Why ESG Faces Backlash and Its Future Under Trump 2.0
By Saijel Kishan and Tasneem Hanfi Brögger,
Bloomberg News
February 04, 2025
(Bloomberg) -- ESG. Three letters that have inspired, confused and angered.
They stand for environmental, social and governance, and refer to a strategy where banks and investors weigh factors such as climate change and labor conditions in their financing decisions.
The term was coined about two decades ago by United Nations staffers working with the finance industry. It became more popular after the #MeToo, racial justice and climate movements took hold when President Donald Trump was in the White House the first time around. The hope was that ESG standards would help make the world a better place, demonstrating that profit doesn’t have to come at the expense of clean air, human rights or honest management.
The ESG label was put on everything from mom-and-pop investment funds to complex Wall Street securities. But it was an amorphous and ill-defined concept, and quickly became a hotly debated topic as inconsistencies were exposed.
As accusations grew that companies and money managers were exaggerating their ESG credentials, European and US regulators began to clamp down on this “greenwashing” activity. And then ESG investing became a political wedge issue in the US as Republican politicians mounted an unprecedented, coordinated attack, castigating it as a threat to American capitalism — all before Trump even began his second term.
How have Republicans attacked ESG?
The US is the epicenter of the ESG backlash as the investing strategy became a lightning rod in the country’s culture wars. Financed by fossil-fuel interests, Republicans took aim at Wall Street for its talk on climate change, accusing lenders and investors of being part of a “woke agenda.”
They launched investigations, introduced anti-ESG bills across the nation and restricted some firms from doing business in their states. Officials also took legal action against companies including BlackRock Inc. — the world’s largest money manager, whose chief executive officer, Larry Fink, was an early advocate of ESG — claiming they prioritized ESG considerations over investment returns.
Republican lawmakers in New Hampshire even tried, though unsuccessfully, to criminalize the use of ESG factors in investing.
How will Trump’s return affect the ESG landscape?
Conservatives stepped up their anti-ESG efforts in the run-up to Trump’s inauguration. In December, the Republican-led House of Representatives’ Judiciary Committee called on investment firms to detail their role in net-zero groups such as Climate Action 100+, which it accused of operating as a “climate cartel.”
The attacks on ESG will intensify as the new Trump administration targets three-letter labels that can be used as a catchall for subjects it doesn’t like — another notable one being DEI, which stands for diversity, equity and inclusion. Shortly after being sworn in for his second term, Trump took aim at key ESG topics, including electric vehicles and wind turbines, while lashing out at DEI programs.
The fight is being sustained at the state level too. Texas Attorney General Ken Paxton is leading an effort to demand Wall Street answer questions about its DEI and climate commitments, threatening legal action if firms don’t comply.
What have ESG champions said?
ESG advocates have described Republicans’ attacks as anti-free market. They say taking into account the risks of global warming and other ESG topics can protect investment returns and is in line with acting in the best interests of clients.
The wildfires in California demonstrate the financial risks from natural disasters, which are becoming more frequent and severe. They’ve caused billions of dollars in losses, raising liabilities for insurance companies.
Labor strikes in 2023 cost the automaking industry billions of dollars and saw the share prices of Ford Motor Co., General Motors Co. and Stellantis NV — the big three Detroit manufacturers — tumble. Members of the United Auto Workers union successfully picketed for higher wages and other improvements in their employment contracts.
Has the anti-ESG push had an impact?
The war on ESG has sent a chill across the US finance industry. The pendulum swung from Wall Street being accused of embellishing its ESG bona fides to “greenwash” its image, to potentially “greenhushing” its activities, meaning it’s not being as vocal about its sustainability efforts.
BlackRock’s Fink said he would stop mentioning ESG altogether after it had become politically “weaponized.” His firm lost business from some state entities amid the wave of anti-ESG sentiment.
Money managers and bankers now avoid talking publicly about net-zero emissions goals and have scrubbed the ESG label from websites and many funds. Banks have quit climate alliances in droves amid the threat of litigation from Republican politicians. They’ve found themselves walking a tightrope because they still want to cater to climate-conscious clients.
Meanwhile, investors pulled around $20 billion from US ESG funds in 2024, according to Morningstar Inc., compared with outflows of just over $13 billion a year earlier. By contrast, traditional funds pulled in $740 billion of net new money.
That movement of capital wasn’t just about the political backlash; investors were discouraged by lackluster returns as the ESG strategy was tested by high inflation, elevated interest rates and supply-chain disruptions. The iShares Global Clean Energy ETF, for example, slumped by about 27% in 2024, whereas the S&P 500 climbed 23%.
The global sustainable debt market has proven more resilient. Annual bond issuance topped $1 trillion in 2024 — the second-highest total since the market’s inception in 2007, according to data compiled by Bloomberg. This was fueled by record sales of green and sustainability notes.
Has the ESG backlash spread to Europe?
There are headwinds for ESG in Europe too, although these are being driven more by regulatory fatigue rather than the ideological debate raging in the US. Companies are balking at the sheer volume of data points they’re being asked to provide, on everything from the gender diversity of their boards to the biodiversity risks posed by their operations.
The European Union has been at the forefront of ESG rulemaking, buoyed by its commitment to reach net-zero emissions by mid-century — a target that’s enshrined in law. The bloc introduced its green taxonomy in 2020, a classification system that defines what economic activities are considered environmentally sustainable.
But two more landmark ESG reporting rules have been passed since then and concerns are growing that the regulatory burden could put European companies at a competitive disadvantage — particularly as the US looks poised to enter a phase of deregulation. The EU’s two biggest economies, France and Germany, have pushed for the bloc to scale back its Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive.
The EU’s executive branch, the European Commission, said it would propose a legislative package to simplify the three pillars of its ESG regulation — the taxonomy, CSRD and CSDD — and this is likely to land at the end of February 2025. The Commission is expected to limit the number of companies in scope for the full CSRD requirements.
©2025 Bloomberg L.P.
