Donald Trump’s emerged as the Republican front runner in the US election and the scars on Environmental, Social and Governance (ESG) investing from his last stint in office have some investors concerned.
What is ESG investing?
ESG is an investment approach where investors consider Environmental, Social and Governance factors as part of their wider research. These are things like whether the company effectively manages its carbon emissions, how well it treats its customers, staff, and suppliers, and if senior managers are incentivised appropriately.
Thinking about ESG factors can help investors identify non-financial risks and opportunities. And integrating ESG and sustainability can pay off. In fact just last year, sustainable funds outperformed peers across asset classes. Past performance isn’t a guide to the future.
Why are some investors worried about Trump?
One area of concern is how opposed Trump is to ESG principles in workplace retirement plans. In fact, his final months as president involved actively trying to stop them being considered. This rocked the confidence of investors globally in integrating ESG factors.
Trump's strong pro-fossil fuel stance is another big concern. He famously pulled out of the Paris Agreement and implemented policies favouring traditional energy sources. So, winning re-election could mean keeping to the status quo, or even pausing regulation efforts of fossil fuel investments.
This could be very damaging to the net-zero transition because fossil fuels – coal, oil, and gas – are by far the biggest contributors to climate change. It’s nearly 90% of all carbon dioxide emissions. Trump’s climate science denial has propped up his pledge to “drill, baby, drill”.
What does the climate agenda mean for Trump?
Trump is sceptical of the climate change agenda altogether, seeing it as a burden on Americans.
By disconnecting the cost to consumers and the socioeconomic and environmental benefits of climate action, voters now think they have to pick a side. But it’s clear accelerating net zero won’t just create jobs, but also attract business investment.
Senior members of Trump’s campaign team are reportedly planning big changes to the Inflation Reduction Act – the most significant climate legislation in US history. There are even rumours he plans to roll back regulations in areas like electric vehicles.
What does this mean for investors?
We need to be accelerating investment in low-carbon solutions to meet decarbonisation targets. And transportation is key, accounting for almost a third of US emissions. Policy uncertainty will just undermine overall investor confidence.
The election result, and Trump’s policies are still big unknowns, but what isn’t is that the political landscape around ESG is set to intensify in 2024.
And with ongoing legal battles and greenwashing litigation, it’s making it a complicated picture for some investors.
However, the risks and opportunities are still there. And people investing for the long term should make sure their portfolios reflect those constants and not what might just be temporary.
This isn’t personal advice. Remember, all investments and any income they produce can fall as well as rise in value – you could get back less than you invest. If you’re not sure an investment is right for you, ask for financial advice.
Article image credit: Mark Wilson/Getty images.