Not so long ago, enthusiasm for sustainable investing was on a seemingly unstoppable upward trajectory. Since 2023, however, the ESG theme has experienced turbulence on both sides of the Atlantic. So, is this disenchantment temporary – or is it here to stay?

Faced with the risks posed by global warming and biodiversity loss, and under pressure from public opinion and increasingly alarming scientific reports, governments have implemented ambitious public policies. The US launched the Inflation Reduction Act and the European Union unveiled the Next Generation EU.

Prior to these stimulus packages, the EU had already pushed through the Paris Climate Agreement (2015) and the Kunming-Montreal Global Biodiversity Framework (2022) a part of the Green Deal and the Nature Restoration Law. This regulatory and political context has created an appetite for climate- and biodiversity-friendly investments, including ESG (environmental, social, and governance) investments.

ESG-labelled funds aim to invest in companies or assets that demonstrate strong ESG practices and are aligned with certain sustainability goals. These have been met with growing interest from investors, demonstrating their resilience during the pandemic due to their underweighting to the energy sector1. In Europe, flows into ESG funds ballooned to €233 billion in 2020 from €126 billion the year before1.

But the brakes came on in the immediate aftermath of Russia’s invasion of Ukraine. The resurgence of inflation, fuelled in part by soaring energy costs, triggered a rapid and lasting rise in interest rates that penalized investment in the highly capital-intensive and subsidy-intensive energy transition – the shift from fossil fuel-based energy sources, such as coal, oil, and natural gas, to renewable and low-carbon energy sources, such as solar, wind, hydro, and geothermal power. This was particularly true of offshore wind power, exemplified in the difficulties encountered by the Danish windfarm Ørsted and the Swedish energy giant Vattenfall .

At the same time, many European countries that had traditionally been weaned on Russian gas decided to secure their energy supplies by resorting to Liquefied Natural Gas (LNG), often imported from the US or Qatar. The message was clear: energy security trumps environmental concerns.

Since then, European governments – whose debts accounted for 89.9% of GDP as of Q3 20233 – have realised they can’t afford to remain outside the Stability and Growth Pact forever4. After being suspended in March 2020 in the wake of the Covid crisis, European budgetary rules were re-applied in January 2024. And the outlook for Europe suggests growth will be sluggish for the foreseeable future5 – around 0.5% of expected GDP growth in 2024 following 0.5% in 2023, raising the prospect of a return to fiscal austerity.

In March 2024, France was forced to make budget cuts of €10 billion, including €2 billion for the environment, due to a lower-than-expected growth forecast. Other European countries, such as Germany and Italy are making similar cuts6. These short-term trade-offs compromise the chances of success of a transition that requires massive, long-term investment. According to the Rousseau Institute’s 'Road to Net Zero' study, Europe needs to invest €1,520 billion a year to reach the 'net zero' target by 20507.

And when the geopolitical and financial context is combined, it explains the so-called ‘ESG backlash’ on both sides of the Atlantic. The immediate result is that climate ambitions are on the wane, in both the investment and political spheres.

Put simply, ESG hasn’t been yielding the desired financial performance of late, and the absolute necessity of achieving carbon neutrality by 2050 does not diminish investors' demand for a return on capital. Constrained by their fiduciary responsibility to their clients, investors are abandoning the preservation of the biosphere and biodiversity in favour of the search for yield.

According to Morningstar1, funds classified under SFDR regulations as Article 8 and Article 9 – those incorporating ESG criteria or with a sustainable investment objective – underwent outflows in 2023, while Article 6 funds, which do not take ESG criteria into account in their investment process, collected €93 billion in Europe.

After two good years in 2020 and 2021, during which ESG-labelled funds mostly proved resilient, the promise of ESG funds to combine financial and extra-financial performance was not fulfilled in 2022. This was largely because the price of fossil stocks, to which ESG funds were underexposed, soared while that of technology and growth stocks, to which ESG funds were overexposed, plummeted8.

At the same time, some of the world's largest asset managers have scaled back their ESG ambitions. BlackRock, JP Morgan AM, Pimco and State Street Global Advisors left the Climate Action 100+9 investor coalition in February 2024. This seemingly backward step for the sustainable investing community is also evidenced in the changes to proxy voting policies: BlackRock, State Street and Vanguard have significantly reduced their support for shareholder proposals on environmental and social issues10.
On both sides of the Atlantic, politicians are under pressure from lobbyists and their constituents, and they are seeking to ease environmental constraints.

