Will Sustainable Finance Survive Trump’s Attacks?

In just a decade, ESG investing has shifted from an obscure industry niche to a global financial wave. However, the world of sustainable finance has just endured its worst quarter on record in Q1 of 2025, with net outflows totaling $8.6 billion. In the previous quarter, there were $18.1 billion in restated inflows, indicating a drastic change in investor sentiment.

On the 20th of January 2025, Trump’s exit from the Paris Agreement set a clear precedent for his Administration’s stance on environmentalism and ESG. This, coupled with his rejection of the mere existence of climate change, has marked the first in a series of moves to dismantle the regulatory scaffolding that supported sustainable finance. The question now confronting investors and policymakers alike is whether this signals the unravelling of sustainable finance, or whether consumer and investor demand has become self-sustaining, driven by a genuine market preference for investments in firms that acknowledge their environmental and social responsibility.

Background

ESG refers to a set of environmental, social, and governance criteria used by investors to evaluate possible sustainability risks and responsibility. Sustainable funds are investment vehicles that allocate capital toward companies or projects that demonstrate strong environmental or social performance. The composition of such sustainable funds is set by asset managers but constrained by regulators. Holdings are labeled “sustainable” based on fund mandates, which specify the sectors excluded and the activities permitted.

 The modern ESG industry traces its roots to the establishment of the Pax World Fund in 1971, the first publicly available mutual fund to use social criteria in its investments. The founders were opposed to the Vietnam War and wanted to ensure that their churches’ investment dollars were not funding weapons manufacturers. Just over 50 years later, in 2024, global assets in ESG-aligned funds were valued at over $30 trillion, around one in every 5 dollars invested worldwide.

Trump’s Attack

Trump's SEC appointees have made notable efforts to deprioritize climate-related disclosure enforcement, arguing that investors should “focus on fundamentals, not ideology”. This approach reflects a broader view within the Trump administration that ESG and climate disclosures represent regulatory overreach and politically motivated interference in capital markets. This move dismantles years of progress made under the Biden administration's climate disclosure framework. New SEC rules, introduced in March 2025, provide corporate management with greater abilities to block or dismiss ESG-related resolutions proposed by shareholders. As a result, many ESG proposals are being scrapped. By mid-2025, around 40% of ESG resolutions had been excluded from shareholder ballots, reflecting a contraction in investors' ability to hold companies accountable over environmental and social issues. The administration has also signaled that non-profits and philanthropic foundations engaged in climate advocacy could face inquiries into their tax-exempt status. This move has been interpreted as an attempt to discourage climate-focused lobbying and research.

The consequences of this stance have sent ripple effects into the private sector. In a striking reversal of tone, Goldman Sachs became the first major American bank to exit the Net-Zero Banking Alliance. This was then followed by Wells Fargo, Citigroup, Morgan Stanley, and, most recently, JPMorgan Chase. The UN convened this initiative to align the banking sector with the terms of the Paris Agreement. This was done by making banks hone in on reaching net-zero on their “financed emissions”, which are the emissions linked to a bank’s lending and investment activities rather than its own direct operations. This is significant as financed emissions are the only core metric for evaluating how “green” a financial institution truly is. This mass withdrawal reveals a broader U.S. retreat from coordinated climate finance, highlighting how policy shifts can quickly descend into private-sector disengagement.

Under the Trump-era deregulation, the definition of ESG has also widened, granting asset managers the ability to allow more energy-intensive and polluting firms to re-enter “sustainable” portfolios. This has raised uncertainty around ESG classifications, prompting investors to reprice risk and, in some cases, withdraw capital altogether.

So, how have all these changes within sustainable finance actually impacted investors and asset managers? ESG products have typically become harder to assess and carry a higher perceived risk, mainly due to new SEC climate disclosure rules. Less climate disclosure leads to less reliable information, making it harder for investors to identify genuinely sustainable firms. Dwindling green bond issuance has also reduced the total capital available for climate projects, which are typically capital-intensive investments such as renewable energy, clean transport, and energy-efficient buildings. The US government finances these projects with the bond proceeds, so as fewer and fewer green bonds are issued, less capital is available for such projects. As institutional investors increasingly price climate and regulatory risk into required returns, lower bond prices and higher yields have raised the cost of capital for these projects. Political and legal pressures have also led to US banks and asset managers rebranding or withdrawing ESG funds to avoid being targeted by state regulators. This has reduced overall investor choice, making it harder for institutional and retail clients to find sustainable options.

