ESG investing under Trump: As companies scale back ESG initiatives have anti-woke crusaders won, or is there still a future?

Is there a future for ESG investing under Trump? And if so, does it still appear as lucrative? Let’s take a look at these questions.

Recap of what ESG is

Environmental, Social, and Governance (ESG) is a framework used to evaluate a company’s impact on the world beyond its financial performance. ESG criteria help investors assess the sustainability and ethical impact of their investments.

Environmental Evaluates how a company contributes to and addresses environmental issues such as climate change, biodiversity, pollution and waste.

Social involves how a company engages with its stakeholders through metrics like employee working conditions, employee relations, fair labour practices, the absence of child-labour and forced labour in a company’s operations and supply chain, social development initiatives, as well as diversity, equity, and inclusion.

And Governance involves looking at how a company is governed. To measure a company’s performance look at metrics including a company’s compliance with laws and regulation, how executive pay is structured and aligned with the company’s performance and long-term goals, the rights and treatment of shareholders as well as the diversity, independence, and expertise of the company’s board of directors.

The rise of ESG

ESG has become popular in the last decade or so for several issues. There have always been environmentally-conscious investors, but now we have seen companies develop ESG frameworks and consider some of them just as important as financial metric. After all, some metrics can indicate that there could be problems for profitability in the future. For instance, if a company has high carbon emissions, it may face carbon taxes in the future. If it is poorly governed at the board level, this can (and does) flow down to the lower echelons of the company.

Younger generations, particularly millennials, are more conscious of social and environmental issues. They are more likely to invest in companies that align with their values, driving the demand for these kinds of investments. As they inherit Baby Boomers’ wealth, they will become more and more influential. Additionally, large institutional investors, such as pension funds and insurance companies, are increasingly incorporating ESG criteria into their investment strategies to meet the expectations of their stakeholders.

There are many ways to measure the rise of ESG. Bloomberg has forecasted US$40tn in financial asset will be ESG by 2030, 25% higher than 2022 levels. Or look at Australian Ethical (ASX:AEF) which has seen FUM quadruple from $3bn to over $12bn in the past 5 years.

The (fall) of ESG?

But…has Trump’s win put this all under threat?

Since the pandemic, there was an explicit backlash against ‘politically correct’ or ‘woke’ views and a perception that many companies embracing ESG were doing so at the direct expense of serving customers. Many right wing activists would point to the example of Bud Light and how it alienated its customer base of conservative males by using a transgender influencer.

Conversely, many progressives would point to how many companies are striving for Net Zero (if not already) and that this is better for the planet while having no impact on the bottom line. They would also say that whatever hurt happens to certain customers by identity politics would be outdone by the company being seen as a good place to work and potentially winning over customers who otherwise wouldn’t have considered their product.

As Trump’s election campaign gained more and more momentum, some companies famously pulled back on initiatives including Harley-Davidson, Ford and Molson Coors. Australia has not seen this – at least not yet. In fact analysis by Jarden post-FY24 reporting season found a 13% increase in ESG mentions over the last year on earnings calls including a 24% increase specifically about climate exposure.

ESG investing under Trump: What will happen

No doubt we’ll see some more companies pull back from certain ESG initiatives. But initiatives we will not see any backtracking from is climate change and energy efficiency, because the concerns are real and legitimate – and there is a good dollar to be made out of energy efficiency.

Besides, many companies have invested too much money in it to backtrack now. Oh, and did we mention that companies with over $500m will from this financial year be required to report climate targets? And over the next 3 years, companies with revenue over $50m will need to follow suit? Sorry to climate skeptics, but it seems those initiatives at least are here to stay.

We would also say that looking more generally at ESG, we expect less of a backtracking in Australia compared to the US. After all, Australia is a smaller economy, and the political environment is not as ideologically divided as Australia’s.

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