Balancing act: Climate action in shifting political tides

So much has been made of the rise in anti-climate policy and rhetoric this year, that it can be easy to lose sight of what progress has been made or fear that all will be reversed with new policies and investor preferences.

The (Republican) elephant in the room has been very much at the fore and whether a Trump presidency will undo much of Biden’s climate policy, including the much-publicised Inflation Reduction Act. The slim majorities in the House and Senate, with the Republicans in the latter showing strong support for the Act given it, has brought employment to predominantly Republican states, means it will be very difficult for him to reverse. We can also look at what happened during the previous Trump presidency as a guide to the future energy trajectory, despite his calls to “Drill, baby, drill”. According to the US Energy Information Administration (EIA) coal production fell dramatically during his last four-year term, continuing its declining trend for the previous decade while renewable capacity rose and continues to rise.

In the rest of the world, we saw the last coal power station close in the UK, removing coal as a source of electricity in the move to decarbonise. This acts as an example to other countries that it can be done. The Labour government is putting climate back at the fore of public and foreign policy. Just this month, Canada added a 2035 target to ensure steady progress to net zero by 2050. In the EU, the Action Plan on Sustainable Finance aims to shift capital flows away from activities with negative social and environmental consequences and direct them towards responsible investing. While China’s emissions are still rising, climate policy is a key priority for the Party with renewable capacity being added at a rate twice that of the rest of the world as it looks to ensure emission peak in the coming years.

The imperative isn’t just coming at the macro level, companies themselves have been taking the initiative to set science-based targets for their own net zero transition. Science based targets are a critical tool for corporates to align emissions reduction with climate science, aligning with the targets of limiting global warming to below two degrees Celsius above pre-industrial levels.

The Science Based Targets initiative (SBTi) provides companies with a clear framework to set and achieve targets while aiding the transition to a low-carbon economy. While the companies that adopt the targets see substantial reductions in greenhouse gas emissions contributing to the global climate goals and enhancing environmental credentials, they also drive innovation and operation efficiency. Research undertaken by McKinsey indicates that sustainable initiatives can improve operating profits by up to 60%. By proactively addressing emissions, companies can mitigate long-term and short-term risks associated with regulatory changes, carbon pricing, and resource scarcity leading to higher input costs for companies.

As of December 2025, there are more than 12000 companies that have validated targets or have committed to set them, with the highest number of companies with approved targets being from Japan, the UK, and the US.  With an increase of 61% in 2025 in the companies being validated globally, the S&P 500 consists of 39% of companies that have science-based targets and 4% have commitments. The rising adoption of science-based targets highlights their critical role in mitigating climate risks, enhancing profitability, and securing long-term shareholder value in a transitioning global economy.

Investors have been taking note and we do see continued appetite for sustainable funds, albeit regional differences have emerged.

The global sustainable open-end and exchange traded funds did record net outflows in the fourth quarter of 2025, a lot of which was redemptions from large UK institutional investors relocation into bespoke ESG mandates from pooled funds. Despite these outflows, the global sustainable funds asset increased by about 4% to USD 3.9 trillion in Q4 2025. The regional difference are prevalent, for instance, Europe accounts for almost 86% of the global sustainable fund assets, followed by the US and rest of the world. Further when we talk about fund flows in Europe, in Q4 2025, passive sustainable funds did witness modest inflows of USD 685 million.  In contrast, the United States faced challenges in the sustainable investment arena. U.S. sustainable funds experienced net outflows for the sixth consecutive quarter, with redemptions totalling approximately US$4.6 billion in the fourth quarter of 2025. The trend in the market reflects a growing anti-ESG sentiment there and the political backlash in the US against sustainable investing lead to increased scrutiny and divestment from the ESG focused funds. The varying regional perspective on sustainable investing is highlighted by the disparity between Europe’s proactive stance and US’s cautious approach.

The contrast between the US’s ongoing challenges and Europe’s leadership in sustainable investing highlights regional dynamics, but the global expansion and market resilience and growth signals a strong foundation for future growth in the wake of a stronger regulatory environment and ongoing investor demand.

For investors considering how sustainability and climate policy may impact long‑term investment decisions, speak with your Davy adviser.