Trump 2.0 - Should impact investors just give up?

Donald Trump’s first term as US president saw the deprioritisation of climate policies, the reduction of renewable energy subsidies and the withdrawal from the Paris Agreement.

Ahead of his second term, he pledged to end offshore wind projects “on day one”, called the Green New Deal “the greatest scam in history” and told supporters of electric vehicles – as part of his 2023 Christmas message – to “rot in hell”.

The signs are looking ominous for impact and ESG strategies, many of which are already sitting on losses over the medium term. With this in mind, why don’t ESG investors just accept the only way to make money from investing is without any concern for people or planet?

Well, because that would be “fake news”. While it would be tempting to draw conclusions about entire sectors from headline events, these often end up having little bearing on performance, and the impact of Trump’s first presidency on sustainability strategies is a case in point.

During his first term, the water, clean energy and electric vehicle (EV) sectors outperformed the MSCI ACWI and S&P 500 indices¹. And despite Trump’s “drill, baby, drill” agenda, the US oil & gas sector fell by more than 50% in absolute terms against a market that was up by more than 50%².

Granted we were in a completely different inflation and interest rate environment back then. But it goes to show that rather than basing investment decisions on headline-grabbing soundbites, investors need to look at the underlying drivers of performance, including valuation levels which are an indicator of how much bad news has already been priced in. There are several areas that sustainable investors will be watching closely during Trump’s second term.

“Electric Car Lunacy!”

To begin with, ‘mitigation’ companies, or those tackling the root causes of climate change (primarily through the reduction of greenhouse gas emissions), are likely to receive less government support in the US over the next four or so years.

With EVs, for example, Trump is likely to cut tax credits (currently worth up to $7,500 per vehicle) and other incentives, reducing demand. The US automotive sector will suffer, with the possible exception of Tesla, whose unique position in the market will likely see it come out on top due to its lower production costs, a stronghold on EV technology and a CEO in Elon Musk with unusually strong ties to the White House.

When it comes to renewable energy providers, reduced subsides will make it difficult for companies reliant on federal tax credits. Offshore wind farms, which are predominantly located in Democrat-leaning states in the north-east, are likely to be the worst affected.

It is not all bad news, though – solar and onshore wind farms may remain competitive, while green hydrogen has the backing of the traditional energy sector as well as Republican-leaning areas.

There are also numerous offsetting dynamics at work:

• With a bipartisan focus on deregulation, we may still see a net positive for the energy transition, with greater ease and speed of building out the grid infrastructure. A potential reform to the onerous permitting process would also help remove bottlenecks.
• Grid resilience and reliability are issues that receive bi-partisan support and certain ‘mitigation’ technologies such as batteries will continue to enjoy structural demand.
• Corporates are on their own ESG journeys. The strongest demand for clean energy comes from the high-growth tech sector, which has made ambitious sustainability pledges. US-based multinationals will also need to conform to the regulations of each country in which they operate.
• Many states (such as California and New York) remain committed to net-zero goals (as they did during Trump’s first term), maintaining opportunities in renewables and energy efficiency.
• While the US’s withdrawal from the Paris Agreement will make headline news, other countries will continue with their decarbonisation plans: Japan, for example, has a $1 trillion climate policy³ that is poised to stimulate economic growth.

“Get your mops and buckets ready!”

In 2020, Trump dismissed suggestions that a wall could be built to protect New York City from rising sea levels, Tweeting: “Sorry, you’ll just have to get your mops and buckets ready!”

This hints at where sustainability investors will be able to find most opportunities in the US in the coming years.

Reduced support for ‘mitigation’ efforts will inevitably drive ‘adaptation’ needs as extreme weather events become more severe; in other words, those sectors dealing with the consequences of climate change (such as flooding and higher temperatures), most often by building resilience in the system:

• Disaster recovery – The federal government’s obligation to respond to hurricanes, floods and wildfires ensures sustained demand for adaptation solutions. This also means opportunities for specialist insurers, early warning systems and hazard mapping. Infrastructure, an area of investment focus during Trump’s first term, could also benefit.
• Water – The US already loses 2 trillion gallons of treated drinking water each year due to undetected leaks⁴. Extreme weather events such as flooding exacerbate the vulnerabilities of an aging water infrastructure, highlighting the urgent need for investment.
• Food supply – Food security is a public health priority. Technological solutions such as precision agriculture, smart monitoring and fertilisers will play a crucial role in ensuring the resilience of agriculture as extreme weather events become more common.

“A BIG AND GLORIOUS VICTORY!”

Although the opportunity set in some of the mitigation companies mentioned above has increased since the election, share prices have fallen in many cases as sentiment turns negative towards any company related to sustainability.

Lots of noise has created lots of volatility in markets, and depressed valuations in innovative companies tied into long-term growth themes should pique the interest of every active fund manager.

How to describe someone willing to give up on the entire sector based on policies the incoming president may or may not introduce? Here, tongue-in-cheek perhaps, we might leave the last word to Trump himself. “Wrong!”