“Why ESG funds will continue to struggle in 2025 The hard times aren't over just yet”, by Dave Baxter
“Funds have to contend with greater regulatory complexity as they grapple with the Sustainability Disclosure Requirements (SDR) regime, whose labelling rules came into force in December.”
Why ESG funds will continue to struggle in 2025
The hard times aren't over just yet
Published on December 30, 2024
by Dave Baxter
A second Donald Trump presidency could mean good things for all manner of assets, from bitcoin to Tesla (US:TSLA) shares and US equities more generally. But while the market believes it has identified many winners already, some forms of investment look set for a difficult few years.
That's certainly one take when it comes to ESG investing, an approach that has already struggled in recent years in the face of higher interest rates. The prospect of Trump rolling back climate regulations could mean a tougher time for these investments. In the meantime, some funds with a very different ethos are springing up, including an 'anti-woke' ETF set to launch in the US next year.
Performance issues of recent years have already led to investors redeeming assets. Investment Association data shows that the funds it badges as 'responsible' had a net outflow of £3bn in 2023, with that trend continuing in the first 10 months of this year (figures for the final months aren't yet available). Some trusts have now opted to throw in the towel, with both Jupiter Green (JGC) and Menhaden Resource Efficiency (MHN) unveiling proposals to wind up as 2024 drew to a close.
On top of this, funds have to contend with greater regulatory complexity as they grapple with the Sustainability Disclosure Requirements (SDR) regime, whose labelling rules came into force in December.
Those requirements are meant to make the sector easier to understand. But all of this negative newsflow may well seem offputting to investors, and the onus remains on them to do their due diligence: anyone interested in investing in this space must still look carefully at the assets funds actually hold.
Even so, perhaps we do have cause for some cautious
Firstly, the trends that drive ESG investing have not gone away despite the return of Trump. The low valuations on offer could even be a contrarian buying opportunity. On top of this, more challenging times could mean that asset managers who previously looked to 'greenwash' their funds don't stay the course. That could leave only the truly committed ESG funds around. Meanwhile, the SDR labels do offer some further clarity on exactly what individuals are buying into, making life a little easier for investors.
It's also worth noting that some ESG funds have done well even in this difficult period. In June we pointed to multiple funds that had notched up strong returns, including those from firms such as Stewart Investors and Royal London Asset Management, an impressive feat given they weren't focused on the AI plays driving market performance. We also noted strong returns from a handful of ESG-minded UK equity funds, which by design tend to deviate quite notably from the underlying market.
As such there is hope for ESG investors looking for a decent return, even if we do need to remember that such an approach will often translate into very different performance from the broader market. The SDR regime and investor demand may also mean that we see more granular ESG approaches emerge in future, something that could mean such portfolios differ further still from a conventional equity market.
With these vehicles garnering little in the way of inflows at the moment, it does seem likely that many asset managers will reduce their focus on this area, limiting investors' options. But that leaves the path clear for the most dedicated specialists to show us what the sector has to offer.