ESG investing appears to have hit a major roadblock.
Donald Trump’s return to the White House has set off a fierce backlash against the use of environmental, social and governance (ESG) principles in investment.
In the US, a growing number of large financial institutions including BlackRock, Fidelity and JP Morgan are paring back their climate and social commitments.
Many American investors have also voted with their wallets, pulling some USD4.3 billion from ESG-labelled funds in the final three months of 2024, double the amount seen the previous quarter. Outside the US, the picture is hardly more encouraging. Investment flows into ESG labelled funds worldwide have fallen to their lowest since 2018.
Yet for all this, there are reasons to welcome the ESG shakeout.
Even before the political storm, ESG was hardly an unalloyed success. There have been high-profile cases of some companies and funds using ESG labels to make exaggerated claims about their environmental credentials. Such behaviour was so rife it gave birth to a new term: greenwashing.
ESG ratings systems are not without their shortcomings. The typical scoring frameworks can be confusing and sometimes contradictory. They usually highlight risks to a company’s revenue growth or future profitability but are not designed to capture a company’s true impact on the environment and society.
What’s more, ESG ratings gave the false impression that investors can contribute to sustainability by simply excluding or getting rid of low-rated stocks. Research shows that this approach has failed to change the behaviour of companies with poor practices or to improve investors’ financial performance.
So even if ESG is suffering a serious setback, its troubles present the investment industry with an opportunity to recast sustainability on a more solid foundation. With a more thoughtful and intentional approach, the re-appraisal could well lead to the more judicious deployment of capital.
Investment credentials
What shouldn’t get lost in the debate about whether to keep or retire ESG, are the investment credentials of the environmental products industry. They remain strong.
Take the energy transition. Spending on low-carbon transition hit a record USD2 trillion last year.[5] The amount is almost twice as much as spending on coal, oil and gas.
Importantly, most of that capital flowed to cleantech that is proven and commercially viable. What is more, with renewables often cheaper than fossil fuels,[6] utilities, governments and companies across all sectors have every reason to ramp up their investment in clean-energy projects.
And even if the US is rowing back on climate investment, Europe and China are redoubling efforts to develop cleaner and sustainable sources of energy.
In March 2025, the UK and China agreed to work closely on climate and clean energy after nearly eight years of hiatus. The EU and China have pledged to invest nearly USD800 billion in clean tech by 2030.
A study by the London Stock Exchange Group (LSEG) shows market capitalisation of the global green economy — made up of companies developing products and services with environmental benefits– hit a record USD8 trillion in 2024, becoming the fastest growing sector after technology.[7] What’s more, green equities have beaten the benchmark FTSE Global All Cap Index by 70% in all five-year periods.
Beyond ESG ratings
One positive to emerge from an ESG rethink is a lessening of the influence ESG company ratings have on investment decisions.
Used as one of the inputs, these scores represent one of the building blocks in the construction of truly sustainable portfolios. Yet they have serious shortcomings that investment managers can only address using their own models and fundamental analysis.
Alternative tools to ratings, such as science-based frameworks like Planetary Boundaries and Life Cycle Assessment can be deployed to better capture environmental credentials.
Value creation through engagement
But sustainable investment isn’t only about directing capital to companies that are already green. Investors can also have a positive impact on those which are still in the early stage of transformation by taking a more active approach.
Active engagement is effective in bringing about meaningful and positive corporate transformations and can also lead to improved financial returns. Specifically, investors can, for example, encourage the investee companies to reduce their carbon footprint by setting science-based targets and linking executive compensation to progress and improve their corporate governance practices. Where relevant, they can use proxy voting to reinforce their engagement activity, either by supporting shareholder resolutions or by voting against management when progress is not sufficient.
This approach helps investors identify future material risks that may not show up in a company’s quarterly results. It also highlights opportunities among those that show a true commitment to address sustainability challenges.
Sustainable investing’s journey to the mainstream adoption has not been smooth sailing. But the scrutiny ESG is now attracting in the US and elsewhere has a silver lining. As sustainable investing matures and corrects its course, it is sure to become even more embedded in portfolios among asset owners and long-term investors.
Gertjan van der Geer is Senior Investment Manager in the Thematic Solutions Team at Pictet Asset Management
