ESG and the Presidential Election: What Lies Ahead

The popular adage that Wall Street doesn’t care about elections, the markets just want certainty, is as fitting for this election as it has ever been. But within the financial markets, the exception to the rule might be the ESG space.

When it comes to environmental, social, and governance investing, the contrasts couldn’t be starker between Republican Donald Trump and Democrat Kamala Harris.

This is not to suggest the next U.S. President will mark an uber-bearish or -bullish sign for ESG investing. But it will most likely pave the way for a measurable level of support for the category.

“I don’t think Harris will create a golden age for ESG, nor do I think Trump will snuff it out,” said Tom Kuh, head of ESG Strategy at Morningstar Indexes.

“It’s really a question of the way in which their respective policies might affect issues important to ESG investors,” he added.

Judging by Trump’s support for fossil fuels, both during his presidential term and as a candidate, Kuh is assuming certain ESG strategies will get less support from the federal government under a second term.

“I’m pretty sure the Department of Labor, under Trump, tried to revert to some earlier, more restrictive rules for fiduciaries on ESG investing,” he said.

For Harris, Kuh is relying on her campaign pledges and the direction of ESG support that has unfolded under President Joe Biden.

“The pendulum has swung back and forth in terms of DOL rules, and that kind of uncertainty is exactly what investors and companies don’t like,” said Kuh, who added that under Biden, the Securities and Exchange Commission cracked down on ESG disclosures to try and tamp down abuses such as greenwashing.

“We’re talking about an industry that developed almost completely unregulated,” he added. “It’s really about providing a stable foundation for growth and the kind of continuity that seems to be missing.”

The Presidential Contrast in ESG Investing

David Demming, Sr., president of Demming Financial Services in Akron, Ohio, also sees ESG as an investment strategy most directly impacted by this election.

“ESG was essentially a non-issue with Trump denying it and Harris ignoring it,” he said. “Hopefully if Harris wins it will become a real topic.”

But even if Harris wins the election and is able to bolster support for ESG issues, it remains to be seen how much appetite investors have for ESG strategies.

The category, which enjoyed a brief heyday of hot demand from 2020 through 2022, has been floundering ever since with poor performance, higher fees, and seven straight quarters of net outflows from ESG mutual funds and ETFs.

According to Morningstar, ESG funds have only had two months of net inflows since August of 2022.

“If you set aside how people feel about sustainable investing and think of the characteristics of ESG funds, they tend to be growth stock strategies, which have been losing flows to fixed income over the past few years,” said Ryan Jackson, senior manager research analyst at Morningstar.

“ESG is just narrower stock portfolios, and the one pocket of equities that has done well is the broad-based equity index funds,” he added. “Once the luster came off the ESG performance, you saw them falter. It’s less about being anti-ESG than it is about poor performance.”