2025 has started with a rather cautious outlook for sustainable investing. President-elect Donald Trump returning to the White House has ushered a period of uncertainty. He has already promised to dismantle key environmental initiatives within the Inflation Reduction Act (“IRA”), to “drill baby drill” - his three-word election promise in reference to drilling for more oil and gas, and to end ‘wokeness’ in corporate America, signalling a sharp shift in policy direction.
Globally, the early effects of the US’s shift in policy direction appears already apparent and may also lie behind the resurgence of anti-environment rhetoric. We have seen a pullback in diversity, equity and inclusion (DE&I) policies, such as Meta’s recent decision to abandon theirs and Trump’s executive order rescinding the US government DE&I polices within his first few days in office. And in Australia, Labor’s new laws requiring companies to disclose their annual greenhouse gas emissions (‘GHG’) came into effect on 1 January 2025. By 2 January, the Coalition promised to repeal the disclosure framework, if it were to win the upcoming federal election.
This is all despite 2024 being the hottest year on record. As UN Secretary-General Antonio Guterres said, “today’s assessment from the World Meteorological Organization (WMO) proves yet again – global warming is a cold hard fact”. The average global temperature last year was 1.6 degrees Celsius above pre-industrial levels. That’s higher than the 1.5 degrees Celsius that was agreed to at the Paris Agreement and above the threshold for dangerous planetary warming.
So how does a sustainable investor, one who does consider the environmental and social impact of their investment decision making, navigate the uncertain landscape? We continue to believe sustainability factors remain significant and carry both positive and negative investment (financial and non-financial) implications. The key tenets of a responsible investment approach, be it addressing climate risks, attracting diverse talent or ensuring robust governance, remain crucial to effective investment decision making, regardless of which way the political wind blows.
This year hasn’t taken long to demonstrate the tangible impacts of extreme weather. In the Northern Hemisphere winter, the usually quieter bushfire season, turned catastrophic with wildfires sweeping through Los Angeles in the first few weeks of January, killing 24 people and destroying over 12,000 structures and homes. The economic losses are expected to exceed over USD 250 billion (initial estimates), and whilst a lot has been said about the drivers and causes of the fires, what we know for certain is insurance rates in the region are no doubt going to rise exponentially, and we could even see the complete withdrawal of coverage where insurers just cannot underwrite the risk.
The US Department of the Treasury has released its most comprehensive report on the impact that climate is having on US homeowners, showing how insurance premiums are increasing across the country, and that people living within the greatest climate-driven risk areas are experiencing the steepest rises of all. In the four years to 2023, people living in the top 20% riskiest places paid, on average, 82% more than those in the 20% lowest risk areas. Insurance companies too are finding it difficult to operate in States prone to extreme weather, like Florida and California, leaving homeowners significantly exposed if a disaster strikes.
The impact of climate change on insurance premiums globally has and will continue as more extreme weather becomes the new normal. It is becoming more difficult to afford and secure coverage in areas at risk of climate-related weather events, and this has serious implications for countries like ours. We are incredibly prone to natural disasters, and too are facing an increase in home-related insurance premiums. Voters’ priorities remain highly attuned to the rising cost-of-living and high interest rates, yet seemingly unable or unwilling to draw the link between a warming planet and higher insurance premiums.
The rising cost of insurance is another stark reminder that climate change is a real-world risk, and its financial consequences shouldn’t be ignored. The climate crisis is additive to a cost-of-living crisis too.
“The US is poised to become an authoritarian state ruled by plutocrats and fossil fuel interests.”
Trump’s first week in office has seen him swiftly take aim at low carbon energy initiatives, he declared a ‘national energy emergency’ ordering expedited deregulated drilling for oil and has repeated his promise to “drill baby drill”. He signed executive orders relating to climate initiatives including to:
“The US withdrawing from the Paris Agreement is unfortunate, but multilateral climate action has proven resilient and is stronger than any single counties politics and policies.”
The US has never been a reliable partner for its commitment to climate change. In 2001, then President George W Bush withdrew the US from the Kyoto Protocol, a legally binding pact to cut greenhouse gas emissions, and in Trump’s first term, he withdrew from the Paris Agreement about six months after taking office. As Laurence Tubiana, CEO of the European says, ‘the ongoing collaborative global push to cut greenhouse gas emissions and slow global warming will continue with or without the US”.
