Green Ideology Goes Out of Fashion

A 2025 outlook? The green color may no longer be in fashion. The United Nations (UN) Annual Conference of the Parties (COP29) was held in Baku, Azerbaijan in November 2024. Its main theme was the environment, climate change, and the energy transition. However, unlike other years when the world’s attention was focused on the United States, where the presidential election recently took place, the 2024 COP drew more attention because of the tensions that arose during its holding. Shortly after the meeting began, Argentine President Javier Milei withdrew his country’s 80-member delegation, citing the lack of a pragmatic energy policy that would encourage development rather than hinder it. Subsequently, the French climate minister, due to political differences with the host country’s president, refused to return to participate in the work of the assembly.

The host also distinguished himself with his statements on his desire to encourage and increase investment in the natural gas sector, the backbone of Azerbaijan’s economy, and with his statement that hydrocarbons are a “a gift of God,” he clearly expressed the views of many developing countries that are reconsidering their positions on climate change. Saudi Arabia has gone from words to action, blocking a $100 billion-a-year funding plan designed to help the poorest nations make their economies more environmentally friendly and sustainable, demonstrating its unwillingness to continue the energy transition process, agreed to and signed in Dubai the previous year.

However, despite the bickering and obstructionism, the final declaration of COP 29 not only reaffirmed the intention of the richest countries to finance energy transition projects in the poorest countries, but also increased the annual amount allocated for this purpose to 1.3 trillion dollars per year by 2035. Of this amount, $300 billion will be provided through public funding and multilateral agreements at the national level, with the remainder expected to be provided by the private sector. However, in light of the US election results, major environmental projects may remain only on paper, as the new White House host has already shown that he has different views on the green agenda.

Some of the executive orders signed by President Trump immediately after his inauguration leave little room for imagination regarding his administration’s future environmental policy decisions. Immediately after the declaring an energy emergency, the USA withdrew from the 2015 Paris climate agreement and then signed an executive order on “Unleashing American Energy,” aimed at incentivizing not only US hydrocarbon production, but, more generally, all minerals that can contribute to and sustain the US economy. At the same time, restrictions on the sale of vehicles with internal combustion engines and allowances for the purchase of electric vehicles have been cancelled.

The world of finance, always keen to anticipate changes in the market, has already prepared for a change of course. BlackRock, which at the end of 2024 managed $11.6 trillion in funds in early January, withdrew from the Net Zero Asset Managers (NZAM) initiative, a group of asset managers dedicated to achieving a net zero emissions strategy by 2050. This sudden exit by the American company put the NZAM initiative in a serious position, to the point that it had to revise its objectives to accommodate the new expectations of its customers. Even Wall Street seems to have decided not to take any chances: Goldman Sachs, Wells Fargo, Citigroup, Bank of America, Morgan Stanley, and J.P. Morgan Chase again in early January exited the Net-Zero Banking Alliance, a group of global private banks that, under the UN auspices, have committed to aligning their lending and investment activities to achieve the goal of net-zero emissions by 2050. This outcome is not surprising, as even the US Federal Reserve (Fed), days after President Trump’s inauguration, announced its withdrawal from the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), a group of global central banks committed to “integrating climate and environmental risk management into the financial sector and mobilizing finance to support the transition to a more sustainable economy.”

However, the speed with which financial players have changed course cannot be considered a surprise. Despite political pressure and economic incentives from governments to support green policies and the energy transition, many companies, and not only financial ones, have shown little or often only superficial commitment to supporting the fight against climate change. Even environmental, social responsibility, and governance (ESG) principles have never really been able to encourage companies to focus on environmental or social issues, and in the recent past, ESG has become increasingly irrelevant to companies. According to the Association of Investment Companies (AIC), the UK trade association for the closed-ended investment company sector, the percentage of investors, considering ESG investments, has fallen from 65% to 48% between 2021 and 2024. Not only interest is declining, but financial interest as well. Investment flows, which peaked at the end of 2020, have declined sharply since 2021, to the point where by the end of 2023, a permanent capital outflow was recorded. However, investors are not the only ones who have lost interest given the sharp decline in ESG investment returns. In fact, according to a PricewaterhouseCoopers (PwC) survey released in September 2024, CEOs of US companies confirmed their detachment and distancing from ESG practices, to the extent that only 47% consider them an integral part of their companies’ operations.

