Ryan Short & Gita Briel | So, what comes after the ESG backlash?

The prevailing narrative frames the Trump administration’s rollbacks of climate, ESG and DEI policies as existential threats to sustainable investing. This is misguided, argue Ryan Short and Gita Briel. Rather than marking ESG’s death knell, these pressures are accelerating its evolution.

The notion that ESG, after a rapid takeoff for five years, is now in decline has been heavily influenced by political shifts, particularly in the US. The backlash against so-called “woke capitalism”  has gathered pace since Donald Trump’s re-election, heightening doubts over whether ESG is still something for companies and investors to worry about. US ESG funds recorded $8.6bn in outflows in Q1 2025, a sharp reversal from $18.1bn inflows the previous quarter. Europe saw the first net outflows from sustainable funds since 2018. While the US accounts for just 10% of global ESG assets, the political backlash is proving influential.

The shift extends beyond politics. AI, cybersecurity and economic resilience are crowding out ESG on the corporate agenda. For the first time in six years, European banks mentioned AI more frequently than ESG in earnings calls, Bloomberg reports.

Policy shifts are also having an impact. The US has withdrawn from the Paris Agreement again and revoked a $1.5bn commitment under the Just Energy Transition Partnership.The UK has similarly prioritised short-term national interests over long-term sustainability goals, redirecting development and environmental aid funding to bolster defence spending.

Still, there are important reasons why ESG will persist 

First, the ESG fund retreat reflects a pivot to more sophisticated impact investing. Investors are abandoning low-value offerings, such as funds using crude exclusionary screens or conventional products rebranded with ESG labels to charge premium fees. This correction is positive: divesting from polluters merely shifts ownership to indifferent holders, undermining systemic change. 

The new focus integrates ESG into fundamental analysis, prioritising active stewardship, engagement and tangible outcomes. Thematic strategies targeting climate adaptation, biodiversity and natural capital are gaining traction, alongside “quantamental” models tying ESG factors to financial performance. Green bonds epitomise this evolution, with 2024 issuance exceeding $1tn globally.

Second, anti-ESG policy is more a US issue than a global one - nor is it uniformly applied in the US. While the U.S Securities and Exchange Commission diluted climate rules (dropping Scope 3 and narrowing Scope 1-2 requirements), California has enacted the strictest disclosure regime in the US, mandating all three scopes. While Europe’s Corporate Sustainability Reporting Directive (CSRD) has been reduced in scope under the Omnibus package, this is largely a removal of unnecessary reporting red tape to stay competitive with the US, and core ESG commitments remain. Meanwhile, more than 30 countries have committed to adopting or aligning with the International Sustainability Standards Board (ISSB) framework, driving convergence in sustainability reporting.These developments signal a global ESG landscape that is in flux, not decline.

Third, a pushback on “woke capitalism” doesn’t change the science.  ESG remains fundamental to risk assessment not as box-ticking but as financial necessity. ESG imperatives - climate disruption, resource scarcity, and social instability - are intensifying. Recent science shows seven of nine planetary boundaries have been breached, creating irreversible environmental damage and business risks. For pension funds and institutional investors, these now represent core portfolio exposures requiring active consideration and mitigation.

Fourth, capital follows long-term value, regardless of political winds. S&P Global forecasts that US policy shifts will have a “limited impact” on sustainable investment trends. The clean energy sector underscores this: plunging technology costs and market forces have made renewables increasingly competitive. In 2024, global energy transition investment hit $2.1tn - ten times the amount poured into AI.

Finally, closer to home, South Africa’s ESG market demonstrates enduring demand. The country’s long-established responsible investment culture continues to drive appetite for impact-aligned products, particularly among pension funds. Local asset managers report robust performance and growing client interest, confirming ESG’s resilience as an investment framework. 

South Africa’s leadership in corporate governance - notably through the King Code and Integrated Reporting - has fostered voluntary sustainability disclosure for decades.  A shift to mandatory reporting is now underway as the South African government explores the adoption of IFRS S1 and S2, a move aligned with developments in other African markets.

Certainly the Trump-led aggression against sustainability has introduced political and legal uncertainty for companies and investors, probably enough to create hesitation. Yet this turbulence is driving a welcome shift away from ESG posturing to substantive risk analysis and genuine impact investing. ESG had become a bubble, full of greenwashing, posturing, and a morass of reporting. The correction has scared off funds and companies relying on ESG as buzzword branding, and linked it back to meaningful risk management and positive business and investment opportunities. 

The underlying principles driving environmental and social sustainability remain valid for people, consumers and staff. The arc of history is towards ecological and social sustainability and this -  rooted in material financial risks and opportunities - will outlast the political noise.