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Stranded assets or green energy? Which category performs best? The answer might surprise some.
Perhaps an American administration ago, the answer might have come in unison with their EU partners. Now the EU and the US are growing further apart in their stances on green-energy-friendly impact investing.
Recently, the EU Parliament voted to scale back some ESG regulations as the divergence between the US and the EU continued to grow.
The reasons for the change were simple: "They won”, said Pascal Canfin, an MEP for the centrist Renew Party, with “they” being the American Chamber of Commerce and fossil-fuel industry.
So, what does a different approach – and tenuous attempts to bridge it – mean for insurance investors?
About a generation ago, US and European companies were mostly aligned in their goals to combat climate change, an important aspect of impact investing. It was the US in 2015 that used its diplomatic clout to sign most of the world up to the Paris Climate Change Accord.
"These poorly performing woke financial scams are radical left garbage that would never be funded on their own."
Now, things are shifting.
“These people are sick. These poorly performing woke financial scams are radical left garbage that would never be funded on their own, and certainly never be funded on their own merits”, said then second-time US Presidential nominee, Donald Trump, in 2023 about those people and funds investing in green-friendly ESG investments.
The new administration has turned on green energy, and insurers have been left struggling to sufficiently diversify their portfolios and match their long-term liabilities.
And today, in the US, stranded assets have enjoyed a new lease on life, whereas in Europe, insurers have piled heavily into the green energy space.
For insurers managing trillions, this divergence in transatlantic behaviour creates a dilemma. The US has disincentivised green investment, while in Europe it is actively encouraged, thus forcing insurers to choose between markets and align with what they see as the long-term trajectory of climate policy in the West.
Donald Trump is representative of a growing change in the US regarding investing in ESG and more green impact investments.
“The environmental, social and corporate governance movement has produced an opaque and perverse system."
Local state officials are also going after those investors.
“The environmental, social and corporate governance movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy,” said Glen Hegar, the State Comptroller of Texas.
Whilst this is not new, the rhetoric and nervous response from the industry has increased.
One major aspect of impact investing is the goal to combat climate change, a phenomenon that the current President calls a scam. But it isn’t just rhetoric; the administration has made cuts to fund the transition from fossil fuels.
Instead, the administration is pursuing investment into stranded assets, which some insurers might be benefiting from; as of 2019, insurers had $536 billion in fossil-fuel-related assets, according to sustainability consultancy ERM, investor advocacy group Ceres, and carbon accounting firm Persefoni, which they said is unlikely to have changed much since then.
At the same time, the Europeans are investing heavily in the green energy space.
In the EU, insurers have many opportunities to get into green energy. Nuclear energy, wind, and solar opportunities abound.
And insurers have capitalised on this green-friendly environment. For example, Zurich and Amundi have launched the Zurich Global Green Bond Fund. The fund allows customers to invest in the “global green bond market.” Those funds then fund private renewable energy projects.
"The market is evolving from simple ESG integration towards actively deploying capital into transition projects."
Supranationally, the European Union has launched several programmes in order to modernise countries’ energy infrastructures, which rely more on renewable energy.
“The market is evolving from simple ESG integration towards actively deploying capital into transition projects that support both decarbonisation and climate resilience,” said Anne de Clermont, Chief Investment Officer for the UK and Ireland at AXA, in a recent interview with Insurance Investor.
De Clermont, an advocate for sustainable investing, said that the market was further maturing and developing despite the attacks from other areas.“ Collaboration is key – sharing methodologies and challenges helps accelerate collective progress.”
Elsewhere, at the inaugural Insurance Investor Live | Benelux event, held earlier this month in Amsterdam, the overarching theme was the defence of sustainable investment in the European market.
Huge sums of money going into this area and innovative projects were the focus, with complete acceptance of ESG – and moving further to impact investing – being one common thread.
In order to avoid the hostile political environment, US investors have shifted their language regarding their green portfolios. This phenomenon of “green hushing” is in response to the hostile environment outlined above.
Such an environment poses a significant reputational risk in the US, and CEOs who make certain green-friendly investments may be sued.
Therefore, the risk to reputation, from the hostile political environment, and the risk of capital, through the lack of government support, might persuade ESG-keen impact investors to look to Europe.
A more European and green-friendly way of investing provides returns, according to research from AXA. The French-based insurer found that, in 2024, green bonds “outperformed the conventional bond market by close to 2%”. AXA also predicted that the green market would perform similarly well this year.
As the two economic heavyweights diverge on investing strategy, insurers face a stark choice. Take on more risk, reputationally and economically, in the largest economy in the world, or pile into Europe, where investors are welcomed.
As was seen in Brazil earlier this month at COP30, the global market still expects to see some adherence to its values and will move in without the US if necessary. COP may no longer move markets based on grand declarations, but it continues to shape the direction of travel for sustainable finance, from transition plans and disclosure standards to sovereign risk assessments and blended-finance mechanisms. These are still the foundations on which investment strategies rest for most of the planet.
Whatever insurers decide, they cannot dismiss the returns on so-called “woke” green energy investments.
