It would be hard to say that 2024 is ending on a high note for sustainability and ESG.
Where there was once a feeling of optimism, driven by climate change agreements and pledges, sources now say pessimism has become pervasive in the sector.
The shift gaining the most headlines is the imminent return of Donald Trump to the White House. Sources said this political reversal from a Biden administration looks likely to see a return of climate skepticism, with the U.S. having pulled out of the Paris Agreement during Trump’s first term.
Outright anti-ESG policies enacted in Republican-governed states such as Texas and South Carolina may well become federal policy during the next administration as well, with Biden using his presidential veto to preserve a newly enacted ESG regulation in 2023, sources said.
“Obviously, there is this continuous politicization of the ESG topic, particularly in the U.S.," said Eugenia Unanyants-Jackson, global head of ESG at PGIM, which had approximately $1.3 trillion in AUM as of Sep. 30. "There is also growing alarm from investors who really are worried and want to address systemic issues such as climate change.”
On the world stage, the COP29 climate conference hosted in Baku, Azerbaijan, proved disappointing for many. Ultimately, attending countries agreed to supply $300 billion a year in climate mitigation payments to developing countries, well shy of the $1.3 trillion requested by international organizations such as the Small Islands Developing States. This amount was described as “not nearly enough” at COP29 by Tina Stege, climate envoy for the Marshall Islands, a SIDS member state, who made headlines during the conference by at one point walking out in the middle of negotiations.
A growing sense of apathy and even outright hostility toward climate considerations in the world of policy is also starting to affect how some industry players are approaching investment.
“I was at the (October) U.N. Principles for Responsible Investment event in Toronto and sat on a panel on stability and alpha, which received a huge amount of attention," said Laura Nishikawa, global head of ESG research at financial data firm MSCI. “There was a period of time in around 2021 where those who are really deep in the ESG space thought, 'it’s done, we’ve proved the financial materiality of this investing, wow let's go change the world.' I think we're back to thinking there's still a lot more to prove. There's still a lot more to understand.”
Climate outflows
Morningstar data showed net outflows from climate funds in the first nine months of 2024, with the funds shedding approximately $24 billion. By comparison, there were net inflows in these funds of $40 billion during the first nine months of 2023.
“There have been headwinds (against these funds) in the macro environment with rising interest rates, and there's also greenwashing accusations that have contributed to reduced investor trust in these strategies,” said Hortense Bioy, global head of sustainability research at Morningstar Sustainalytics.
Sustainability-linked bond issuances have also fallen sharply this year, according to Bloomberg data. As of Dec. 11, companies and government bodies had raised $37.6 billion via SLBs, 46% lower than in all of 2023.
Sticking to ESG?
Nevertheless, sources still had hope for climate and ESG-conscious investing among asset owners in the sustainability space, particularly on the European side.
For Patrick O’Hara, director of responsible investment and engagement at LGPS Central, Wolverhampton, England, which had £30 billion in assets as of Dec. 1, all of the outside influences of the past 12 months are no excuse to stop focusing on internal climate targets.
“We remain committed to our net-zero strategy and pushing it forward through voting and engagement. Ultimately, we don't want to just decarbonize our portfolio and see our portfolio looking better from a Scope 1 (direct emissions) or Scope 2 (indirect emissions) perspective. We really want to see a real-world decarbonization,” he said.
In October, LGPS Central became a signatory to a blueprint developed by IFM Investors, which highlighted the need for pension funds to work within the right policy framework to prioritize the interests of participants while contributing to the U.K.’s clean energy future.
Also signatories to the letter were the Universities Superannuation Scheme, London, which had £78 billion in assets as of March 31. Since 2021, USS has had a £500 million sustainable growth portfolio, which has made investments included in electric-powered aircraft and carbon capture and storage technology.
“For us the transition to a low-carbon world is a fundamental investment issue and it’s therefore business as usual as part of the day job," said Sandra Carlisle, head of responsible investment. "We integrate financially material ESG factors into our investment decisions and engage with the companies we invest in to encourage positive change.”
Some observers in the sustainability space are however seeing a divergence developing within institutional investment, between those pension funds taking the broader approach to ESG as seen with LGPS Central and USS, and others not.
“There's bifurcation in the (investment) community,” said Robert Sawbridge, head of responsible investment at Insight Investment, an asset manager with £665 billion in AUM as of Sep. 30.
“There are investors in certain jurisdictions that only want to understand risks that have a direct impact on a portfolio, and only over the time horizon of the investment itself. You’ve also got a different way of thinking in the community, which looks at sustainability holistically and the long-term profile of these businesses,” he said.
Governance
Surrounding the sustainability discussion is how best to address the governance of a firm a pension fund has invested in, either supporting or challenging ESG decisions that will impact the perceived long-term financial health of a company or investment.
Holding companies to account, particularly in the climate space, did take a hit in January when a decarbonization resolution at Exxon Mobil, filed by activist investors Follow This and Arjuna Capital, was met with a lawsuit from the oil and gas giant, pursued even after the resolution had been withdrawn.
Aeisha Mastagni, senior portfolio manager in the $346.5 billion California State Teachers' Retirement System, West Sacramento, also condemned the lawsuit, and the pension fund went on to vote against the appointment of two of Exxon Mobil's board members in May.
Beyond the actions of one oil and gas giant, asset owners remain keen to press firms on the need to maintain open and reliable governance structures.
Adam Gillett, senior investment manager and climate lead at Railpen, which runs the assets of the £34 billion Railways Pension Scheme, London, remains undeterred: “We see good governance as central to the creation of sustainable financial value,” he said.
“We are also witnessing a resurgence in investor activity and activism at companies to improve their corporate governance and protect important shareholder rights at a time when policymakers in the U.K., European Union and elsewhere are rolling back corporate governance standards in the search for post-COVID economic growth. Railpen believes these policy developments fail to recognize the extent to which robust shareholder protections lead to better and more sustainable value creation for companies and investors.”
In an update to its global voting policy for 2025, Railpen committed to vote against any move by a company to reincorporate in a domicile that it considers to have significantly fewer protections for shareholders, unless a “compelling rationale” is provided.
The policy also decried "moves to weaken shareholder rights in the U.K. and elsewhere," in part a reference to the introduction of dual-class listings on the London Stock Exchange, something Railpen Senior Investment Manager Caroline Escott has been vocally opposed to.
The sharper counter of the engagement approach taken by asset owners is an exclusion approach to firms that do not meet the ESG standards of an institutional investor, sources said. Some pension funds exclude broadly, such as Pensioenfonds Zorg en Welzijn, Zeist, Netherlands, selling its stakes in 310 oil and gas companies in February, while others take a more particular approach.
There can also be a less broad approach to exclusion, as explained by Sindhu Krishna, chief sustainable investment officer at Standard Life, Edinburgh, a pensions and insurance firm which runs a master trust with £10 billion in assets as of June 19.
“Broadly across the investment strategy, we have a very narrow exclusion policy," she said. "As we completely acknowledge that it's a blunt tool, and is only used in extreme scenarios where it doesn't meet our principles."
