As a concept, environmentally responsible investing is in its flop era. Right-wing backlash has turned “ESG” into a four-letter word in terrified corporate boardrooms. Donald “Drill, Baby, Drill” Trump is returning to the White House. Bitcoin, possibly the least environmentally responsible investment on the planet, is at $100,000 and climbing.
But the flop is always floppiest before the dawn, as the kids (absolutely do not) say. Whisper it, but investors and business leaders are still checking the math and recognizing that corporate behavior that benefits the environment also benefits the bottom line that Milton Friedman told them to value above all else.
No doubt, green investments are having a grim year. Investors pulled $24 billion from climate-related funds during the first three quarters of 2024, Bloomberg News reported last month, citing Morningstar data. I’d be shocked if that didn’t get much worse in the fourth quarter, during which “Trump trades” of all kinds, including Bitcoin, have been ascendant. Green energy would seem to be the antithesis of a Trump trade. You can already see the damage in the S&P Global Clean Energy Index, which has tumbled in the fourth quarter compared with the S&P 500 Index.
Make no mistake: This is all about vibes. Fine, it’s a little bit about high interest rates, which hurt clean-energy investments. But it’s mainly vibes. Even before Trump’s election, corporate leaders were running scared from ESG in response to a political backlash led by Republicans at all levels of government. Last month, Texas Attorney General Ken Paxton sued several large asset managers, accusing them of conspiring to use ESG investing to hurt the fossil-fuel industry. On Friday, Goldman Sachs said it was leaving the Net-Zero Banking Alliance (part of the Glasgow Financial Alliance for Net Zero, which is co-chaired by Bloomberg LP founder Mike Bloomberg and Bloomberg Inc. chair Mark Carney), joining a stampede of other banks out of such groups. Goldman, like many of its peers, suggested it had achieved a state of green independence and no longer needed the support of others. Maybe, but the subtext in all of these announcements is clear: It’s time to lay low.
That doesn’t mean the logic of investing in clean energy has changed. Despite the fund outflow, assets in climate-related funds still rose 6% from a year earlier because their prices rose, Morningstar noted. And ESG funds overall (meaning not just those focused on the environment but also those paying attention to the “social” and “governance” parts of the acronym) attracted modest global inflows through the first three quarters of the year, according to Morningstar. The big exception is the US, where investors have been withdrawing money for more than two years.
Those investors are probably missing out. The ESG backlash won’t last forever, and smarter people than me have suggested being greedy when others are fearful. If anything, Trump’s election could be a harbinger that the bottom will soon be reached, as Hamish Chamberlayne, head of global sustainable equities and a portfolio manager at Janus Henderson Investors, suggested last week. Chamberlayne cited the economic inevitability of the clean-energy transition, along with a nod to the fact that the S&P Global Clean Energy Index jumped 250% during Trump’s first term.
Whether you like or believe in them or not, both climate change and the clean-energy transition create risks and opportunities for companies. It’s bad business to ignore them. That’s partly why, last week, a coalition of pension funds and insurers with $9.5 trillion in assets under management (and also part of that Glasgow Financial Alliance for Net Zero) published a report pushing regulators and companies to agree on standards for mandatory reporting of corporate “Scope 3” greenhouse gas emissions. These account for the biggest chunk of all corporate emissions, but because they affect so many parts of the value chain — from suppliers to end users — they are also the hardest to measure.
The Securities and Exchange Commission punted on requiring Scope 3 disclosures earlier this year after lobbyists howled about it. But other jurisdictions, including the European Union, Japan and California, are already starting to require them, affecting thousands of US companies. Trump’s pick to run the SEC, crypto enthusiast Paul Atkins, will almost certainly want to ease the pressure for corporate disclosure. The rest of the world probably won’t give US companies a choice. Ignoring that risk is a good way to lose money.
On the other hand, cleaning up your act is a good way to make money. Stock prices of companies that pledge to reduce their carbon emissions rise “significantly and persistently” after the announcement, according to a Federal Reserve Bank of San Francisco study released last week. The “dirtier” the company making the pledge, the bigger the gain.
These promises weren’t just hollow greenwashing, either; the study found emissions of companies making pledges were 12% lower, on average, five years later. Investors have learned that they can trust companies to make good on green promises, thus avoiding energy-transition risks that they see as bigger than the costs of decarbonizing. The companies get rewarded twice — once in the stock market and a second time when they avoid even bigger future costs.
Of course, companies still have much work to do. Their meager green promises haven’t been nearly enough to help the world reach the 2015 Paris Agreement goal of keeping global heating well below 2 degrees Celsius above preindustrial averages, a recent National Bureau of Economic Research paper found.
That Paris Agreement was the product of a global climate-talks machine that is breaking down lately. In its absence, we’ll need new horses to pull humanity toward its goals. Companies can be one of those, and investors have plenty of both carrots and sticks to get them moving.
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