Aberdeen: Not the end of sustainable investing despite political retreat, here's why

Since Trump's election in the first half of the year, sustainable investing has gone through a critical moment, marking a deep rift between the United States and Europe. Dan Grandage, Chief Sustainable Investment Officer at Aberdeen Investments, in this analysis for ESGnews, highlights how and why, despite the American political retreat compromising the climate and social commitments of some financial players and ongoing regulatory overhauls in Europe, interest in sustainability remains strong. Even when it requires different approaches than in the past, institutional investors are increasingly demanding strategies that address concrete climate and environmental objectives, transcending trends and rhetoric, for example. On the other hand, "sustainable investing has always been fundamentally focused on financial and pragmatic issues. These issues remain crucial regardless of the political whims of the moment."

Are we at the end of the road for sustainability? Let's look at the transatlantic divide and the evolution of strategies in light of the political backlash. How will the asset management industry react?

Investors who have set interim climate targets for 2030 have less than five years to achieve them. However, even as the frequency and severity of extreme weather events have increased, many investors have faced a sharp political backlash against climate change and sustainable investing.

These developments have accelerated in recent months in the face of a drastically changed political environment in the United States, leading major asset managers and US companies to abandon climate commitments and backtrack on diversity, equity, and inclusion (DEI) issues.

Yet, beyond the news, we see a more nuanced evolution in the world of sustainable investing, where demand for sustainability-focused strategies remains strong. Driving this trend are institutional investors who demand tailored solutions to achieve specific objectives and are backing up their words with action.

The United States and Europe are moving in opposite directions. Political pressure has led to a retreat from sustainable investing in the United States, while Europe remains largely engaged.

President Donald Trump intends to dismantle the measures adopted by the previous US administration to promote sustainability and wants to increase coal, oil, and gas exploration on federal land, and recent executive orders demonstrate his intentions. He has weakened the Environmental Protection Agency and withdrawn the United States from the Paris Climate Agreement.

Some U.S. asset managers, facing legal challenges, have turned their backs on climate goals and withdrawn from international climate initiatives, such as Net Zero Asset Managers and Climate Action 100+.

But across the Atlantic, climate commitments have remained largely unchanged, as the region has long been at the forefront of international efforts to promote the transition and sustainable investment.

Last December, authorities began implementing the European Union (EU) Green Bond Regulation. These rules aim to clarify the eligibility criteria for what the EU considers "green bonds." The goal is to protect investors from the risks of greenwashing.

Even in the EU, things aren't all rosy. In an effort to increase competitiveness, Europe's Omnibus package reduces key sustainable investment policies, including the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive, as well as proposing to dilute the Sustainable Finance Disclosure Regulation that applies to the region.

This divergence in philosophy, combined with pressure to weaken existing measures, complicates global operations for asset managers and investors. In short, a one-size-fits-all approach is no longer possible.

That said, many institutional investors continue to demand sustainable investment strategies. This isn't always obvious, but it's a fundamental component of the current investment landscape.

In February, a group of 27 investors, primarily from the United Kingdom, but also from Europe, Australia, and the United States, signed the Asset Owner Statement on Climate Stewardship to strengthen their support for sustainability principles and clarify what they expect from fund managers.

Demand for tailored investment solutions is growing. While these primarily focus on investors seeking to achieve their climate goals, there is also interest in strategies that protect the environment through tailored, or segregated, mandates.

Our assets under management that we classify as sustainable investments reached £87 billion ($112.4 billion) at the end of 2024, up from £55 billion the previous year. This increase was largely attributed to segregated sustainable investment mandates.

We're also seeing cases where asset managers who stray from sustainability goals are penalized by investors. For example, both the People's Pension in the United Kingdom and the Akademiker Pension in Denmark withdrew their mandates from a US manager following disagreements over their handling of climate issues.

Companies adopt DEI (Diversity, Equity, and Inclusion) policies for reasons such as employee well-being, legal compliance, and enhancing brand identity. But critics equate DEI with prioritizing image over skills.

Many US companies have watered down or eliminated their DEI policies in response to Trump's executive order on diversity and inclusion issues and to avoid controversy. Quotas and targeted action programs for DEI have come under particular scrutiny. Opponents claim they are discriminatory and that employees hired through these criteria are not chosen based on merit. For example, some companies have eliminated gender quotas on boards of directors.

The response from asset managers has been mixed, given the growing number of DEI cases brought to court. While some have remained silent on the issue, other fund managers continue to engage with companies and deepen long-term relationships to promote improvements in this area.

The changes companies are making in DEI, responding to new pressures and expectations, are another aspect of the evolving nature of sustainable investing in an increasingly complex world.

Many recent headlines have painted a bleak picture for sustainable investing, with phrases like "the sustainability crisis." There's no doubt that the golden age of sustainable investing is over. However, a closer look reveals a more nuanced investment story.

A hostile political environment in the United States makes it more difficult to follow the principles of sustainable investing. Despite this, demand for sustainability-focused strategies remains strong, especially from institutional investors who remain committed to achieving sustainability goals and require customized investment solutions.

Despite the hype, sustainable investing has always been fundamentally focused on financial and pragmatic issues. These issues remain crucial regardless of the political whims of the moment.

That's why long-term investors remain committed. That's why opportunities exist for investors who can navigate today's complex landscape.

Sustainable investing isn't dead, but it's reforming and evolving to meet the needs of an ever-changing world. It took over 100 years to reach agreement on globally accepted accounting principles. We're trying to achieve the same result more quickly, while the world gets warmer every year.

It's no surprise that there are some bumps in the road.