“ESG is just a load of crap.” Sitting next to me in a Starbucks at 99 Wall Street, two 30-somethings, one in a blue BrookBrothers suit, the other in black Armani, bitterly comment on Wall Street's slow conversion to sustainability. “It's merely a scam to further push the woke culture,” they say, referring to the progressive and environmentalist culture. It's a day in early November 2023. For more than a year, Republicans have been fighting openly to create an equivalence between ESG and the radical progressive world (the so-called woke culture).

Who hasn't heard the words of Republican Congressman Andy Biggs (R-Ariz.), chairman of the right-wing group House Freedom Caucus? According to Biggs, “ESG are being used to promote left-wing policies through authoritarian means.” The line, of course, is dictated by Trump himself: “We must protect Americans from Radical Leftist ESG investments. I did it once, and it's time to do it again as I set the example for Republicans across the country to follow my lead in fighting ESG,” he tweeted.

The Republican war on woke capitalism

The first to take him up on his word were the governors of Florida, Louisiana, and Missouri, who pulled $3 billion in sustainable investments from BlackRock. This prompted the other asset management giant, Vanguard, into removing itself from a group of investors in funds targeted to zero greenhouse gas emissions by mid-century. At the same time, at state level, 46 initiatives have been filed to stop investments classified as ESG, although only a dozen have been approved.

In March, President Joe Biden overruled – the first veto of his presidency – a Republican legislative proposal to prevent pension fund managers from basing investment decisions on factors such as climate change. “I just signed this veto because the bill passed by Congress would put the retirement savings of citizens across the country at risk,” Biden said. The Republican bill would have scrapped a Labor Department rule that makes it easier for fund managers to consider environmental, social and corporate governance (or ESG) issues.

John Podesta, Biden's clean energy adviser and appointed in early February 2024 as the successor to Climate Envoy John Kerry, has repeatedly warned conservative Wall Street investors. He explained that Republicans' attacks on “woke capitalism” are “irresponsible” and contrary to free market principles. “Some people in Washington are taking advantage of this hostility […]. Investing in clean energy is not controversial but common sense,” Podesta said at a White House press briefing.

“You cannot reduce the risk of your investment portfolio if you do not take material climate risks into account in your investment decisions,” said Al Gore when interviewed by the Financial Times. For the former Democratic vice president and climate activist, the Republican-led anti-ESG bills are part of a “new wave of climate denial.” Now, the question on everyone's mind is how much this heated debate on green investment (and climate in general) will affect the presidential campaign in November.

Much ado about nothing?

Investors' flight from sustainable funds continued in the fourth quarter of 2023. US funds suffered their first year of outflow since Morningstar, a Chicago-based financial studies firm, began keeping track of them more than 10 years ago, making 2023 the worst year on record for ESG. Investors withdrew $5 billion from sustainable funds in the fourth quarter, for a total of $13 billion over the full year (-12%). A less steep decline compared to 2022 and all in all, not too far off from the overall decline in US finance (-5%), which continues to see around $323 billion invested at the end of 2023 (but with mediocre returns), and the arrival of new funds such as Vontobel Global Environmental Change ENVRX.

Despite this, confidence in sustainable investors is rising. “We have just wrapped up an important week of meetings with the board of the Sustainable Investment Forum in New York: interest in sustainable investing remains high and there is no perception that there is a retreat into the corporate trenches,” Maria Lettini, chairwoman of US SIF, the leading US forum on sustainable finance, comments to Renewable Matter. “There is definitely a need to raise the bar, to choose the words you use carefully, but a significant part of our financial advisor community continues to believe in the centrality of sustainable investing.” She does not deny the setback, but believes it should rather be read as a reflection “to review, to improve, to dot all the i's and cross the t's, potentially an opportunity for our industry that can make us stronger.”

Focus on climate remains high, especially after the stock market jump in December with the announcement at COP28 about transitioning away from fossil fuels. “We see several strategic investors, energy companies, sovereign wealth funds looking closely at direct climate-tech investments,” says Peter Fusaro, creator and CEO of The Wall Street Green Summit, which for 20 years has served as a meeting point for venture capital, investors, and clean tech companies. “Interest in these decarbonization-related companies is definitely growing. We are optimistic about 2024. In addition to investments in renewables, there is increasing attention being paid to hydrogen and technologies for the capture and use of CO2.”

Star-spangled green investments

Despite being politicized, the ecological transition, for many Americans, including Republicans, remains critical to countering climate change disasters. “Sixty per cent of Americans say this is a priority, that it must be addressed, and that we need an economic and financial strategy. In some parts of the country, it has become impossible to secure housing, such as in Florida,” Frances Colón, director for climate policy for the think tank Center for American Progress and former ambassador for science and environment at the State Department, tells Renewable Matter. “But to take action,” she adds, “you require capital.”

The less-than-stellar performances of thematic equities in the US are mainly due to the high level of interest rates. This trend can also be observed globally, given the long investment returns that characterize climate finance. Just look at the MSCI Alternative Energy and S&P 500 Clean Energy indexes, which monitor renewable energy companies: they closed the year 2023 with declines of

-25.4% and -20.4%, respectively (compared to the MSCI World Energy index – which includes fossil fuels – which recorded +3.5%). The Bloomberg Electric Vehicles index, which tracks the electric vehicle sector, also lost 7.4%. Better were the circular economy (+12.8 NYSE Arca Environmental Services Index) and smart grids (+21.9% NASDAQ Clean Edge Smart Grid Infrastructure Index). Data that for experts serve to understand the slowdown in US sustainable finance.

However, a renewed focus on green issues is to be expected. “There is a lot of dry powder (a slang term referring to cash reserves kept on hand by a company or a venture capital firm, author's note) and increasingly net-zero targets will be made evident in all types of businesses, from energy to technology, from automotive to agriculture,” Fusaro explains. Uninvesting from sustainable funds is primarily a risk of lost earnings for those (Republican) states or non-institutional entities that, for ideological reasons, decide to pull out of ESG investments.

IRA, leverage for sustainable investments

The Inflation Reduction Act is a misleading name: it has little to do with reducing inflation, especially in the short term. The IRA includes tax credits, loans, and grants worth $370 billion to boost domestic production of low-emission technologies and projects for the next 10 years, which is a key challenge to support green investments as well. “It's a launching pad for the deployment of capital in energy storage, hydrogen, wind and solar,” Fusaro comments. “Although it's a sector that is slowly moving up the ladder.”

However, the effects are not invisible. Joe Biden's solid achievements of 3.1% growth in the US economy over the past year were such thanks in part to the IRA. Moreover, the positive indexes of the US economy, driven by clean-tech, may mark the beginning of the end of the crusade against sustainable finance and green investment. With 353,000 jobs created in January 2024 alone (320,000 in December), the FED's planned interest rate cut, and a positive outlook through 2024, Biden has much to rejoice about. By November, it could be a major weapon in the hands of Kamala Harris to stop Trump. It would benefit not only sustainable investments but the ecological transition globally.

This article is also available in Italian / Questo articolo è disponibile anche in italiano

Image: Fearless Girl at NYSE © Billie Grace Ward via Flickr