There has often been debate about how worthwhile sustainable investing really is. Particularly fierce headwinds against everything to do with ESG criteria are currently coming from the US. Here's what it's all about and what it means for sustainable investment strategies.
"Who Cares Wins": that is the title of a study published in 2004 that popularized the abbreviation "ESG." It was the result of a collaboration between 20 large financial institutions, initiated by the United Nations. The aim was to explore how environmental, social and governance aspects could be given greater weight in asset management and financial research.
For an investment that is guided by ESG criteria, investors now have thousands of products to choose from. At the end of 2024, the assets invested worldwide in such funds and ETFs reached a new all-time high. That's shown by figures from Morningstar. Of the 3.2 trillion US dollars invested in total, 84% was in Europe.
From time to time, however, doubts about the various concepts keep resurfacing. What really defines sustainable investing, and what counts as "greenwashing"? The European Union has answered this question with a huge body of rules, which, rather than creating transparency, itself raises many questions. "Well-intentioned, poorly executed: the guidelines are a prime example of this," says Philipp Dobbert, head of asset management at quirion. Do you want to invest in an environmentally sustainable way under the Taxonomy Regulation, or would you prefer to invest sustainably under the Disclosure Regulation? Answering such questions in an informed way is likely to be at least very difficult for most people.
From ESG to anti-ESG
Right now, though, the fiercest headwinds are coming above all from the US. There, "anti-ESG" has been a buzzword for some time. It refers to the desire among conservative political circles to banish ESG considerations from corporate management and asset management as far as possible.
In this context, court rulings from Republican-governed US states have repeatedly turned heads. Recently, for example, one from Texas in a case against American Airlines. It concerned the airline's retirement plans, which are managed primarily by BlackRock. The asset manager, which was not itself a party to the proceedings, has already frequently been accused of "ESG activism" in the US. The ruling emphasized that a fiduciary managing such plans is not permitted to pursue a non-financial interest. And in this case, the judge considered that at least partly proven, even though the retirement plans did not even offer any special ESG products.
With Donald Trump's second presidency, the anti-ESG movement has now gained even more wind beneath its wings. Trump is cutting subsidies for green energy projects and for equality and inclusion programs. One after another, in a kind of preemptive compliance, US banks and asset managers have withdrawn from the "Net Zero Banking Alliance" climate coalition, BlackRock among them. Many large companies such as Meta and McDonald's have discontinued diversity programs.
Consequences for investing?
When it comes to investing, one common argument against orienting oneself toward ESG criteria is quickly refuted, namely that doing so more or less inevitably leads to poor investment results. This is shown, for example, by a comparison of the popular MSCI World with the MSCI World ESG Screened over the past five years. The ESG offshoot performed somewhat better than its classic counterpart over this period.
That said: if an investment strategy is guided by ESG criteria, it leaves part of the equity universe out. "But the best balance between return and risk is always found in a portfolio that is as diversified as possible," Dobbert emphasizes. The more focused a portfolio is, the riskier it is. "And many products in the ESG segment are very heavily concentrated, on alternative energy, for example."
Return matters, but so does risk
That's why quirion's sustainable portfolio was designed from the outset with the goal of combining ESG criteria with diversification as effectively as possible. "We want sustainability in a double sense, in terms of return and risk too," Dobbert explains. "That way you can invest money for the long term with a clear conscience, without taking on excessive risks."
Does the anti-ESG movement in the US have any impact on such a portfolio? "When a piece of news on this topic is making headlines, individual areas of the equity market can temporarily see somewhat larger swings," Dobbert notes. "In principle, though, there are no direct effects. After all, the portfolio is very broadly diversified and comprises around 3,000 stocks."
Long-term solutions are what's needed
But what would happen if, because of US policy, more and more companies stopped taking ESG criteria into account? "For now, that's pure speculation," Dobbert emphasizes. "If the number of securities that can be included in such a portfolio according to ESG criteria were to fall significantly, that would of course limit the scope for diversification."
That, however, is not on the horizon at present. Nor is it particularly likely. Climate change, for example, one of the greatest challenges of our time, calls for long-term solutions that cannot be found while shutting the economy out. In any case, it can't be halted by decrees from the US president.
Even so, some investors may wonder whether now is a good time for a sustainable investment. "Trying to find the best timing usually goes wrong, with any form of investment. No one knows exactly when which stocks will rise or fall," Dobbert explains. "Whether and how you want to take ESG criteria into account when investing is a matter of personal attitude. But if you want to avoid unnecessary risks, I recommend diversifying as broadly as possible."
Find out more about quirion's sustainable portfolio here.
