A shifting global policy landscape is prompting companies to retreat from their environmental, social and governance (ESG) commitments, with potential long-term consequences for corporate reputations and financial risk management, warns Zenith’s Dugald Higgins.
In a statement on Monday, Higgins said: “Businesses are facing a regulatory roller-coaster.”
“This inconsistency is making companies wary of overcommitting to sustainability targets that may be difficult to maintain under changing political and economic conditions.”
Companies dialling back their ESG commitments include the likes of Microsoft, BP and Walmart, with others withdrawing from voluntary climate initiatives like the Net Zero Asset Managers initiative (currently suspended), and the Net Zero Banking Alliance.
The US Securities and Exchange Commission (SEC) recently dropped its defence of mandatory climate disclosure rules in the US, while the European Union’s new Omnibus package has notably scaled back ESG reporting requirements.
Locally, Higgins said, while the Australian Securities and Investments Commission (ASIC) has introduced new regulatory guidance on sustainability disclosures, political uncertainty remains, with the Coalition signalling plans to abolish these measures, if elected.
On the flipside, the responsible investment lead shared, more than two-thirds of asset owners globally recognise that ESG factors have become more material to investment decision making.
As such, he noted, despite regulatory pullbacks, transparency remains critical, as growing investor demand for ESG data means companies that fail to disclose material risks may face long-term disadvantages.
“Ultimately, investors need information, and we’ve seen this play out in Australia in the past, with ESG-related scandals at AMP, Crown, and Rio Tinto, and more recently with Wisetech and Mineral Resources,” Higgins said.
“The reality is that ESG considerations are now deeply embedded in the investment process. Ignoring these factors doesn’t make them go away. Whether or not the information is there doesn’t remove the risks.”
Last week, speaking at an event in Melbourne, UniSuper’s chief investment officer, John Pearce, affirmed that geopolitics does not dictate the fund’s approach to sustainability.
In response to President Donald Trump’s “drill, baby drill” approach and the US withdrawal from the Paris Agreement, Pearce said “the geopolitics has nothing at all to do with that”.
“Trump pulled out of Paris before, and corporate America went headlong and kept on the decarbonisation path,” he said.
“So, is corporate America going to do anything differently today because Trump’s going out? I don’t know, the jury is out.”
Pearce explained that while UniSuper is committed to the decarbonisation thematic. The more complex challenge is determining where to invest.
“Decarbonisation is such a compelling thematic, that we are going to stick with it. The question is, where do you place your chips? That’s to me a much tougher question, so what we’re grappling with is exactly that.”
Earlier this year, data from Morningstar revealed that over 250 sustainable products globally rebranded or dropped key ESG terms in 2024, driven by Trump’s return to office, as well as a lack of clarity surrounding climate disclosure rules, especially in the US.
In Australasia, specifically, there were 12 sustainable fund closures during the fourth quarter, including funds from Magellan and BNP Paribas, indicating tough conditions for fund houses, in general, as margin pressures crept up, Morningstar said.
However, on the flipside, the ratings house also revealed that global sustainable fund assets reached a record high of US$3.2 trillion at the end of 2024, an 8 per cent increase from the previous year.
