What the Trump era means for our ESG investments

ESG and MAGA are two agendas that seem to be at odds with each other. On one hand, the climate emergency increasingly calls for investments in environmental, social, and governance (ESG) initiatives, with a particular focus on the “E” to support the energy transition. On the other hand, Donald Trump’s vision for Making America Great Again (MAGA) excludes any meaningful sustainability action plan.

That the Republican path is not paved with green intentions is clear. Among the 100 executive orders issued on the first day of Trump’s second administration, one of the most significant is the US withdrawal from major international agreements, including the Paris Agreement. This means that the US will no longer be required to report its annual emissions and will face fewer legal constraints in contributing to climate funding.

This withdrawal will take effect in one year—faster than the three-and-a-half-year process required when Trump previously pulled out of the Paris Agreement in 2017. Since then, global temperatures have continued to rise. Last year was the hottest on record and the first time the global average temperature exceeded a 1.5°C (2.7°F) increase—the threshold set by the Paris Agreement, which commits countries to efforts to remain below it.

To achieve this goal, the EU has introduced the European Green Deal, a strategy designed to cut emissions and reshape the economy to reach climate neutrality by 2050. A key pillar of this plan is the transition to renewable energy. In the US, however, Trump’s return to the political stage could add new complexities to the path towards a greener economy.

From an economic and fiscal perspective, Donald Trump signed two executive orders that could alter the trajectory of renewable energy in the United States.

The first targets vehicle emissions standards, rolling back regulations designed to encourage the adoption of electric cars. According to Trump, these rules impose unnecessary burdens on consumers, pushing them toward costly and inconvenient solutions. However, the decision has sparked criticism from experts and industry players, who warn that it could weaken US competitiveness in the global electric vehicle market—just as China and Europe are ramping up their own energy transitions.

The second executive order temporarily halts federal approvals for new offshore wind projects, restricting access to public funding for the sector.

These moves are accompanied by executive orders aimed at easing restrictions on drilling and mining. For the first time in the country’s history, the President of the United States has declared a national energy emergency, with the goal of temporarily suspending certain environmental regulations or expediting permits for specific mining projects.

With the catchy slogan “Drill, baby, drill” Trump is calling on the oil and gas industry to accelerate operations and ramp up drilling to full capacity. However, his ambitious plan to cut energy costs and curb inflation through expanded drilling may not deliver the expected results.

While Democrats before Trump had implemented green policies, the Biden administration also approved plans for the construction of seven new liquefied natural gas (LNG) export terminals. Furthermore, the US is already the world’s largest LNG producer, with prices at historic lows. Oil production has also reached record levels, standing at 13.6 million barrels per day, while prices—around $70 per barrel—are significantly lower than the $120 peak following Russia’s invasion of Ukraine.

Energy costs in the United States are already low, and inflation (at 2.9% in December) is normalizing toward the 2% target set by major central banks.

Attempting to address the situation by extracting more resources and increasing production could, in the long run, prove counterproductive. History provides a key precedent, from Shell’s early expansion to the 2010s, when OPEC flooded the market with oil, jeopardizing its own financial stability. Today, the energy sector seems to have learned from that lesson, adopting a more cautious approach and focusing on already active fields rather than aggressive expansion.

Even without substantial US support, the energy transition still has strong backers. China invested $546 billion in renewable energy in 2022, while Europe allocated $180 billion in the same year. This could incentivise American businesses to align with global ESG standards to remain competitive.

Nevertheless, the shift from a fossil fuel-centered energy mix to one based on low or zero-carbon renewable sources will inevitably be slowed down by Trump’s latest policies.

What does this mean for our ESG investments?

Moneyfarm’s ESG portfolios are Socially Responsible Investments designed to generate financial returns by investing in a diversified manner through ETFs in global financial markets and companies listed on major indices, while incorporating specific sustainability objectives.

• Reducing exposure to controversial companies
• Mitigating sustainability-related risks
• Increasing the share of sustainable investments
• Engaging in active ETF stewardship

This means that our ESG portfolios do not solely invest in companies producing solar panels or electric vehicles—sectors that could be directly impacted by Trump’s sustainability policies. Instead, they also include companies across industries such as textiles, technology, finance, and energy, provided they align with the sustainability objectives outlined above.

To assess the potential impact of US policies, it is useful to examine each sustainability objective in our ESG portfolios and how it might be affected.

Reducing exposure to controversial companies

Our ESG portfolios exclude companies involved in social controversies, such as human rights violations, as well as businesses engaged in controversial sectors like tobacco, weapons, and gambling. Additionally, they avoid companies heavily reliant on fossil fuel revenues.

Companies involved in social controversies or controversial industries are unlikely to benefit from Trump’s policies, so we do not expect significant deviations in performance due to this factor.

Fossil fuel companies may face fewer regulatory constraints in a more permissive policy environment. However, their ability to outperform will depend on several unpredictable factors, such as commodity prices. In a scenario of potential deregulation, the importance of directing private investment away from sectors or companies with a negative societal impact becomes even more crucial.

Mitigating sustainability-related risks

Our ESG portfolios take into account the sustainability risks of ETFs, including reputational risks, challenges in managing the energy transition, physical risks—such as the increasing frequency of extreme weather events like floods—technological risks, and regulatory risks.

While it is true that a more lenient regulatory environment may temporarily ease constraints for fossil fuel companies, reputational risks, physical climate risks, and technological risks will not disappear. ESG risks will continue to be an important consideration in investment decisions.

Increasing the share of sustainable investments

Sustainable investments focus on economic activities that contribute to environmental or social goals. For example, Moneyfarm’s ESG portfolios include ETFs that invest in bonds issued by Sustainable Development Banks and Green Bonds from highly rated governments or corporations, financing projects with environmental benefits.

These asset classes typically exhibit much lower volatility compared to thematic equity investments. Their bond-based nature, diversification, and high credit quality help manage risk effectively. Ensuring continuous liquidity flow from private investments into sustainable projects becomes even more critical in an environment of reduced public funding for sustainability initiatives.

Engaging in active ETF stewardship

Asset managers’ ability to exercise voting rights in support of ESG resolutions can be directly or indirectly influenced by government actions and policies. We have already observed a decline in corporate ESG activism in recent years. However, it remains our responsibility to monitor and integrate asset managers’ behavior into our investment decisions.

While concerns about the future of climate action are valid from a citizen’s perspective, they do not alter our medium- and long-term positioning within ESG portfolios.

Should you continue investing in ESG portfolios?

This depends on your sustainability preferences. If your investment goals remain aligned with Moneyfarm’s ESG objectives, then your investment journey should continue. As outlined above, we do not believe that Trump’s policies fundamentally alter the sustainability objectives of our portfolios. Investing in companies free from social controversies and committed to managing their emissions remains just as relevant.

In the long run, other factors will likely play a more decisive role, such as interest rates, monetary and fiscal policies, commodity prices, unemployment, and inflation. Our ESG portfolios remain highly diversified across geographies, sectors, and asset classes.

We expect periods of outperformance and underperformance relative to traditional portfolios, but our goal remains to achieve similar risk-return profiles over the long term while maintaining a focus on sustainability.