Shifting Trends in Sustainable Investing
As the political landscape evolves and substantial funds exit ESG initiatives, the realm of sustainable investing is encountering a critical juncture. After a phase of rapid growth, investment strategies emphasizing environmental, social, and governance (ESG) principles are experiencing notable withdrawals. Political opposition, regulatory ambiguity, and a sense of investor fatigue are prompting a reevaluation of these strategies. In early 2025, a record $8.6 billion was withdrawn from sustainable funds globally, as reported by Morningstar. The trend of outflows persisted in the U.S. for the tenth consecutive quarter, while Europe experienced its first net redemptions, despite controlling 84% of worldwide ESG assets.
Resilience Amid Outflows
Even with these outflows, the total global ESG assets have seen an increase of 8% year-on-year, reaching $3.2 trillion, which is more than quadruple their level in 2018. This growth underscores the ongoing integration of ESG principles into mainstream investing. The PWM Global Asset Tracker survey presents a nuanced perspective: only 18% of private bank chief investment officers (CIOs) anticipate growth in ESG inflows for 2025, while one-third predict further declines. However, a longer-term outlook remains cautiously optimistic.
Political Pressures and Sustainable Strategies
According to Christopher Greenwald, the head of sustainable investing at LGT Private Banking in Zurich, the recent withdrawals of prominent U.S. asset managers from climate partnerships are more a response to political pressures than a retreat from sustainable investment practices. He argues that there hasn’t been a fundamental change in how leading firms manage investments. Institutions like BlackRock and JP Morgan Asset Management, along with major U.S. banks, exited climate initiatives amid scrutiny during President Donald Trump’s second term, driven by concerns over potential congressional backlash rather than a change in emissions strategies.
Commitment to Authenticity
While some pension funds have shifted their capital allocation due to ESG considerations, indicating a commitment to sustainability, Greenwald observes no widespread withdrawal among affluent families or family offices. Instead, there is a continued emphasis on avoiding greenwashing, with a demand for genuine managers who can substantiate their commitments with tangible actions. He notes, “This environment is actually fostering more rigorous mandates.”
Beyond Labels: A Holistic Approach
For LGT, the concept of ESG investing has transcended mere labeling. The firm’s SFr21 billion ($26 billion) Princely Portfolio, co-invested with the Liechtenstein royal family, has been aligned with the Paris Agreement since 2021, emphasizing ESG screening and decarbonization across diverse markets. Greenwald states, “This is about managing risk and identifying opportunities, not about completely flipping portfolios.” This holistic strategy extends across all funds, utilizing LGT’s proprietary Navigator tool to perform internal ESG analyses on over 11,000 companies.
Rethinking ESG: A Call for Stability
Greenwald contends that the term ESG has become distorted, particularly in the U.S., and advocates for fiduciary duty as a more solid foundation for investment practices. Recent research from MSCI supports this notion, treating ESG as a factor that can enhance investment performance, comparable to momentum or quality. He emphasizes that client preferences and long-term risk management are the true catalysts driving ESG integration, emphasizing the need for stability over regulatory fluctuations. “We don’t need more regulations; we need time for existing ones to be effectively implemented,” he argues.
Pragmatic Perspectives on ESG Investing
Erika Karp, a consultant based in New York and former investment banker, bluntly states, “There’s no such thing as ESG investing.” She views ESG as a discipline for investment research rather than a distinct style. Karp believes that the essence of ESG lies in enhancing transparency in investment decisions, a goal that all investors should pursue. She cautions, however, that while transparency is vital, it can also be disruptive. For her, ESG was intrinsically linked to fiduciary duty and materiality long before it became a political issue.
Addressing Industry Challenges
Karp criticizes the industry for failing to implement meaningful changes in investment processes, leading to a proliferation of ESG-labeled funds that lack substance. She argues that the rapid growth in this market has been careless and has compromised credibility, fueling investor skepticism. Instead, she advocates for a focus on investment stewardship aimed at protecting and enhancing long-term value, asserting that sustainability should reflect how a business operates rather than its marketing strategies.
Active Ownership and Engagement
Many successful companies have managed ESG risks and opportunities well before these practices were classified under the ESG banner, according to Karp. She underscores the importance of active ownership and cautions against delegating responsibility to proxy advisors. Encouragingly, some families and foundations are adopting a more proactive approach. “Constructive engagement doesn’t have to be confrontational,” she emphasizes, suggesting that a shift towards open dialogue would benefit the entire sector. Karp dismisses the notion that ESG impedes returns, asserting that skilled managers can achieve success in any market.
A New Reality for Sustainable Investing
Recent outflows indicate a recalibration rather than a withdrawal from sustainable investment strategies, according to Daniel Wild, the chief sustainability officer at Bank J. Safra Sarasin in Zurich. He acknowledges a slowdown in investments in high-conviction sustainability themes but insists that the broader trend towards robust ESG integration among asset managers remains intact. His firm employs a “leaders over laggards” strategy within high-emission sectors, focusing on companies that enable the transition rather than blanket exclusions.
Long-Term Perspectives Amid Short-Term Politics
Wild makes a clear distinction between long-term climate strategies and short-term political shifts. He argues that even during a deregulatory administration, energy firms are unlikely to engage in high-risk projects simply based on policy changes, as these initiatives require long lead times. Additionally, there is a growing investor interest in defense stocks, driven by increased military budgets and heightened geopolitical tensions. However, the classification of ESG remains contentious, with many funds excluding controversial weapons manufacturers.
Transparency Over Labels
Wild believes that the primary challenge lies in achieving transparency rather than merely creating more ESG labels. The confusion resulting from numerous ESG ratings and classifications complicates decision-making for clients. He calls for standardized reporting to facilitate informed investment choices.
Future Growth of ESG Assets
Despite current challenges, global ESG assets are expected to surpass $40 trillion by 2030, accounting for 25% of the total $140 trillion in assets under management worldwide.
A Call for Clarity and Pragmatism
Wild critiques the fragmented regulatory environment in Europe, viewing it as more of a burden than a clarification. Many firms have removed “sustainable” from certain strategies not due to a change in approach but because they no longer fit evolving labeling criteria. He asserts that clarity regarding exclusions, engagement practices, and performance metrics is essential for investors to make informed decisions.
The Path Ahead for Investors
As COP30 in Brazil approaches, with nations under increased pressure to enhance their climate commitments, Wild emphasizes the significance of long-term threats such as climate change and resource scarcity for institutional investors. He notes that while the urgency for ambitious long-term goals may wane, the financial sector must support companies in their transition. Wild observes that the initial excitement surrounding sustainable investing has diminished, yet he sees this as a positive development, advocating for a more realistic and pragmatic approach that embeds sustainability within the investment process.
