Behind the Numbers: What impact is Trump having on ESG?

Since the November election and January inauguration of Donald Trump, I’ve gotten a lot of questions about whether the new president will have a chilling effect on sustainable investing. The term refers to any investment approach that systematically includes environmental, social and corporate governance (ESG) criteria in the investment process and/or the consideration of ESG impacts on investors, stakeholders, the environment, society, economy and financial system.

To my knowledge, Trump has never mentioned sustainable investing, but if he has, I’d wager that the terms “hoax” or “fad” were involved. With the new administration trying to bring back coal, pulling the US out of the Paris Agreement, and favouring broad deregulation of business, has sustainable investing now become a risky proposition? Will companies that have been improving their sustainability profiles start abandoning their progress? Will the stocks of “bad” companies suddenly start outperforming, causing sustainable strategies to underperform?

So far, there is little evidence of a chilling effect. If anything, Trump in the White House is having a galvanising effect, as sustainable investors become more committed to the idea and draw even more into their ranks, as more people seek ways to counter Trumpism outside of the political sphere.

Most of the nearly US$9trn in assets invested sustainably in the US are institutional, and I’ve seen no indication that institutional investors are abandoning the concept. To the contrary, institutional investors in May led the charge for greater climate risk disclosure at ExxonMobil and Occidental Petroleum, and many signed a pledge to keep working towards fulfilling the carbon emissions reductions in the Paris Agreement.

Among retail investors in the US, interest continues to build. It has taken a while for that interest to translate into investible assets as financial advisers have had to educate themselves about sustainable investing and asset managers have had to launch more funds in a climate favouring ultra low-cost market index funds.

We’ve noticed a big change in the use of ESG data within our Morningstar Direct Cloud platform, which is used by asset managers, advisory firms and independent wealth managers. Usage of ESG data has quadrupled since Trump’s January inauguration, an indication that the subject is on the minds of an increasing number of our users.

In addition, a dozen open-end funds or ETFs have been launched so far this year in the US, including the first sustainable target-date funds for defined-contribution retirement savings plans and two sustainable index funds from fund-giant Fidelity.

That follows on the heels of 35 new funds launched in 2016, bringing the total number of sustainable investment funds in the US close to 200. The new flows into these funds in just the first half of 2017 is already more than the net flows for 2014 or 2015, and are on pace to top the group’s $4.8bn in net flows last year.

Sustainable funds have held their own from a performance standpoint this year. Among sustainable US large-cap blend funds, 15 out of 33, or 45 per cent, outperformed the S&P 500 during the first half of 2017, compared with only 28 per cent of large-cap blend funds overall. Among the 17 funds focused on renewable energy, water, and clean tech, 14 have outpaced the S&P 500 so far this year, with a dozen posting double-digit returns. By comparison, the iShares S&P 500 Energy Sector ETF lost 12.8 per cent during the first half.

With more Morningstar users referencing our sustainability ratings, retail investors putting money into sustainable funds, and those funds generally outperforming for the first half, Trump being in the White House appears to have done little to slow the momentum of sustainable investing in the US.

Jon Hale is director of sustainable investing research at Morningstar