Investors who have set interim climate targets for 2030 have less than five years to achieve them. But even with an increase in the regularity and severity of extreme weather events, many investors have faced a political backlash against climate change and sustainable investing.

These developments have accelerated in recent months with a drastic shift in the US political climate. This has led to big-name US asset managers and companies abandoning climate commitments and rushing to roll back on diversity, equity and inclusion (DEI) pledges.

But behind the headlines, we see a more nuanced evolution of the sustainable investing world – one in which demand for sustainability strategies remains strong. This is being driven by institutional investors demanding bespoke solutions to meet specific goals and these asset owners are backing up their talk with action.

Transatlantic split

The US and Europe are heading in opposite directions. Political pressures have led to a retreat from sustainable investment in the US, while Europe largely remains committed.   

President Donald Trump plans to dismantle the previous US administration’s measures to promote sustainability and wants to increase coal, oil and gas exploration on federal land – his recent executive orders demonstrating his intent. He has weakened the Environmental Protection Agency and pulled the US out of the Paris climate agreement.

Some US asset managers, facing legal challenges, have turned their backs on climate targets and withdrawn from international climate initiatives, such as the Net Zero Asset Managers and the Climate Action 100+ initiatives.

But across the Atlantic, it’s almost business as usual for a region that has long been at the vanguard of international efforts to promote sustainability and sustainable investing.

Last December, regulators there started applying the European Union’s (EU) Green Bonds regulation. These rules aim to clarify eligibility criteria on what qualifies in the EU as a ‘green bond’. The goal is to improve investor protection by preventing ‘greenwashing’.

It’s not all plain sailing even in the EU. In a bid to boost competitiveness, Europe’s Omnibus package rolls back flagship sustainable investment policies including the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive, amid proposals to dilute the region’s Sustainable Finance Disclosure Regulation.

This divergence in philosophy amid pressures to weaken existing measures complicate global operations for asset managers and asset owners alike. It is simply no longer possible to operate with a one-size-fits-all approach.

Big investors lead the way

That said, many institutional investors continue to demand sustainable investing strategies. This isn’t always obvious, but it is a critical component of the current investment landscape.

In February, a group of 27 asset owners – primarily from the UK but also representing European, Australian and US investors – signed the ‘Asset Owner Statement on Climate Stewardship’ to reinforce their support for sustainability principles and to spell out what they expect from fund managers.

There is growing demand for tailored investment solutions. While these are predominantly focused on asset owners looking to meet their climate targets, there is also interest in deploying strategies to protect natural environments in bespoke, or ‘segregated’, mandates.

In our own assets under management, those we classify as ‘sustainable’ investments, grew to £87 billion (US$112.4 billion) by end-2024 from £55 billion a year earlier. This increase was largely attributable to segregated sustainable investment mandates.

We are also seeing cases in which asset managers who turn away from sustainability goals may be punished by some asset owners. For example, both the UK’s People's Pension and Denmark’s Akademiker Pension pulled mandates from one US fund manager amid disagreements over climate stewardship.

DEI requires diverse solutions

Companies employ DEI policies for reasons including employee wellbeing, legal compliance and enhancing brand image. But critics equate DEI with the prioritisation of identity over competence.

Many US companies have been diluting or scrapping their DEI policies in response to Trump’s executive order on DEI and to avoid litigation. DEI-related quotas and affirmative-action programs have been under particular scrutiny. Opponents say they are discriminatory and that employees hired through these initiatives have not been chosen on merit. Some firms have removed gender quotas on boards, for example.

The response from asset managers has been mixed amid a growing number of DEI cases going to court. While some have gone quiet on DEI, other fund managers continue to engage with companies and deepen long-term relationships to drive improvements in this area.

The changes companies are making with regards to DEI, as a result of navigating new pressures and expectations, is yet another facet of the evolving nature of sustainability investing in a complex world.

Final thoughts

Many recent headlines have painted a grim picture for sustainable investing, with phrases like ‘sustainability in crisis’ making the rounds. There’s no doubt that the honeymoon for sustainable investing is over. However, a closer look reveals a more nuanced story.

A hostile political environment in the US makes it more difficult to follow sustainable investment principles there.

However, the demand for sustainability strategies remains strong, especially from institutional investors who remain committed to achieving sustainability targets and need customised investment solutions.

Once the marketing hype is stripped away, sustainable investing has always been fundamentally about financially-material issues. These issues continue to be critical regardless of the political whims of the day.

This is why asset owners, as long-term investors, remain committed. This is why there are opportunities for those investors who can navigate this complex landscape.

Sustainable investment is not dead – it is reforming and evolving to meet the demands of a changing world. It took over 100 years to secure agreement on globally-accepted accounting principles. We are trying to achieve the same thing with less time and as the world gets hotter each year. 

Is it any wonder there are a few bumps along the road?