The global conversation around sustainable investing has shifted in recent years — and perhaps nowhere as loudly as in the US. With President Trump once again pulling out of the Paris Agreement and planning to roll back Biden-era green infrastructure funding, climate investment is a hot topic. And amid the rising political temperature, some US asset owners are deprioritizing decarbonization due to reputational risk.
But while the discourse around climate investment has changed, it would be a mistake to think US institutions are backing away from the energy transition altogether. In fact, many are still committing significant amounts of capital — but they are increasingly doing so on economic rather than ethical grounds. This evolving stance presents both challenges and opportunities for transition-focused asset owners and managers.
Seeking a “golden ticket” of returns
Despite shifting priorities, US institutional investors continue to see attractive long-term value in transition assets. The Schroders 2024 Global Investor Insights Survey shows nearly eight in 10 (77%) North American institutions are either currently investing in the energy transition or planning to do so. These investors seem motivated by pragmatism as much as principles. In a world where energy demand continues to grow, transition finance will provide a much-needed source of funding for projects offering attractive investment opportunities for long-term institutional investors.
A US pension fund manager thinks the role of clean energy in providing the electricity needed to power AI will create sizeable opportunities for investors. “This bigger [energy demand] thematic is going to relate to trillions of dollars of CapEx needs. That capital intensity is not going to be derived solely by virtue of sovereign entities or fiscal subsidies, it’s going to come from pools of capital like ourselves and I think that bodes very well…If we could step in as allocators and investors to help subsidize that push further, it’s such a golden ticket for not only sizable returns but for differentiated returns.”
Meanwhile research from Robeco shows nearly half (48%) of North American institutions point to risk-return considerations as one of the biggest challenges facing portfolio decarbonization efforts. This underscores how investors in the region are viewing the transition through a more pragmatic investment lens.
Will political pressures punctuate a new dialogue?
The US political backdrop adds another current of complexity for asset managers and owners navigating an increasingly turbulent ESG environment. For some, sustainability considerations are outweighed by fiduciary pressure to justify investments on purely financial grounds.
The same Robeco study shows just 13% of North American institutions have publicly committed to achieving net-zero emissions from their investment portfolios – far lower than their European and APAC counterparts.
But that positioning has not deterred North American investors from investing in the energy transition with other goals in mind, namely return generation. These different priorities may prompt asset managers to tweak their messaging around the transition to US investors by placing more emphasis on risk, reward and resilience. US institutions ultimately want transition investments that benefit investors as well as the planet.
Navigating transition headwinds
While global institutional investors have broadly indicated appetite for energy transition opportunities, several structural headwinds complicate the investment case. One such factor is deglobalization and reshoring. This trend has been exacerbated by tariffs, supply chain fragmentation, and policy shifts – resulting in rising costs that could impact project economics.
Policy uncertainty poses another headwind. This is especially so in the US, where the regulatory environment is in flux. Institutions are consequently recalibrating hurdle rates and assessing the long-term economics of projects heavily reliant on subsidies or regulatory support.
“People are starting to see how policy changes can negatively impact those returns,” says an institutional investment consultant. “From my perspective, investors are paying more attention to what those potential changes mean and how that affects the return profile. I think overall it’s going to make it more challenging to find high-quality investments.”
A further headwind to consider is asset scarcity and access. As demand grows, the best opportunities will likely be cornered by larger players. Smaller institutions may consequently face greater competition for second-tier assets, often with weaker risk-return profiles.
“There’s going to be competition of capital behind these ‘trophy assets’ that do have the prowess to support the transition and tick all of the boxes without presenting a litany of risks,” says the US pension fund manager. “I think you’ll find dollars funneling into those particular assets and it’s going to be about who carries the biggest checkbook at the end of the day to win them.”
Rethinking the role of traditional energy
In this return-driven paradigm, traditional energy companies still play a role — particularly those positioning themselves as “transitioners”. Nuveen’s recent research shows that nearly three-quarters of institutions agree that rising energy demands mean both ‘green’ and ‘brown’ assets have a place in portfolios. While many investors accept the need to include traditional energy in the short term, the credibility and measurability of transition plans are increasingly coming under scrutiny.
But the investment consultant is confident that, with an appropriate focus on risk and return, reputational risk will not be a concern for most institutions moving in this direction. “Talking with a lot of LPs and a lot of institutional investors, very few people ever made an investment just because it was green or just because it was ‘energy transition’…they would follow a full underwriting and due diligence process and make the best investments they could in that area. Because they’ve followed a very defensible, quality process, even if the returns aren’t where they hoped they’d be, it’ll be okay.”
The future transition: transparency through numbers
Going forward, asset managers will need to navigate an investment environment that increasingly focuses on the risk-return calculus alongside impact and other non-financial factors. That means grounding the investment case in numbers and not just narratives. Institutions are increasingly seeking partners who can separate the substance from the noise in an evolving space. And shifting the conversation to focus on the risk side of the equation may also generate more demand from investors.
The investment consultant thinks greater transparency will be key to unlocking more investment in the sector. “When things don’t work out the way [LPs] were expecting and it comes from an area of risk that wasn’t really identified or properly explained and understood, it’s going to cause long-term problems. I think that’s going to be one of the issues in terms of LPs putting more capital to work.”
The pension fund manager points to expertise as a crucial differentiator for managers. “I think size and scale will be important but also operating expertise and having the acumen around some of these novel types of approaches. There’s not a ton of historical ex-post data to pick from in terms of what it means to run a hydrogen generation facility or a biofuel plant. I think from a value-creation perspective that’s going to be interesting to see how that plays out.”
There’s no single roadmap for investing in the energy transition. Institutional investors will need to adapt their strategies based on access to assets, shifting regulatory winds, and appetite for risk. And for that they will need asset manager partners who can fill in knowledge gaps around risk and return. But through the noise, one thing is clear: a sense of realism is increasingly driving the conversation.
Jared Raymond is a senior research consultant at CoreData Group, a global specialist financial services research and strategy consultancy. To find out more about our industry insights and research programs, you can reach him at [email protected]