Take Five: Withdrawal Symptoms
A selection of the major stories impacting ESG investors, in five easy pieces.
The full implications of Trump 2.0 for sustainable investment may take time to emerge, but the direction of travel is clear.
Out of this world – Many were disorientated by the scale and pace of policy change in the US this week, as President Donald Trump turned signing executive orders into a spectator sport at his second inauguration. Alongside tariffs, disruption is one of Trump’s favourite words, so he will have been pleased with the ‘shock and awe’ reaction. While the sheer range of disparate policy actions was indeed dizzying, there were several common threads, withdrawal from a globalised world being one of the most prominent. Pulling up the drawbridge on the southern border was expected, as was withdrawal from the Paris Agreement (again), less so perhaps the exit from the World Health Organization or the Organisation for Economic Co-operation and Development’s global tax reforms. There was no need to withdraw from the Global Biodiversity Framework, which the US helped to draft but did not sign as a non-member of the UN Convention on Biological Diversity. However, the chances of US pharmaceuticals firms adhering to the recent COP16 decision to share more profits from exploitation of genetic digital information more equitably have probably diminished from slim to none.
Follow the leader? – Withdrawal from the wider world by the US has implications for neighbours and allies, nowhere more so than Europe. OK, maybe Canada. Following his inauguration, President Trump addressed Davos, telling Europeans their taxes and tariffs are too high, their regulations too restrictive, and their treatment of US firms too harsh, especially in the tech sector. Painfully aware of recent differences in economic performance, many European politicians would like to follow America’s lead, riding with Trump as he frees animal spirits. Emboldened by a skewed reading of the Draghi report, some were reportedly keen to increase the number of sustainable finance regulations to be streamlined at this week’s Ecofin meeting. An alternative approach might cleave to policy stability, offering investors greater certainty – not to mention transparency on material sustainability risks and impacts – while the potentially volatile Trumpian policy experiment plays out. With wind energy investors undercut by the change of curtains at the White House, the imminent details of the Clean Industrial Deal could provide a strong signal – especially if accompanied soon after by meaningful progress on the long-delayed Capital Markets Union.
The ESG of AI – Access to finance has been critical to the development of the US tech sector, which President Trump is so keen to defend from European politicians and tax collectors. Different perspectives on the industry’s further development of AI were evident this week as the World Economic Forum’s AI Governance Alliance issued safety recommendations at Davos, while Trump hailed Stargate, a US$500 billion infrastructure initiative aimed at arming the US with the data centres needed to maintain its already virtually impregnable lead. Policymakers and investors are rightly taking AI governance risks – and their social implications – seriously, but the environmental risks attached to such massive data centre expansion also demand attention. Trump delighted in declaring that he would use “emergency declarations” to provide the initiative with endless electricity, not needing to explain how he’d prefer that power to be generated. While the ‘broligarchy’ have been keen to show fealty, they don’t see eye to eye with Trump on every issue – as evidenced by Google’s recent record investment in biochar carbon removal credits.
Textbook stewardship – This week saw the founding of the Global Tailings Management Institute in South Africa, a multi-stakeholder body which will oversee an independent assessment process aimed at ensuring tailings facilities no longer pose threats to people and the environment. Primarily, it will monitor compliance with the Global Industry Standard on Tailings Management, ensuring firms prioritise safety and accountability. The board will represent the mining industry, local communities, Indigenous Peoples, investors, employees, regulators and technical experts. But the genesis of the project was the reaction of a small group of dedicated investors who wanted to ensure incidents such as the Brumadinho dam collapse in Brazil in 2019 – which killed 272 people – were never repeated. As noted in one of this week’s commentaries, stewardship is at an interesting juncture, with its value under scrutiny, particularly with regard to collaborative efforts to address systemic risks, and regulations tipping the balance away from accountability. In this sixth anniversary week of the disaster, investors’ response to Brumadinho remains an informative case study in partnership to the long-term benefit of all.
Regional divides – It remains to be seen how US institutional investors’ approach to managing ESG risks and opportunities will evolve under Trump 2.0. For now, their European and Asian counterparts appear committed. According to a new Fidelity International survey, more than half of investors consider E, S and G factors as important when it comes to portfolio asset allocation over the next 18 months, with environmental factors the top consideration (63%). Digging deeper, decarbonisation and the energy transition, as well as preservation of natural capital and corporate transparency, are key areas of focus. In terms of restraints, impact measurement is seen as the biggest barrier to sustainable investment, cited by 68%, followed by regulatory consistency, mentioned by just over half. Given the shake-up to energy policy, diversity, equity and inclusion programmes, and immigration rights to name a few, one might expect US investors to flip these top two concerns.
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