Sustainability adapts to policy pressures and opportunity

Six months into the second Trump administration, the global sustainable investment landscape is showing signs of resilience and even unexpected strength. While the US’s rhetoric and agenda initially rattled markets and investors, a more nuanced picture is emerging, in which some areas of sustainable investment are thriving.

The immediate aftermath of Donald Trump’s re-election was marked by uncertainty and volatility in ESG (environmental, social and governance) investments. With global outflows in the first three months of 2025 totalling USD 8.6 billion from the category’s USD 3.2 trillion of assets under management, sustainable funds experienced their worst quarter on record. Europe, traditionally a sustainable investment stronghold, saw its first net outflows since 2018, when data was first compiled.

Paradoxically, the Trump administration may be coinciding with a more robust, regionally diversified, private sector-led, and economically sound sustainable investment universe. By May 2025, inflows had resumed across both sustainable equity and fixed income funds. The rebound was broad-based, with notable strength in US dollar- and euro-denominated bond funds, as well as in global, Asian, and emerging market equity funds.

Meanwhile, sustainable investments have generally held up against their traditional benchmarks in the first half of 2025. Many thematic equity funds are delivering double-digit returns year to date. Our selection of CLIC^® (Circular, Lean, Inclusive, Clean) Leaders tracked by our portfolios have gained 13%, ahead of the MSCI World Index’s 8% returns this year¹. This suggests that investors, while initially cautious, have recalibrated their strategies in recent months to align with new geopolitical and economic realities.

Many thematic equity funds are delivering double-digit returns year to date

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Headwinds and adaptation - from global to regional initiatives

Geopolitical change has fragmented global climate cooperation. Multilateral initiatives are losing traction as countries prioritise their national security and economic resilience. Yet this fragmentation is fostering a more regionally grounded and economically pragmatic approach.

China has taken advantage of the transition to become strategically the global leader in clean technologies. In 2024, clean energy sectors contributed USD 1.9 trillion to China’s economy, equivalent to 10% of its gross domestic product. China dominates clean technologies such as battery energy storage, a critical enabling technology for the integration of renewable energies. We enlarged our investment universe as a result, while maintaining a selective and diversified approach, since China’s regulatory changes to strategic sectors can be both swift and highly disruptive.

Europe must continue to invest in renewable power, independently of its climate goals, because it needs to reduce its reliance on imported energy. Solar and battery technologies are increasingly competitive on a ‘levelised cost of electricity’ (LCOE) basis, and generally more insulated from geopolitical uncertainties. As a result, the focus is shifting towards smart grids and infrastructure security to support industrial competitiveness and energy autonomy.

The US administration has rolled back numerous ESG-related policies, including weakening the enforcement of climate disclosure rules and promoting fossil fuel development. With a possible deal on the US budget in the days ahead, US policy may fuel further volatility in the renewable energy sector, but the proposed provisions are unlikely to derail momentum. Tax credits for clean energy, created by the Inflation Reduction Act under the Biden administration, are part of these discussions and their future remains uncertain at the time of writing.

Nevertheless, such uncertainty has been with us since the re-election of Mr Trump. In the meantime, clean energy investments in the US grew by USD 67 billion, or 7% in the first quarter compared with a year earlier (see chart). This growth, while slower than in previous years, underlines the structural momentum behind the energy transition.

Clean energy investments in the US grew by USD 67 billion, or 7% in the first quarter

We see state-level initiatives and corporate demand maintaining this momentum. Without IRA subsidies, solar and wind power could see costs increase by 54% and 65% respectively, according to BloombergNEF, and hence lose some of their competitive advantage against natural gas. This could theoretically create a resurgence in natural gas use, notably in highly-efficient, combined cycle gas turbines that also produce energy from steam. However, the current bottleneck in producing natural gas turbines favours new power generation from rapidly installed, renewable energies.

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Circularity, water and infrastructure are key

Besides national regulations, industries from manufacturing to packaging are increasingly investing in recycling technologies, as circular solutions help to mitigate demand growth while securing critical supplies. Waste-to-value models also help to control costs in an environment of rising and volatile commodity prices, and supply concerns resulting from geopolitical tensions. We see a growing number of companies investing in circular solutions with clearly defined financial objectives for margins and risk management.

Extreme weather events and physical risks from the global warming are sadly materialising. In 2024, the National Oceanic and Atmospheric Administration recorded 27 largescale weather and climate disaster events in the US, collectively costing USD 180 bn. Insurers and academics are warning of the impacts of the accelerating rise in temperatures on house prices and other asset values and such events are costly for any firm, whatever their ESG commitments. For this reason, we see value in investing around the adaptation theme and increased our exposures to two unanimous worries, immune from politics and sentiment, for which the addressable market is set to grow further: water and infrastructure security.

Water, either for drinking or as an essential component in manufacturing and cooling processes, is under pressure globally from pollution, the impacts of climate change, and growing demand. In a report published in May, the European Central Bank estimated that surface water scarcity alone puts almost 15% of the euro area’s economic output at risk, fueling interest in adapting better water management infrastructure and closed-loop solutions for cooling or industrial use. We have therefore increased our exposure to specialists in AI optimised flow management, pipes, and leak detection. There is also more awareness of water contamination and pressure for regulation, even in the US. This creates a growing need – and commercial opportunity – for firms capable of testing, treating, and removing micropollutants.

We see opportunities in engineering, automation, design and climate analytics…

In addition, most transport, energy, and telecoms infrastructure requires upgrades to withstand extreme weather heat and flooding. That favours investments, beyond the usual sustainable building materials and infrastructure sectors, we see opportunities in engineering, automation, design and climate analytics as corporates are using scenario analysis to shield assets from physical climate risks such as rising sea levels or wildfires.

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A catalyst in disguise

The Trump administration may, involuntarily, be reinforcing the foundations of sustainable investing by accelerating its evolution. Rather than relying on favourable policy, sustainable investing can now absorb political shocks, as investors are focused on fundamentals - profitability, short-term needs, and long-term resilience. As the multilateral consensus over global climate initiatives weakens, regional leaders are stepping up, particularly in Asia and Europe. Decentralisation is fostering innovation, competition, and new models of sustainability leadership.

At the same time, sustainability is becoming more closely aligned with economic and security priorities. Economic pragmatism now drives sustainable investing, overshadowing any ideological commitments. A drive for national energy independence, supply chain resilience, and technological competitiveness are channelling investments into clean technologies. This is also instilling greater discipline, as investors shift from broad ESG labels towards targeted, economically sound strategies.

Economic pragmatism now drives sustainable investing, overshadowing any ideological commitments

In response, sustainable portfolios must be both agile and selective. We focus on regional diversification by favouring allocations across Europe, Asia and selective US sectors to capture regional strengths. We also take diversified thematic exposures to energy storage, smart infrastructure, water treatment and infrastructure, the circular economy, and health systems. At the individual company level, we look for quality firms with strong balance sheets, clear transition plans, and competitive advantages in their respective sectors.

Sustainability is maturing from a moral imperative into a strategic necessity. President Trump’s administration is no ally of ESG, but by stripping away policy support and forcing the market to adapt to real-world pressures, it may prove to be a catalyst for sustainable investments.