ESG isn’t going anywhere – despite the political noise

Just months into the new US administration, the global discourse around environmental, social and governance (ESG) investing has shifted markedly.

US President Donald Trump has emboldened an anti-ESG movement that has prompted major financial institutions to scale back their commitments to climate-focused alliances. But the deeper question is: how much of the shifting ESG stance is driven by ideological battles rather than investment fundamentals?

Asset managers have cited the complex and evolving regulatory landscape as a key factor in scaling back their participation in global climate-focused initiatives. US politicians argue that ESG-focused investments conflicted with fiduciary duty, even though research consistently shows that ESG-aligned portfolios remain competitive, and demonstrate resilience in volatile markets.

The MSCI’s 2024 ESG Ratings in Global Equity Markets report bears this out.

“Companies with higher MSCI ESG ratings outperformed their lower-rated counterparts across both the MSCI [large- and mid-cap index in developed countries] and the MSCI world index over the study periods of 11 and 17 years, respectively,” it said.

This outperformance was attributed to superior earnings growth and higher dividend yields, rather than valuation effects. This indicates that robust ESG practices contribute to fundamental financial strength. The MSCI ESG ratings methodology evaluates companies based on their exposure to and management of financially-material ESG risks, linking ESG performance to long-term earnings stability and resilience.

Another 2024 study by Morningstar Sustainalytics and Natixis Investment Managers Solutions analysed portfolios with varying ESG risk ratings. It found that those with lower ESG risk not only achieved superior raw and risk-adjusted returns but also demonstrated enhanced resilience during crises. Stress tests on these portfolios during events such as the 2007-2009 subprime crisis revealed that portfolios with low ESG risk consistently outperformed their high ESG risk counterparts.

In Europe, low ESG risk portfolios have been the most consistent outperformers since January 2015, with a daily year-over-year expansion for nearly five years. In North America, significant outperformance for low ESG risk portfolios occurred during market declines in 2015. In the Asia-Pacific region, a strong ESG risk premium in 2015 allowed for compounding returns in subsequent years, suggesting that minimising ESG risk can provide downside protection.

Sanlam’s 2024 ESG Barometer report found that “50% of Kenyan and 38% of South African companies expect returns from ESG investments in line with their cost of capital”. This underscores the view that ESG integration enhances financial resilience, particularly in emerging markets.

For asset managers, while instability may arise in the US market, the long-term trajectory of ESG investment remains strong. In 2022, global ESG assets surpassed $30-trillion and are set to exceed $40-trillion by 2030 – more than 25% of the expected $140-trillion in total assets under management. Amid the growing frequency of climate-related disasters, shifting consumer preferences, and increasing regulatory expectations, sustainability remains central.

But despite political pushback in the US, global markets are taking a different approach. Europe remains committed, reinforced by regulations such as the Corporate Sustainability Reporting Directive and the Sustainable Finance Disclosure Regulation – rules designed to ensure ESG integration is not merely a voluntary commitment but a structural necessity in that region.

In South Africa, regulatory developments continue to shape corporate sustainability practices. The Climate Change Act, signed in 2024, mandates carbon budgets and sector-wide climate adaptation and mitigation plans. Similarly, the Companies Amendment Act, which has yet to be fully implemented, strengthens governance requirements, enhancing transparency around executive remuneration and social and ethics committee reporting. And the JSE’s Sustainability and Climate Disclosure Guidance provides listed companies with a structured approach to ESG reporting.

Doubling down

As counterintuitive as it might seem, the political landscape in the US actually presents a unique opportunity for asset managers to lead by example, and reinforce their ESG commitments.

Two principles remain unchallenged: first, climate change is an undeniable economic risk; and, second, governance failures impact shareholder value. This is the time for asset managers to double down on their sustainability strategies, recognising that long-term financial success is intrinsically linked to environmental and social resilience.

One way to do this is to engage to a greater degree with investee companies. Asset managers have a fiduciary duty to push for improved ESG disclosure standards and ensure that corporate sustainability translates into measurable outcomes. By holding companies accountable, investors can drive meaningful change, rather than allowing political rhetoric to derail progress.

ESG integration has to go beyond compliance and public relations; asset managers should leverage data to identify ESG risks and opportunities more effectively. For instance, the use of climate modelling and enhanced ESG data analytics will be crucial in identifying not only sustainable investments that generate long-term returns, but also in ensuring that capital is allocated towards initiatives that drive real-world positive change.

Now, more than ever, investment decisions must be anchored in objectivity, transparency and financial fundamentals over political agendas built on misinformation. While the forces fighting ESG may be loud, they don’t change the reality that long-term sustainability and financial success are intrinsically linked.

Asset managers who remain steadfast in their ESG commitments will not only do better in mitigating risks, they’ll position themselves to capitalise on emerging opportunities. The transition to a more sustainable economy is inevitable.

Ayabulela Quzu is an ESG and impact analyst at Sanlam Investments.

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