Asset managers shy away from ESG label under Trump

The catch-all label ESG used in proving funds’ credentials is falling further out of favour as asset managers adapt in the second Trump era.

Global investors’ heightened feelings of uncertainty took centre stage this week with President Trump’s announcement of trade tariffs on China, Canada and Mexico sending markets on a downward slide, bouncing back when Trump’s rhetoric softened. With tariffs on Canada and Mexico only delayed a month, analysts are warning of the consequences of an economically damaging trade war between the US and its main trading partners.

“There's no doubt that Trump creates a type of headwind, and political change generally creates uncertainty, no matter who it is and where it is,” says Dean Hegarty, co-CEO of Responsible Investment Association Australasia.

Trump’s return to office is already helping to accelerate the dropping of ESG as a descriptor, with US-based asset managers changing the language they use, says Hegarty. Although the shift was already in motion with the introduction of tougher rules on disclosure requirements and anti-greenwashing measures in many overseas jurisdictions. 

“It's partly a maturing thing that was happening anyway,” says Hegarty.

“What we're going to see is it accelerate, and I think we're going to see people being forced to be clearer about what they're doing, why they're doing it.”

Time is up for ESG labelling so what next?

The challenge with the label ESG, says Hegarty, is that it is too broad now the world’s shifted into delivering on the action it has been promising.

“You’re not either ‘good at ESG’ or ‘not good at ESG’.’

“You might be amazing at environmental practices, but your social practices are terrible, or you might have the most revolutionary EV technology that is being taken up at scale and changing the way transport impacts the environment, but your governance is horrific.”

The policy changes underway are already doing away with the need for loose terminology, he says.

“We are talking about capital being invested in a way that supports sustainable outcomes, that takes into account the impact of climate, the impact of society and how well an organisation is being governed.”

“New Zealand's developing a sustainable finance strategy and Australia has done the same.

“Both will have taxonomies associated with them and that is how you reduce the risk of greenhushing by being really clear about what certain terms mean when you can use them, and  when you can't.

“That gives investors and investment managers the confidence to use those labels appropriately.”

Investing responsibly still the future despite headwinds

Language aside, just what the Trump administration’s impact on responsible investment strategies will be, if any, is uncertain, says RIAA’s Dean Hegarty, but it is unlikely to slow momentum with the real drivers behind investment decision-making unmoved by the personality in the Oval Office.

“We are talking about capital being invested in a way that supports sustainable outcomes, that takes into account the impact of climate, the impact of society and how well an organisation is being governed.

“These factors are going to impact the performance of those companies over the medium to long term, right?

“We are moving to a society that's going to be more reliant on renewable energy, that's going to be less reliant on fossil fuels, that's going to be more interested in healthcare, more interested in looking after the people who need help.

“And I think it makes sense then that the investment opportunities and the opportunity for advisors to invest in clients’ long-term interests are only going to continue to grow.”