It is therefore not surprising that over the years there have been more and more attempts to “circumvent” the rules so as not to harm the financial performance of the companies themselves, to the point where the term “greenwashing” has emerged to describe practices and/or behaviors by which companies give the impression or even misleading information that their products or production processes are sustainable or have a lower environmental impact than they actually do. For example, in 2019, McDonald’s announced that it had reduced the use of single-use plastic straws in its drinks, replacing them with recyclable paper straws, even though they’re not actually recyclable. Another example of green PR is the case of Royal Dutch Shell, which had to defend itself in court against accusations that it had failed to deliver on its zero-emissions promises by spending only 1% of its long-term investments in low-carbon energy projects over many years. Automaker Volkswagen was also found to have falsified emissions data for its diesel engines in 2015 and subsequently faced billions of dollars in fines for defrauding consumers.

In October 2023, Aswath Damodaran, professor of finance at the Stern School of Business in New York, wrote in the Financial Times an article entitled “ESG is beyond redemption: may it RIP,” calling for the abandonment of ESG practices given their incurable structural problems. While, on the one hand, trillions of dollars are promised to combat climate change, ESG investments fail to quantify not only the benefits to the environment and society, but also their true economic return. The rationale of “increasing value for shareholders and investors” is no longer sufficient to justify these investments.

The financial sector has come up with other green money laundering schemes. For example, so-called ESG investment funds have generated multiple discussions. Although by definition they were supposed to hold shares in environmentally and socially responsible companies, they actually copied the structure of other non-ESG funds, even though the fees applied were generally higher, precisely because of their ESG component. The practice was so widespread that the competent authorities had to intervene, and in September 2023, the US Securities and Exchange Commission amended its directive on investment names to require funds “to invest at least 80% of the value of their assets in the type of investment intended by the name of the financial product itself.” The reason for this practice should perhaps be sought in a 2021 analysis by the Boston Consulting Group (BSG), which recorded a 4.6% drop in investment fund profitability, due to a greater prevalence of passive investment strategies among their clients.

Despite regulatory changes, such greenwashing techniques are still practiced, and so widely that in October 2024, ClientEarth, a nonprofit legal and environmental organization, asked the French Financial Markets Authority to investigate BlackRock’s practices, accused of managing “sustainable” funds that actually include positions worth several billion dollars in oil companies.

Banks have also come under scrutiny. A study by the Tax Justice Network, a non-profit organization, revealed how financial institutions, in order not to miss out on significant returns on investments in traditional but not “green” energy sources, have managed to keep their investments in the hydrocarbon sector, hiding behind the financial secrecy. The results of the analysis, if confirmed, will reveal a situation that does not at all reflect the statements and intentions of the banks themselves to combat climate change or emissions. In fact, the world’s 60 largest banks cover about 68% of financing in the hydrocarbon sector, which is provided to subsidiaries registered in countries with rather vague transparency laws and then transferred to the regions or countries where the funds are required. While overall funding levels have decreased from 2019, when funding reached $1 trillion, funding in 2023 is expected to reach 705 billion US dollars. The data collected show that US banks have always been very active, most notably J.P. Morgan, which was to provide $430 billion between 2016 and 2023.

So, the moment when financial actors abandoned their green course may not come as a surprise and should not even be unexpected. It is no coincidence that since nuclear power was defined as a “clean energy source” at the 2023 Conference of the Parties, the world’s largest commercial banks have expressed their commitment and interest in financing future projects to build new power plants, demonstrating that financial institutions have been and continue to be pragmatic about the environment, as the most important decision-making factor is to improve returns on leverage.

So, in the end, although it is argued that ESG adds value to everyone who has an interest in a given company (stakeholders), profit is the only metric that shows what and how much economic contribution a given company makes to society. Perhaps the green color was never in fashion.