4 Truths About ESG Investments Under a Second Trump Administration
In the wake of November’s election news, ESG investing trends have quickly come under the crosshairs of several policymakers, political insiders, and industry watchdogs. And while the news is grim, this is not the end of ESG as we know it. In this month’s column, we’re taking a deep breath, and a step back, turning down the volume, and considering a few truths about what a new Trump administration means—and doesn’t mean—for ESG investments over the next four years:
Truth 1: Yes, ESG Investing Will Be Harder.
There’s no great way to sugarcoat this one. Whether you are an ESG analyst investigating sustainability metrics of companies or industries, an impact investor looking to engage companies on ESG issues, or an individual looking to include ESG investments in your retirement savings, you are going to be facing roadblocks under Trump that were not there under Biden. Changing rules at the SEC and Department of Labor will make all of these efforts more difficult – but far from impossible.
And importantly, all these activities will still be going on. The ESG genie, so to speak, is out of the bottle. With billions of dollars now invested in ESG funds, that ESG analyst and that impact investor are still going to be doing the same work they’ve been doing. That individual investor is still going to be looking for ways to invest in companies and causes that they believe in. Sustainable investing will not be taking a break while a challenging administration is in place.
Truth 2: Yes, ESG Investments are Still Meaningful
While there are many people who invest in ESG because they believe it is a good investment – and we are among them – another primary driver of ESG investors is aligning their investments with their values. If your values are unchanged, then the benefit you get from investing in companies that align with those values remains unchanged.
If anything, the emotional benefit from aligning with these companies may increase under the Trump administration. With opportunities for ‘bad actors’ likely to increase in the coming years (more on that below), values-driven investors may find more urgency to put their money with managers and companies that they believe will use it in socially responsible ways.
Truth 3: Yes, ESG Risk for Companies Will Be Lower in the Short Term
Another tough pill to swallow for sustainable investors is that one of the main drivers of the financial case for ESG investing trends—that there is financial risk in companies not engaging on ESG issues—will be taking a hit over the next few years. Under a more relaxed regulatory environment, opportunities to generate strong profits from questionable business practices will only grow. This can be true for environmental business practices, but certainly looser regulations on labor, international standards, and other sustainable business practices will reduce the risk for companies that push the ethical envelope in those areas.
Truth 4: Yes, the Long-Term Investment Thesis for ESG Funds Still Stands
One thing that has always driven us as sustainable investors: studies have shown that ESG funds perform better over longer time horizons. And the business case is still there—companies that figure out ways to operate profitably regardless of the regulatory environment are more likely to be long-term winners. Companies that are a net positive for themselves and their stakeholders are more likely to survive changes in administrations, changes in climate, and other changes in the world around them.
As we said above, the ESG genie is out of the bottle. In a competitive landscape, ESG analysis has been shown to provide more—and sometimes better—data to evaluate in making decisions. It can provide an early indication of labor problems down the road, or vulnerability to lawsuits, or whether this quarter’s earnings bump is in any way sustainable. No matter what legal or regulatory changes may occur, the genie is not going back in the bottle.
So, while the short-term case for ESG investments may be lessened, the medium- and long-term case is still strong. To put it in economic terms, the micro environment may be challenging, but the macro environment is unchanged.
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In the end, our advice for holders of ESG investments continues to be consistent—stay the course. Trying to time the market and figure out when sustainable stocks will go up or down on a particular day is a fool’s errand. Stick with what you believe in and what matters to you. Even—perhaps especially—when the political world is creating challenges, using your money to help drive the change you want to see in the world is the right way to go.
That said, if there’s one minor change we would think about given the news, it would be this: During times of volatility, you may find more comfort and more responsiveness in the hands of an actively-managed fund. Passive funds are just that—passive—and they can take a long time to react to changes in the world with changes in their algorithms and methodologies. That can be seen as a plus, as you are less likely to get knee-jerk reactions, but also a negative when reactions may be warranted. Actively managed funds, on the other hand, can be more nimble, and react quicker to large-scale changes in the world around them. Finding an active manager that you trust can help you feel better about where your money is coming from during times like these. With many passive and active sustainable funds to choose from, if you’re looking to make an adjustment based on the election, there are good options wherever you land.
Yes, it’s easy to get caught up in the doom and gloom of what could happen to sustainability over the next four years. Making sure you’re invested in a way that promotes the things you care about in the world is just one important way that you can be fighting back. Your money is your voice. Make sure you’re using it!
