ESG Focus: Fund Flows, Tariffs, Defence & AI

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FNArena’s dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

ESG and sustainability trends are not immune to the ructions from Washington with investors and companies juggling a fast changing world.

-Sustainability funds are not feeling the love in 2025
-Are European aerospace and defence stocks a sustainable asset sector?
-Gender pay gap, an ongoing Australian challenge
-US tariffs impacts, winners and losers
-More companies embrace AI in reporting season 

By Danielle Ecuyer

Sustainability funds outflows continue

Europe represents around 80% of sustainable funds in RBC Capital Markets’ universe and has been caught in the crosshairs of pending European greenwashing legislation.

In the US, changing policy from the new Trump Administration is underwriting uncertainty and a risk-off tone.

RBC Capital notes both active and passive sustainable equity fund flows have not started 2025 well, with outflows recommencing in January and early data inferring outflows were continuing into February.

The broker highlights active outflows have been more robust than passive flows, with positive trends for Climate Transition Funds, Sustainable Real Estate Funds, and Sustainable Technology Funds.

Within RBC’s observed sustainable fund universe, outflows have been notably “severe” for Impact/Sustainable Development Goal (SDG), Environmental Solutions, and Clean Energy-themed funds.

In other thematic classifications, 2025 has been more challenging for AI-related funds, including nuclear power and grid solutions. Sustainable Agriculture, Food, Water, and Digital Security have been the better-performing themes for 2025 thus far.

With ongoing expected volatility from the new US Administration’s policy changes, RBC envisages the prime opportunities in Digital Security and Grid Solutions, and more positives than negatives for Nuclear Power going forward.

Digital Security has risen in score rankings with improving long-term growth expectations as well as upward earnings revisions.

The Water theme has declined in the broker’s scorecard rating to neutral, with higher relative valuations and a downgrade in long-term growth expectations to the historical average.

Sustainable Forestry has moved into negative across RBC’s quantitative indicators, while Grid Solutions continues to score well, with valuations moving to neutral.

Compared to sustainable equity funds, sustainable income funds have continued to experience inflows and have retained their market share of total fixed income assets under management.

Is national security an sustainability issue?

Changing geopolitics and the global, notably European, race to re-arm has Morgan Stanley proposing a “what if?” scenario under which Sustainability Funds remove the exclusion of defence stocks as part of their investible universe.

The broker’s research finds an average of 5% of equity Sustainable Financial Disclosure Regulation Article 9 (dark green) and Article 8 (light green) funds have exposure to European aerospace and defence companies.

This represents 0.3% exposure of the total assets under management, or US$10bn, and 2% of the aerospace and defense (A&D) stock market capitalisation.

Morgan Stanley considers two cases: one where the exposure increases to the most widely held stock, Nvidia, and the second whereby exposure increases to match benchmarks such as the MSCI Europe and/or MSCI ACWI (All Country World Index).

In the first case, exposure to European A&D stocks would rise by US$97bn through additional fund flows, or ten times growth versus current levels and 24% of A&D market cap exposure.

In the second case, the MSCI ACWI is overweight the A&D sector with 1.78% against 0.3% for sustainability funds. An increase to the same level in sustainability funds would equal additional flows of US$53bn, or six times growth in exposure versus current levels and 14% of A&D market cap exposure.

MSCI Europe is overweight A&D at 3.64% and would result in equivalent fund inflows of US$119bn in sustainable funds, or twelve times growth in exposure versus current levels and 29% of A&D market cap exposure.

Addressing the probability of inclusion, Morgan Stanley highlights with over 90% of sustainability funds excluding controversial weapons, any change could “take time”.

Client conversations suggest growing discussions around the potential for defense equipment inclusion regarding as part of the “protecting national security” narrative. To date, most of the investment in A&D companies has been through carbon abatement strategies.

Australia’s gender pay gap update

Jarden looks at the second year of gender pay gap data for 2023-2024 across 7,800 private sector employees and 1,700 corporates, encompassing an average gender pay gap of 21.8% nationally and a median national gender pay gap of 19%, as a percentage of total remuneration across Australia’s corporate landscape.

Taking a flyover of the results for S&P/ASX200-listed companies, the broker points to real estate, oil & gas, and retail as having the higher average of median total gender pay gaps, with food & beverage, technology, telcos, gaming, and leisure the lowest.

The data can be skewed depending on which departments have submitted. Notably, Wesfarmers ((WES)) has an average gender pay gap of 55.7% at head office but 11.8% at the corporate level.

By company, Goodman Group ((GMG)) and Lovisa Holdings ((LOV)) have the highest average gender pay gaps at 66.8% and 51.9%, respectively, due to high CEO pay. Aristocrat Leisure ((ALL)) and Insignia Financial ((IFL)) have the lowest at -14.3% and -4.5%, respectively.

Looking at the median total, the largest increases in gender pay gap are for Treasury Wine Estates ((TWE)), up 20.3%, Magellan Financial Group ((MFG)), up 12.9% to 45.3%, and Tabcorp Holdings ((TAH)), up 10.5% to 15.7%.

Pinnacle Investment Management‘s ((PNI)) gap moved down -20.3% to 12.2%, Ramelius Resources ((RMS)) down -14% to 11.15%, and Web Travel ((WEB)) down -9.4% to 16.9%.