Market Consequences

Now that the growing misalignment between the White House and ESG has been identified, ESG investors are wondering what happens when the US - the world’s largest capital market - makes a retreat from sustainable finance. One relevant economic indicator is the US’s green bond issuance, the total value of bonds issued by US entities to finance sustainable projects such as renewable energy or EV infrastructure. The issuance of these sustainable financial products fell by nearly 45% from Q2 2024, when their total value was $43.3bn. A year later, the value of green bonds issued was only $24.4bn. Together, these figures reveal that the signals sent from Washington have immense sway over the direction of sustainable finance in the US. 

The instability in the US for ESG investors might be seen as an incentive to relocate operations and/or funds to Europe and Asia. Traditionally, Europe has been a stronghold of ESG, with the EU and the UK dominating green bond issuance and sustainability regulation being built into their financial systems. However, this title is under scrutiny after inflows into global sustainable funds have slowed by nearly 40% year on year in 2025. For the first time, European sustainable funds saw quarterly outflows of $1.2bn in Q1 of 2025, a notable reversal from the $20bn in inflows seen in Q4 2024. A similar story is emerging from Asia, where sustainable fund growth has slowed after 5 years of rapid expansion. ESG-branded fund inflows across Asia fell 27% compared to 2023 levels, especially in Japan and Singapore, which were the previous continental leaders of sustainable finance. 

While these outflows occurred outside the United States, they are not disconnected from developments in U.S. policy. As the largest market for global investors, the U.S. plays a central role in setting global investment sentiment and risk pricing. Signals from Washington that deprioritised climate policy and ESG disclosure contributed to a broader reassessment of the industry, prompting mobile capital to retreat from ESG strategies across regions rather than reallocating exclusively within them.

ESG investing also faces inherent limitations that extend beyond U.S. policy changes. Rather than directly driving environmental or social outcomes, ESG strategies are primarily designed to include non-financial risks into conventional risk–return frameworks. As a result, capital allocated to ESG funds does not necessarily flow toward the activities that deliver the largest emissions reductions, constraining ESG’s effectiveness as a mechanism for systemic change. As ESG functions largely as a risk-management tool rather than a tool for driving direct environmental impact, investor demand is highly sensitive to broader market conditions. Periods of higher interest rates and energy security concerns reduce appetite for ESG strategies, helping explain why global investor sentiment toward ESG has softened even in regions where regulatory support remains strong.

The clear global stagnation of ESG enthusiasm indicates a knock-on effect of Trump’s attack on environmentalism. This is not a surprise given the status of the US as the world’s largest capital market. Perhaps, this decline indicates that demand for ESG products has been artificially propped up by regulation and political sentiment. In this sense, Trump’s reversal of US climate policy has not only caused disruptions to ESG financial markets globally but also exposed their fundamental flaws.

Conclusions

Trump’s approach to climate policy and regulation has undoubtedly sent shockwaves through the world of sustainable finance, highlighting a huge dependency on political and regulatory support. 

The ESG outlook over the next few years is likely to be set in stone. For the remainder of Trump’s term, ESG activity in the US is likely to continue operating at levels below those of the Biden administration. However, the damage done is by no means irreversible, and the mere continuation of ESG activity and the billions still flowing into sustainable investment vehicles proves that there is an intrinsic consumer demand. That said, investor sentiment toward ESG has softened in the current economic and geopolitical climate, as higher interest rates, energy security concerns, and mixed ESG fund performance have reduced risk appetite independent of US regulatory policy. Ultimately, the durability of ESG will hinge on who occupies the White House next. A future administration that restores climate disclosure rules and backs sustainable finance could reignite the industry, while another sceptical presidency would lead to a continuation of the status quo.