By Danielle Walker

Institutional investors are well aware that the political landscape has turned hostile toward environmental, social, and governance investing -- but ESG factors remain important for many of these investors' long-term strategies.

Some investors even see it as their responsibility to "hold the line," on these investing issues as money managers have faced more intense pressures to back away from ESG, according to Thomas Kuh, head of ESG Strategy at Morningstar Indexes.

Kuh says that, despite political pressure around ESG issues, institutional investors are applying these factors across more asset classes, particularly private-equity investments.

"This is not new this year, but it seems to be accelerating -- the application of ESG analysis across a broader array of markets and asset classes," Kuh said, referring to a recent Morningstar report he co-wrote that shared qualitative insights from 25 institutional investors across North America, Europe, and the Asia-Pacific region. His team will use the in-depth interviews from the report to inform a quantitative survey of a larger group of institutional investors this summer.

Some asset owners said they saw steadier returns when applying sustainable investing criteria to private equity, compared with other investments in the asset class, Kuh added.

"Private markets have been a part of institutional portfolios for some time, but we've heard a lot about private equity and private credit, and it seems like private markets are increasingly important, not just in the search for more returns, but asset owners that may want to invest more in their local economy," Kuh said. "And it may offer them a closer relationship with the companies they are investing in."

BNP Paribas, which recently published its ESG Survey 2025, found that the majority of institutional investors (87%) stayed committed to their ESG and sustainability objectives, which remained unchanged. Some 420 asset owners, asset managers, and private capital firms representing $33.8 trillion in assets participated in the survey.

That said, 41% of investors noted they were "less vocal about their process and achievements" related to sustainable investing in the current geopolitical environment, the survey said.

Trump era, ESG backlash. In April, President Donald Trump issued an executive order targeting state policies that address climate change or involve ESG initiatives. (Under the order, Trump directed U.S. Attorney General Pam Bondi to stop the enforcement of such laws). This move is only the tail end of anti-ESG efforts in recent years among conservative groups, which have mounted a multimillion-dollar campaign targeting such initiatives, including ESG investments, The Wall Street Journal reported in 2023.

This year, BlackRock CEO Larry Fink notably skipped any references to ESG or sustainable investing in his annual open letter to investors, reflecting Wall Street's widespread retreat, at least publicly, from those terms.

Kathlyn Collins, vice president and head of responsible investment and stewardship at Matthews Asia, said that the industry "hype" around ESG and sustainable investing "hit a peak" a few years ago, "and I think that's when we started to see some of this backlash."

"This was niche a long time ago and did become mainstream, and the backlash really started happening then," she said. "When you look at the issues that fall under E, S, and G, it really was this amalgamation of things that didn't make sense to lump together. It was this umbrella term that meant a lot when you used it."

"Perhaps investors were never super clear about describing what they meant when they used that term," she said.

Targets out, profits in. Some ESG fallout was also in response to greenwashing, or asset managers making broad sustainability claims that couldn't be substantiated, Collins added.

In response to the changing political and regulatory landscape, money managers have shifted their sustainable investing efforts to a strategy that is less about "broad statements and joining organizations, and more about linking it back to why you are doing it in the first place," Collins said.

"What are the profit centers? Is sustainability profitable?' she continued. "I think people are still trying to figure that out. It's less about having targets, quotas, and commitments -- and more thinking about what is driving business value."

Although many institutional investors appear to be resolved in their commitment to ESG, global flows data show that general investor sentiment may be shaky.

During the first quarter, the global sustainable fund universe (which Morningstar defines as open-end and exchange-traded funds focused on sustainability; impact, or environmental, social, and governance factors) had record net outflows of $8.6 billion, according to a Morningstar report. That marked a significant downturn from the fourth quarter of 2024, when there were $18.1 billion of inflows.

Morningstar attributed the flows reversal to "an increasingly complex geopolitical environment -- shaped in part by President Donald Trump's return to the White House," which "deprioritized sustainability concerns in Europe, including climate goals," the report said.

"In addition, Trump's anti-climate agenda and anti-ESG policy measures such as an executive order targeting diversity, equity, and inclusion, have introduced new legal risks. These developments have prompted asset managers in the U.S. to adopt a more cautious global approach in promoting their ESG credentials and supporting sustainability issues," the report said.

Institutional investors hold the line. Morningstar's qualitative survey revealed that some institutional investors felt the "real pressure" around ESG investing "is on the asset managers," Kuh said. In these instances, institutional investors saw themselves as "trying to hold the line and make sure these issues get the priority they deserve."

"Broadly speaking, everyone has to come up with a strategy for accommodating the political pressure," Kuh said, noting that most institutional investors see sustainable investing as part of their fiduciary duty -- and not optional.

"Their conviction is nonnegotiable," Kuh said.

Morningstar did find that institutional investors' efforts were shifting from fully decarbonizing their investment portfolios to figuring out how to engage with companies and understand their strategy for remaining competitive in a "decarbonizing economy," Kuh noted.

"Climate is very much at the top of the agenda for asset owners," he said. "It has been and is continuing to be."

Collins at Matthews Asia said that the industry has been renaming strategies to "move towards an inclusive, rather than exclusionary approach," around ESG investing.

"We are seeing demand there around the transition theme," Collins said, referring to institutional investors. "So it may not be excluding companies that are in fossil fuels, but investing in those that are transitioning" away from them, she said.

Write to advisor.editors@barrons.com

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July 09, 2025 12:09 ET (16:09 GMT)

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