Premal Ranchod, Head of ESG Research, and Mpho Molopyane, Chief Economist, at Alexforbes

The global transition to net-zero faces a critical crossroads, caught between the push for decarbonisation and the pull of deregulation. As political shifts and economic pressures reshape environmental, social and governance (ESG) commitments, asset managers must navigate an increasingly complex landscape – one that tests both their sustainability pledges and fiduciary responsibilities.

The challenges of net-zero

The Net-Zero Asset Managers (NZAM) initiative was created to align financial institutions with the global goal of achieving net-zero greenhouse gas emissions by 2050. However, the recent withdrawal of key financial sector participants, such as global banks and asset managers, has signalled growing tensions between regulatory pressures, political shifts and market realities.

These exits have been driven by several factors, including legal scrutiny, client expectations and the increasingly complex landscape of ESG integration.
While some financial institutions remain committed to the transition, others are reassessing their ability to meet net-zero targets amid regulatory uncertainty and shifting energy policies. The implications of these developments create headwinds for the net-zero movement and decarbonisation pathways for many companies and countries.

The political landscape

The decision by asset managers to exit NZAM is reflective of both the growing difficulty of implementing net-zero strategies and the changing political environment, particularly in the United States (US). This follows on from President Donald Trump signing Executive Order 14162, titled ‘Putting America First in International Environmental Agreements’, directing the immediate withdrawal of the US from the Paris Agreement and other international climate commitments.

The initial commitment to net-zero by companies was relatively straightforward – many signed pledges, attended summits and made public declarations. However, the operational reality of these commitments has proven far more challenging, requiring dedicated teams, robust frameworks and difficult investment decisions, particularly in regions where fossil fuels play a critical economic role. Certain fiduciaries have cited that while they are allocating capital, they do not have the mandate to provide advice. As a result, they are not able to make commitments to decarbonise without clients mandating them for such a pathway. In jurisdictions like the US, where state-level regulations are increasingly hostile to ESG mandates, some managers have found themselves legally constrained in their ability to exclude high-emission sectors, like oil and gas, from their portfolios. Banks, for instance, must balance their commitments to net-zero with the legal requirement to finance industries that are politically and economically protected.

President Trump’s election has introduced additional uncertainty. His administration has already taken steps to dismantle climate-related policies, including a second withdrawal from the Paris Agreement, a push back of environmental regulations and a renewed emphasis on fossil fuel development. Executive orders have targeted not only climate policies but also corporate diversity, equity and inclusion (DEI) initiatives, further complicating the ESG landscape.

These moves have led to increased regulatory uncertainty, making it difficult for asset managers to maintain a consistent long-term approach to sustainability. For instance, the Bezos Earth Fund ended its support for the Science Based Targets initiative, raising concerns about the influence of political pressures on environmental philanthropy. Some companies have therefore chosen to exit NZAM as a way to reset their ESG commitments in a more flexible manner, without being bound to rigid targets that may conflict with political and economic realities.

The Inflation Reduction Act

Despite these challenges, the Inflation Reduction Act (IRA), passed under the Biden administration, has been a major driver of renewable energy investment in the US, particularly in Republican-led states. The IRA provides $500 billion in tax incentives over a 10-year period to accelerate clean energy and infrastructure development, making it the largest climate-focused investment in US history. Importantly, the economic benefits of the IRA have been disproportionately concentrated in Republican states, with an estimated 80% of clean energy projects located in these regions. This dynamic creates an economic paradox: while Republican leadership may politically oppose climate policies, their states are among the largest beneficiaries of green investment. This reality may make a full push back of the IRA politically difficult, even under a Republican-led government.

While Trump has been vocal about his opposition to the IRA, history suggests that certain renewable energy incentives could survive, as was the case
when the Production Tax Credit for wind energy was reauthorised under his administration in 2018. As a result, while the political rhetoric surrounding climate policy remains contentious, the financial incentives embedded in the IRA may continue to drive renewable energy development, even in a political environment that is less favourable to ESG principles. For asset managers, this means that while the short-term political landscape is uncertain, the long-term economic case for sustainability remains intact.

Does this derail sustainability?

The exits from NZAM and the political challenges facing ESG investing have created a headwind for global transition to sustainability. Due to evolving US
policies, and varying regulatory and client expectations, NZAM is reviewing its initiative to stay relevant in the changing global landscape. Asset managers remain committed to ESG and sustainability despite any regulatory changes or reviews impacting Paris aligned commitments. While there is no doubt that these developments introduce shorter-term obstacles, they are unlikely to completely derail the shift toward a greener economy. Many financial institutions, including those that have left NZAM, continue to integrate ESG factors into their investment processes, albeit with a more flexible approach that aligns with regulatory realities. Additionally, some asset managers, such as those still committed to NZAM, emphasise the financial risks posed by climate change and continue to view sustainability as a core part of their fiduciary duty.

Furthermore, while President Trump’s policies may slow the pace of decarbonisation in the US, global momentum for climate action remains strong. Other
regions, including Europe and parts of Asia, continue to advance ambitious net-zero policies, and companies worldwide are increasingly recognising the business case for sustainability.

In South Africa, the take up of a net-zero initiative has been relatively slow. The select few asset managers who have signed the NZAM initiative remain committed to championing the Just Energy Transition cause. Despite the recent setbacks, they cite that NZAM remains an investor-led initiative. The energy crisis over the past two years, while disruptive, led to significant investment into renewable energy and fast tracked the restructure of the state-owned energy provider. Locally, there are opportunities to strengthen regional partnerships with other countries committed to the green transition. The push towards renewables is driven not just by regulation but also by economic incentives, technological advancements, and shifting consumer and investor preferences.

Navigating the net-zero path

The recent exits from the NZAM initiative and the shifting US political landscape have complicated the global sustainability movement. While setbacks in
climate policies and growing scrutiny of ESG investing present challenges, they do not end net-zero ambitions. The IRA continues to support renewable energy investments, particularly in fossil-fuel-dependent states, highlighting the tension between political narratives and economic realities. Despite uncertainties, the underlying drivers of sustainability – economic opportunity, risk management and technological progress – remain in place. The transition to a low-carbon economy is likely to persist, even amid political and market changes.

ENDS