This is part of a series of blogs exploring the investment markets in some of the largest greenhouse gas emitting countries outside the UK and EU. We delve into how these investment markets are supporting the net zero transition. Here, Randall Ramsahai and Saskia Praill tackle the USA.
The US has historically been among the largest emitters of carbon emissions (per person). Plans for achieving its net zero transition were published in November 2021. The transition plans include an interim target of reducing net greenhouse gas emissions 50% to 52% below 2005 levels in 2030.
The key technological transformations recommended to maintain the US on a trajectory to achieving net zero by 2050 are to:
The US Department of the Treasury published further voluntary guidance for the financial sector in September 2023, which:
Has the US established a ‘green’ investment market capable of supporting its transition? While significant progress has been made so far, the answer to this question is still unclear.
The US investment market for sustainable products has grown significantly in recent years, in part because of investor demand and regulatory change. The market is broad, covering a range of products including green, social and sustainability (GSS+) bonds, sustainability linked bonds (SLBs) and sustainable funds.
Total assets under management domiciled in the US with a sustainable objective and/or using ESG criteria in investment decisions stood at $3.4 trillion at the end of 2023. Major players in the market include public funds, insurance companies, educational institutions and philanthropic foundations. More broadly, considering funds that incorporate ESG issues at all, the net total of sustainable investing assets was reported to be $8.4 trillion in total in 2022.
Green bonds represent the largest segment of climate-themed debt issuance in the US, dominated by agency mortgage-backed securities (MBS) and green municipal bonds (‘munis’). Green munis were the first green bonds to come out, starting in 2013 with a $100 million issuance by the Commonwealth of Massachusetts. Agency MBS are mainly issued by Fannie Mae, a government-sponsored enterprise, with the proceeds used to finance green mortgage loans. Fannie Mae has issued green bonds totalling more than $95 billion since 2012, making it the single largest issuer of green bonds in the world. SLBs are the smallest segment of climate-themed debt issuance.
While the media may portray a reluctance by the general population to accept the need to tackle climate change, it seems this narrative isn’t reflected in the numbers. But there is undoubtedly some level of polarisation within the market.
ESG investing in the US has become divisive and highly politicised. 2022 saw a substantial growth in ‘anti-ESG’ funds, largely driven by the energy crisis and when Republican presidential candidate Vivek Ramaswamy launched the Strive US energy exchange traded funds (ETF). Anti-ESG funds generally target investments that are not included in ESG funds or are unduly punished by ESG ratings providers. However, the size of these funds ($2.1 billion cumulative issuance as at March 2023) has remained relatively small in comparison to ESG funds and have seen net outflows in recent years.
Growing public and political pressure has led large institutional investors such as BlackRock and Vanguard to limit their involvement in various climate change coalitions. Such corporate decisions have been part of a wider trend labelled as ‘greenhushing’ where corporations limit communications on their ESG practices and accomplishments for fear of anti-ESG backlash.
Since coming into office in January 2021, the Biden administration has set ambitious goals to fast track the US on a path to achieving its net zero targets. The administration has also committed to increased funding to developing countries to help achieve their net-zero targets.
The Bipartisan Infrastructure Law was signed into law by President Biden on 15 November 2021. This is the first infrastructure law that explicitly addresses the climate crisis and includes investments aimed at reducing GHG emissions from transportation.
In August 2022, President Biden signed into law the Inflation Reduction Act (IRA). The IRA is the largest investment in green energy and technology in US history. But it’s not without controversy. The domestic content requirement of the act incentivises local manufacturing. It is likely to have a significant negative impact on their close trading partners if it leads to large-scale relocation of manufacturing facilities to the US.
President-elect Trump is likely to take a very different approach to climate change while in office, including ramping up production of US oil and gas. He may leave the Paris Agreement for a second time, having already done so during his first term in office. Biden re-joined the agreement after he came into office. He has also indicated that he could rescind ‘unspent’ funds under the IRA. This remains uncertain as IRA funds for green energy have largely benefited Republican states.
Significant progress has been made by the Biden administration in establishing legislation and providing incentives to develop a liquid sustainable investing market. Green markets continue to expand at pace and investor demand from both private and public institutions show no sign of slowing down. If progress along this path continues, the likelihood of achieving a US with net-zero GHG emissions by 2050 look increasingly positive.
But the change in government in January 2025 means the likely pathway to achieving net-zero is still unclear. With significant gaps in funding still to be addressed and anti-ESG rhetoric being touted by prominent politicians, the US has a long and hard path to net zero.
What are your thoughts on the points raised in this article? What do you think about how equipped global investment markets are to support the transition to net zero?
We would love to hear your views in the comments on the IFoA’s Sustainability Finance Community LinkedIn page.
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