Tensions over trade and changes in US policy could shift the eye of climate finance away from the world’s largest economy, say research directors from MSCI Sustainability Institute, citing recent flows within climate-themed funds.
While US-based companies have historically attracted the lion’s share of investment in these strategies, funds have begun to flow toward opportunities elsewhere in recent months, according to Rumi Mahmood and Linda-Eling Lee.
Since 2018, US-listed companies have made up a larger share of climate funds than they do of the overall market, averaging 67% in climate funds, compared with 58% in global markets generally, as represented by the MSCI ACWI Index.
However, MSCI Sustainability Institute estimates that the share of US equities in climate funds has declined by about 10 percentage points (ppts) since the start of the year. That compares with a 3.1-ppt drop in the weight of US stocks within the MSCI ACWI Index over the same period, note Mahmood and Lee in a June 24 research note.
“While part of the rotation away from US equities in climate funds mirrors broader allocation trends, we estimate that about half — roughly 6 ppts — reflects active reallocation by climate funds toward companies in Europe and the Asia-Pacific region, with the rest driven by market movements,” they add. “This marks the first such shift in at least seven years.”
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While the “overwhelming majority” of climate fund managers are based in Europe and Asia, they recognise that the US “is the place to be for returns”, say the research directors. “US equities have enjoyed average annualised net returns of just over 12% in the 10 years ended May 31, twice that of their global counterparts.”
Mahmood and Lee acknowledge “transition leaders” across the Asia-Pacific region. “India, Taiwan and South Korea host fast-growing clean-tech champions, while China continues to dominate innovation in renewables.”
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Between 2019 and 2024, Asian companies in energy storage, green mobility and low-carbon power expanded revenues at compound annual growth rates (CAGRs) of 66%, 74% and 26% respectively, outpacing peers in the US and Europe, add the researchers.
Despite this growth, global demand for APAC equities has remained “muted as a whole” in the face of US tech equity dominance, say Mahmood and Lee. “Whether the comparatively stable national climate commitments across many markets in the region will alter this dynamic remains an open question.”
In the US, capital deployment into clean-energy projects has been challenged by a higher interest rate environment, say the researchers. In comparison, borrowing costs in Europe could stay lower for longer than in the US, they add.
Even with strong appreciation in the year to date, European companies continue to trade at significantly lower multiples than US companies, write Mahmood and Lee. “Finally, policy support remains more stable across many markets in Europe and the U.K., with the EU’s Green Deal, binding national emissions roadmaps, and an enhanced Emissions Trading System signalling a more predictable regulatory environment.”
Overall, the researchers think the US market “continue[s] to confer clear advantages”. “Investors express stronger confidence in future earnings growth for US-listed companies compared with their counterparts elsewhere.”
That said, climate-focused investors “increasingly could be drawn to opportunities beyond US borders”, whether by valuations, stability of policy, an expanding clean-tech pipeline or simply the potential for greater diversification, they add. “The energy transition opportunity may, after all, open a new chapter for the global economy.”