Jarden makes the point the gender pay gap is not a “perfect measure” and commentary from companies and other data points are important factors for correct framework and interpretation.

The broker believes a more broad-based action plan is needed to create more equitable gender opportunities, including part-time or job-share managerial roles to support equal sharing of “caring priorities” and employment.

February Monthly ESG update 

From an environmental perspective, the US’s 25% tariffs on all aluminum and steel imports as of March 12, with no exemptions, will result in a possible supply response from the domestic steel sector, according to the Macquarie Macro Strategy & Commodities Research Team.

For aluminium, demand will be the key determinant of sustainable cost pass-throughs, the broker explains.

Rio Tinto ((RIO)) is the largest foreign supplier of aluminium to the US, accounting for around 17% of the company’s revenue from sales to the US. Rio’s aluminium is mainly sourced from its Canadian smelters, with around 10% of the company’s Australian smelter exports destined for the US.

BlueScope Steel‘s ((BSL)) US operation, North Star, will directly benefit from rising prices due to tariffs. The company’s downstream businesses, Steelscape and ASC Profiles, import 200-300ktpa in raw steel from Australia, and since they add value through processing, their products might be more insulated from tariffs.

Competitors that import finished steel could face higher tariff burdens, allowing BlueScope to generate higher value-added margins.

Regarding Sims ((SGM)), Macquarie anticipates net benefits from US tariffs. Sims’ ferrous (iron/steel scrap) and non-ferrous (copper, aluminium) recycling businesses should benefit from higher domestic prices driven by tariffs.

The company’s A&NZ exports, in turn, could be impacted by tariffs or lower demand as US buyers move to domestic suppliers. The broker believes the timing is uncertain but envisages Sims as a net beneficiary.

Planning laws change approval process for windfarms

The Queensland government amended the wind farm approval process to include impact assessments, aligning with the process for mining and agriculture projects.

Macquarie highlights ASX-listed companies to be impacted by the pause in wind farm applications due to the changes, including Fortescue ((FMG)), owner of the 1.4GW Wongalee Wind Farm near Hughenden. The project has been placed on hold until May 16.

The pause of the 1.4GW Bungapan Wind Farm in Gladstone, also until May 16, will impact Rio Tinto’s transition to renewables for its Boyne Island aluminium smelter and Yarwun refinery.

BHP Group ((BHP)) is noted for a large power purchase agreement from Qld renewable energy generation.

Expected changes to the European Commission’s review of the EU Carbon Border Abatement Adjustment Mechanism are anticipated to have a “minimal direct impact” on Australian exports.

Targeted sectors represent slightly over 2% of Australia’s total exports to Europe.

Return to work a challenge

The “social” aspect of ESG is tackled by Macquarie in terms of the PAR Group’s research on return-to-office trends post-pandemic. The study reveals office attendance has risen in some Australian cities, but there are still fewer office workers, with -240,000 fewer on peak days (Tuesday through Thursday) compared to pre-covid levels.

There are also significant differences between peak and off-peak days, with -235,000 fewer people working in offices on Mondays and Fridays compared to midweek.

Macquarie highlights the largest office attendance gap is in Melbourne, with -114,534 fewer workers on off-peak days, or -32% of the city’s white-collar workforce.

Opal data shows -33,342 fewer workers on off-peak days in Sydney’s CBD.

Management team are expected to underpin a shift toward a four-day office week, aiming to reduce extended weekends and encourage remote work from regional areas.

The broker highlights return-to-office mandates from ANZ Bank ((ANZ)), CommBank ((CBA)), Flight Centre Travel ((FLT)), Origin Energy ((ORG)), Suncorp Group ((SUN)), Tabcorp Holdings ((TAH)), and Woolworths Group ((WOW)).

Artificial intelligence is more than a buzz word

Macquarie explains AI was a “key” talking point during February’s reporting season, with 25 companies under coverage mentioning it, primarily in communication services, financials, and healthcare, as well as companies in consumer discretionary, industrials, IT, real estate, and energy.

AMP Ltd ((AMP)), CommBank, Jumbo Interactive ((JIN)), and Ventia Services ((VNT)) highlighted responsible AI uses and applications.

Car Group ((CAR)), CommBank, Northern Star Resources ((NST)), Netwealth Group ((NWL)), and TPG Telecom ((TPG)) referenced security and harm prevention AI initiatives.

Productivity and operational efficiency improvements were detailed by Iress ((IRE)), Jumbo Interactive, Karoon Energy ((KAR)), Netwealth, Readytech Holdings ((RDY)), Ramsay Health Care ((RHC)), Resimac Group ((RMC)), Seek ((SEK)), and Block ((XYZ)).

Predictive insights and intelligence were detailed by Integral Diagnostics ((IDX)), Jumbo, Monadelphous Group ((MND)), Northern Star, and Temple & Webster ((TPW)).

AI customer support and chatbots were mentioned by Car Group, Jumbo, Northern Star, Netwealth, Transurban ((TCL)), Temple & Webster, and Megaport ((MP1)).

IDP Education ((IEL)), Ramsay Health Care ((RHC)), and Ventia are employing AI pilots and trials.

FNArena’s dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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