early December, state agency the California Air Resources Board said it would not bring enforcement action against companies that fail to submit full reports in its first year of operation, which is unrelated to the lawsuit but “probably stems from a combination of pragmatism and politics”, he adds.

Littenberg also expects to see red states introducing Florida-style bills that limit financial institutions’ ability to restrict financing to controversial businesses such as gun manufacturers. He also predicts the backlash against diversity, equity and inclusion initiatives will ramp up, either via legislation or litigation. The conservative-led resistance has already seen many big companies, including Walmart and Ford, rowing back on their DEI policies.

“This is an area that resonates with voters and other stakeholders, and a lot of red state politicians perceive it as ripe for their attention,” says Littenberg. “That will provoke a reaction from blue states, but I think it will be more muted than what we saw from red states [during Joe Biden’s term].”

New York, Illinois and Washington State all have their own climate disclosure rules in the works. McGannon at US SIF expects these three, along with California, to continue initiatives that aid sustainable investors, such as protecting shareholder rights and proxy voting rules, which he expects to be restricted at a federal level.

Limiting shareholder rights

“The anti-ESG crowd is attempting to curtail the ability of investors to put questions forward, whether it is raising the level of ownership required, or outright saying you cannot ask on certain topics,” McGannon explains. It would take an act of legislation to fully outlaw — “which is a slog of a process” — but it is possible, he adds.

Indeed, several bills that would limit shareholder rights are working their way through the Senate. In September, the House of Representatives passed a package of bills that would give companies more power to reject ESG-related shareholder proposals and limit the Securities and Exchange Commission’s ability to mandate non-financial disclosures.

Another provision forces the SEC to consider the impact of the EU’s climate reporting and supply chain due diligence rules on US companies. Speakers at an event in Brussels in December said US lawmakers were already aware of the Corporate Sustainability Due Diligence Directive, which will catch many non-EU companies within its scope, even if they do not have subsidiaries or branches in the EU.

Ropes & Gray’s Littenberg also expects to see greater backing, at both state and federal level, for anti-Chinese trade policies and rules around child labour, which he says are broadly bipartisan. 

Ultimately, while ESG issues are important to many companies and investors, there is plenty more going on, he says. “In the broader macro environment, people are thinking about tax, tariffs, foreign policy, cultural issues, and frankly for most businesses, those areas present much greater potential for adverse economic consequences [than ESG rules].”

Added to which, the political polarisation of ESG investing is nothing new. “It was messy even when it was mostly pro-ESG, before the pendulum started to swing back in the other direction,” adds Littenberg. “It’s going to continue to be messy.”