By Simon Jessop
LONDON (Reuters) – A turbulent year for sustainable finance is set to continue into 2025 as Donald Trump’s return as U.S. president heralds more regional differences over everything from money flows to lawsuits and market regulation.
Despite record high temperatures and more extreme weather events across the planet last year, governments’ policy response remains too slow to achieve the world’s nearly decade-old goal of limiting global warming.
While regulators around the world are gradually tightening rules on the financial sector and companies in the real economy in an effort to accelerate the reduction of climate-damaging carbon emissions, the pace of change has been uneven, with the US already lagging behind Europe.
A strong US political backlash against environmental, social and governance (ESG) policies under Trump means the gap could widen even if, in many cases, the economy, companies’ promises to cut emissions in the near term pressing and rising costs of climate events keep the broad direction unchanged.
“We expect to see resilience for sustainable investments globally by 2025, although it is likely that fundamental differences will remain between US and European approaches,” said Tom Willman, Regulatory Lead at sustainability technology company Clarity AI.
“In the US, we can expect a more conservative approach, with investors prioritizing long-term risk-adjusted returns to avoid potential political or reputational risks.”
While just over half of U.S. executives expect new or expanded sustainability regulations this year, that figure is 60% in Britain and 80% in Singapore, according to a Workiva (NYSE:) survey of 1,600 executives in December.
American political realities have already prompted some American companies to limit their climate and diversity efforts to avoid censorship. In the latest sign that companies are changing course, the largest U.S. banks recently left an industry coalition aimed at cutting emissions.
Legal pressure is also being put on the world’s climate efforts. One in five climate disputes were not in line with policies to reduce emissions, an analysis last year by the Grantham Research Institute on Climate Change and the Environment found. The majority of these were in the United States.
The regional divide was evident in sustainable investing in the year to the end of September, with US funds seeing clients withdraw a total of $15.9 billion, while European funds took in $37.3 billion, data from sector tracker Morningstar shows.
The number of new ESG-focused funds launched in the United States, meanwhile, fell to just 7, compared to 189 in Europe.
Around the world, more sustainable funds closed than first launched, hit by the US backlash, increasingly strict European Union rules aimed at forcing funds to prove their sustainability credentials and market consolidation.
Demand for sustainable funds lagged the broader market in part due to mixed performance, concerns over whether some funds were as green as they claimed to be, uncertainty over regulation and the ESG response, said Hortense Bioy, head of sustainable investing Research at Morningstar Sustainalytics.
Despite an uncertain outlook given the potential for Trump to weaken some ESG initiatives, for example government support for electric vehicles, many of the underlying market drivers of demand for sustainable finance, such as the need for green energy, remained in place, she added.
Charles French, co-chief investment officer at Impax Asset Management, said that despite Trump’s negative views on climate change – he calls it a hoax – companies in sectors such as healthcare and manufacturing were looking to climate technology solutions to reduce costs.
“The era of technology-inspired transformation is not yet over. In many areas it is just beginning,” he said.
The amount of money raised through sustainable bonds also continued to rise in America, by 16.9%, and in Europe, by 10.7%, in 2024, LSEG data shows.
Given the competitive pressures, Leon Kamhi, head of responsibility at asset manager Federated Hermes (NYSE:), said he expected investors to “mature” and focus on the effects being achieved in the real economy.
“For the transition to be successful, it is essential that such investments deliver economic returns for both companies and investors.”