In the US, Republicans want to continue supporting oil- and coal-producing states, American jobs and energy security, and not exclude fossil fuels from ESG funds11.

In Europe, right-wing and far-right parties are gaining ground in voting intentions and ruling coalitions. The far right is in power in Italy and Hungary and is part of a coalition in the Netherlands. From July, Viktor Orban, the Hungarian Prime Minister, will preside over the Council of the European Union for six months.

What do they want? For one thing, conservative and radical right-wing parties are challenging environmental policies as too restrictive. Under pressure from industrial and agricultural lobbies, for example, glyphosate was reauthorized for 10 years in Europe12, and the Ecophyto plan to reduce pesticide use in France was put on hold in response to farmers' anger13 – in the name of simplifying environmental standards.

In May 2023, the French President Emmanuel Macron called for a break in European environmental regulations, punishing the EU over its lower-performing competitors in this field.
Decisive elections are taking place in 2024 across Europe and in the US. The implications for the climate debate shouldn’t be underestimated.

The Green Deal, the legislative package designed to enable the EU to comply with the Paris Agreement and limit the consequences of global warming, would be under threat if the right-wing factions in the European Parliament were to gain a majority at the end of the European elections in June. This would be a huge step backwards for the green movement.

Across the pond, although it would be foolish to predict the outcome of the US presidential elections in November 2024, it’s worth remembering that the past can often shed light on the present. For instance, in June 2017, during his first term in office, the former president and unabashed climate-change sceptic Donald Trump announced his intention to withdraw from the Paris agreements and reverse the measures taken by Barack Obama to combat climate change.

If re-elected this year, Trump could again seek to undo the work of his predecessor. Trump’s advisors and associates have indicated that dismantling President Biden’s Inflation Reduction Act would sit at the top of the Republican front-runner’s to-do list14, although it is enacted law, not a federal agency regulation or executive order, which means that any substantial changes would need to be achieved through Congress.

The outcome of the Trump-Biden duel, which may extend or limit the extent of the ESG backlash, could be nudged by any number of factors: a conviction of Donald Trump on one or more of his 91 charges, a shift in Joe Biden's policy of unconditional support for Israel – even a rallying of Taylor Swift and her ‘Swifties’ to the Democratic candidate.

And while environmental policies may change speed with each new election, the goal to achieve carbon neutrality by 2050 remains a non-negotiable: the carbon clock is always ticking.

Stay Informed! With our Expert Collective newsletter

Register Here

1 Source: Morningstar Research, 3 February, 2021, European Sustainable Funds Landscape: 2020 in Review
2 Source: The Guardian, February 2024,
3 Source:
4 Under the terms of the EU's Stability and Growth Pact (SGP), Member States pledged to keep their deficits and debt below certain limits: a Member State's government deficit may not exceed 3 % of its gross domestic product (GDP), while its debt may not exceed 60 % of GDP. If a Member State does not respect these limits, the so-called excessive deficit procedure (EDP) is triggered. This entails several steps — including the possibility of sanctions — to encourage the Member State concerned to take appropriate measures to rectify the situation.
5 Source: Ostrum Perspectives, January 2024
6 Source: le Monde, February 2024,
7 Source: ‘Road to Net Zero’,
8 Source: Morningstar Research, SFDR Article 8 and Article 9 Funds: Q4 2023 in Review, 25 January 2024, page 3
9 Source: The more than 700 investors in the Climate Actions 100+ initiative, launched at the One Planet Summit in December 2017, are calling on companies to improve their climate change governance, reduce their greenhouse gas emissions and strengthen their climate-related financial disclosures.
10 Source: The Financial Times, January 2024,
11 Source: Natixis IM, 2024,
12 Source : Reuters, 16 November 2023, EU to renew herbicide glyphosate approval for 10 years,
13 Source: France 24, 2 February 2024, French govt slammed for putting pesticide phase-out on hold,
14 Source: The Financial Times, November 2023,

This material is provided for informational purposes only and should not be construed as investment advice. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article.