By EY South Africa Strategy & Transactions Sustainability Partner James Brice

The recent survey conducted by Pensions for Purpose, a UK organisation dedicated to promoting and supporting impact investing within the pension industry, has thrown a stark light on the concerns pervading the European investment community concerning the future of Environmental, Social and Governance (ESG) and sustainability practices under a second Donald Trump presidency.

A staggering 93% of UK and Europe-based institutional investors expressed significant unease about the potential rollback of climate policies in the US, which could have ripple effects across the global financial landscape.

This apprehension is not without foundation.

Trump, on his first day back in office, signed an executive order to withdraw the US from the Paris Agreement, an international treaty aimed at combating climate change. This action signals a clear shift towards policies favouring fossil fuels, potentially undoing years of progress in climate action. The survey further reveals that only 17% of respondents felt that US sustainability developments do not influence their investment decisions, underscoring the interconnectedness of global sustainability efforts.

Despite these concerns, the resilience of the European investment community is evident.

Over half (58%) of the surveyed investors plan to increase their allocations to impact investments over the next year, with another 42% committed to maintaining current levels. This indicates a strong belief in the long-term value of sustainable investing, even in the face of adverse policy shifts in one of the world's largest economies.

As Pensions for Purpose notes, “the fact that 93% of investors are concerned about the state of sustainability in the US, combined with the significant influence of US developments on their strategies, highlights the interconnected nature of sustainability in today’s global economy. However, there is strong momentum to increase sustainability allocations, which reflects the resilience and commitment of institutional investors to driving meaningful change.”

This commitment to sustainability comes at a critical time when the planet is teetering on the brink of a climate tipping point.

The Paris Agreement set the ambitious target of limiting global warming to well below 2º C, with efforts to cap it at 1.5º above pre-industrial levels. Yet, 2024 marked the hottest year on record, with temperatures already exceeding the 1.5-degree threshold, following a decade of unprecedented warmth and extreme weather events.

To align with the Paris targets, global emissions need a drastic cut by 43% by 2030 to achieve net zero by 2050, necessitating a profound transformation in energy systems worldwide. However, the reality is stark; global greenhouse gas emissions in 2024 were projected at a record 41.6-billion metric tons of CO2. While renewable energy has seen exponential growth, up 415% since 2000, it still only accounts for 13% of world energy consumption, with forecasts predicting an increase to just 20% by 2030. In contrast, fossil fuels remain dominant, comprising 82% of energy use, with no significant decline in sight.

The situation is epitomised by China, which, despite being a leader in renewable energy and electric vehicle sales, continues to expand its coal power capacity. This paradox of investing in both clean and dirty energy sources reflects the broader global challenge where economic development often still leans heavily on fossil fuels.

The failure to reach a consensus on phasing out fossil fuels at COP29 in Azerbaijan underscores the diplomatic complexities, especially when major emitters like the US, China, India, the EU, Russia and Brazil must navigate the divide between current responsibilities and historical emissions. The US's retreat from the Paris Agreement casts a long shadow over future climate negotiations, notably at the upcoming COP30 in Brazil, where discussions are expected to intensify on climate finance, aligning national commitments with Paris goals, and addressing the needs of the most vulnerable communities.

The withdrawal of the US from the Paris Agreement not only complicates the global fight against climate change but also adds layers to the challenges Brazil will face as host of COP30. These include securing adequate financing for energy transitions in developing countries and managing new pledges for emissions reductions amid a backdrop of increasing energy demands from sectors like data centres and cryptocurrencies.

In conclusion, while European investors are rightly concerned about the direction of US policy under Trump, their commitment to expanding sustainable investments showcases a belief in the necessity and inevitability of a green transition.

The global business community, therefore, stands at a crossroads: continue to invest in the future of the planet or risk being left behind in a world where sustainability is not just an ethical choice but a strategic necessity.

The coming years will test the resolve of investors, governments and industries alike to steer away from the brink and towards a more sustainable horizon.

EY combines deep technical skills across a breadth of business issues to deliver value-led sustainability. Discover our sustainability and ESG services and solutions here https://www.ey.com/en_za/services/sustainability.