The wave of anti-ESG sentiment that fuelled a global retreat from the investing strategy is now showing signs of losing steam, according to an executive at the wealth management arm of Deutsche Bank AG.

“We have seen the trough in ESG fund flows,” Markus Mueller, the private bank’s chief investment officer for ESG, said in an interview. There’s less “backlash globally”.

Mueller says the development follows adjustments to regulations, with investors increasingly able to target a wider array of sectors. Specifically, fossil-fuel assets once deemed off-bounds for climate investors are now finding a home in so-called transition strategies, as regulators in Europe, the world’s biggest ESG market, rework existing rules. 

The shift is allowing “investors to engage a broader range of companies and sectors,” said Mueller.

Few investing themes have been loaded with as much political baggage as ESG, with key figures in the Republican Party dubbing the label “woke” and even anti-American. The political furore has led many on Wall Street to avoid even talking about ESG, with BlackRock Inc chief executive officer Larry Fink saying last year that the term had become too “weaponised” for him to feel comfortable using.

Animosity towards environmental, social and governance (ESG) investing was on full display earlier this year, when US fund managers suffered their worst-ever quarter for ESG-labelled products, according to Morningstar Inc. Redemptions continued in the second quarter, albeit at a slower pace. Meanwhile, investments in pure green stocks have tended to underperform, with the S&P Global Clean Energy Index down about 30% since the beginning of 2023.

Much of the backlash against ESG has centred on the perception that it prohibits investments in fossil fuels. However, one of ESG’s fastest-growing investment strategies is now focused on transition - in other words, getting businesses with big carbon footprints to reduce their emissions. That means investors can hold oil, gas and even coal, provided they can show they’re helping companies in those sectors to decarbonise.

Data tracking ESG sentiment remains mixed, however. A recent survey published by HSBC Holdings Plc showed that global investor interest in ESG has stalled, as everything from war to recession fears dominate allocation strategies. “It is difficult to prioritise long-term sustainability in the short term,” the HSBC analysts behind the survey said. “Time is limited and other issues are more urgent.” 

Deutsche Bank’s Mueller says there are plenty of examples to underline the financial sense of filtering portfolios for ESG risks in the current climate. He cites the toll that extreme weather has taken on key crops, and the ripple effects that it’s having for some sectors.

“For example, consumer staples companies are facing record-high commodity costs,” he said. 

Whether the ESG label survives or not, the strategy it represents is already entrenched in markets, including in the US, according to Mueller. That’s as Republican states emerge as the biggest beneficiaries of the Biden administration’s Inflation Reduction Act, which is the landmark US climate bill that was passed two years ago. 

“Around four-fifths of the appropriated investments of the US Inflation Reduction Act and Infrastructure Investment and Jobs Act go to Republican congressional districts,” Mueller said. So, even if Donald Trump should be re-elected as president, “it will be difficult to fully repeal those,” he said.

Overall, global investment in the clean energy transition rose 17% last year to a record US$1.8 trillion , according to BloombergNEF. 

And an ongoing overhaul of the European Union’s Sustainable Finance Disclosure Regulation - the world’s biggest ESG investing rulebook - now looks like it will include a specific transition category, following demands from the bloc’s banking and markets regulators. The UK has already built transition finance into its ESG regulations. In Asia, which accounts for more than half of global greenhouse gas emissions, Singapore is leading the way to include transition in taxonomies. And Hong Kong is set to update its sustainable finance framework to weave in the concept. 

The introduction of transition frameworks is “leading to more differentiated investment strategies, rather than broad ESG labels,” Mueller said. 

Deutsche Bank’s sustainable financing and ESG investments totalled €279 billion (US$308 billion) at the end of last year, a figure the bank says it can almost double by end-2025. 

“Businesses are seeing the real-world impact of climate risks,” Mueller said. “Industry is getting real about what ESG economically means.”

  - Bloomberg