While Trump’s move will make global climate action more challenging, it has the potential in the long run to hurt the American economy and American consumers more than anything else.
The reality is, and has been for many years, that climate change is not a political issue in the rest of the world.
Trump’s re-election represents a broader trend across many global liberal democracies, where momentum is swinging back towards leaders that value nationalism and individual freedoms, at the expense of environmental sustainability and social equality. Protectionism is the mood of the day and is likely to have profound impacts for global sustainability efforts, which are increasingly coming under scrutiny, particularly in the US.
In Australia, the upcoming federal election is likely to influence our environmental trajectory and determine if we follow a similar path to the US. Peter Dutton, the leader of the Coalition has already said, should the Liberal Government win, he would soften the safeguard mechanism, repeal mandatory climate reporting, be against introducing a carbon tax or emissions trading scheme (ETS), be in favour of more oil & gas and include nuclear energy as part of Australia’s longer-term energy solution.
Tim Buckley, Managing Director at the Institute for Energy Economics and Financial Analysis says, “Australia’s response to climate in 2025 will largely come down to the Federal Election”. Dutton is more skewed to the Trump view of the world, whereas Prime Minister Albanese is more aligned with the European view. Subsequently, this election is going to have a material impact on outcomes.”
What seems to continue to matter most to voters though is the cost-of-living crisis, which they view as rising interest rates and inflation while the economic consequences of climate change appear more of a second-tier concern. But as the world continues to warm, increasing the likelihood of more extreme weather, the overlap between the climate crisis and the cost-of-living crisis will likely be harder and harder to ignore.
The shift is likely to embolden fossil fuel interests which will undoubtedly seize the moment to push back against cleaner energy. Figures like Vivek Ramaswamy, a key Trump ally, argues the climate agenda has nothing to do with climate, it’s about punishing the everyday citizen and rewarding the elite class. Trump’s return to office is likely to accelerate the rollback of environmental pledges and regulations as he promises to ease red tape for new oil and gas projects..
It’s a grim picture in the US clean energy industry, especially amongst offshore wind providers. “The industry is bracing for hostile policy and uncertainty, possibly for the entire administrative term, until January 2029”, analysts at Bloomberg NEF warned in a recent report.
Adding ‘fuel to the fire’, big US corporate giants like JPMorgan Chase and Blackrock are abandoning the Net Zero Climate initiatives. The Net Zero Asset Managers Initiative, the world’s biggest climate finance alliance backed by major asset managers, suspended its activities early in the new year, citing ‘regulatory changes’. The reputational risk and polarisation of ESG in the United States has seen a corporate retreat from clean energy commitments, and public commitments to climate change. Trump’s shift in political direction is not without risk. China remains at the forefront of clean energy, and Trump’s first week in office further cedes the global clean energy market to one of the US’s biggest geo-political rivals.
However, not all hope is lost. No other country followed Trump’s lead last time around, and while it’s still too early to tell, the rest of the world appears to remain aligned on the need to transition our energy to a cleaner and more sustainable one.
There is no doubt sustainable investing is facing headwinds, but we don’t believe the risk factors relating to ESG should ever be overlooked. The recent wildfires in Los Angeles, or the governance issues brought to light by Mineral Resources in late 2024 remind us that ESG factors still have investment implications, both positive and negative. There is no doubt, Trump’s policies on climate will slow down policy progress globally but the US risks isolating itself from the rest of the world in the race to net zero.
While the political and policy landscape remains uncertain, we recommend proceeding with caution, ensuring that thorough due diligence on all investments within a robust and adaptable investment framework is undertaken. As we look into the uncertainty in front of us, understanding the long-term implications of ESG risk factors remains more crucial for long-term investment success than ever.
Despite all headwinds, sustainable fund assets continue to grow positively, driven by growth in Europe, which have been offsetting US outflows, and we continue to see this trend in Australia.
In terms of performance, in the Responsible Investment Association’s (RIAA) most recent 2024 benchmark report, which compared sustainable fund performance to the broader market, found that in Australia, funds classified as sustainable returned 12.3% over 10 years compared to 9.19% for the rest of the market.
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