Talking Heads – Is US environmental investing over? Not so fast

This is an edited transcript of the Talking Heads episode Is US environmental investing over? Not so fast

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors.  In this episode, we’ll be discussing environmental investing strategies after the US election. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Ed Lees, Co-head of our Environmental Strategies group. Welcome, Ed, and thanks for joining me.

Ed Lees: Hi, Daniel, Great to be here.

DM: I think it’s safe to say, Ed, our outlook for the future has changed over the last few weeks and arguably more in the area around environmental strategies, climate, energy transition. Across the spectrum, investors are having to have a rethink of what are the implications. Let’s start with the biggest worry investors might have. I mean, is environmental investing over?

EL: This is the question that’s on everybody’s mind, and it is an important question. What I’d say is that Trump requires a pivot, but he does not represent the end of sustainable investing. Why is that? Well, a couple of reasons. One, the reality of climate change remains. And that needs to be addressed. The US federal government is not the only regulatory force in the USA. States have their own agenda. For example, 37 states have a state level renewable portfolio standard, which is driving utility behaviour to meet regulatory objectives. And economics matter of course. Solar in most places is the cheapest form of energy and battery costs and technology keep improving rapidly. So, there’s no wonder why it’s growing as fast as it is. Of all [the] new energy capacity build out in the coming years, we expect about 80% to be taken by renewables because of economics. Now, that’s just going to accelerate. Let’s not forget that this is an area where tech is advancing in a way that coal and gas isn’t. Lithium ion batteries, battery storage, this is the key thing to smooth out intermittent power, which really going to unlock renewables. There’s exciting stuff going on here. Many companies have sustainability programmes and net zero targets: Amazon, net zero by 2040 (they’re the largest renewable buyer in the world with 77 terawatt),  Apple, Google, both want to be carbon neutral by 2030. And Microsoft, they want to be carbon neutral by 2030, but then go further and remove all their historical emissions by 2050. So, pretty incredible stuff.

Couple other quick things I’d say. Many sustainable themes are linked to strong market trends: the need for energy security argues for domestic power sources including renewables. The world needs more power in large part due to the growth of AI. Green power is a clear beneficiary. We think that power demand is likely to double through 2050. With this power demand comes the need for grid modernisation. Also, in the sustainability universe, energy efficiency is a way to make our power resources go further; [that] is going to be a key area for sustainable investing. Certain areas like sustainable water management are core to society and should rise above politics.

DM: What we’ve seen over the years [is] that when the subject is Trump, people leap to the most dramatic negative potential scenario. The US is going to withdraw from the Paris agreement. Trump’s going to entirely reverse the Inflation Reduction Act and all the measures. Maybe you can give us a more balanced and calm assessment of what really is likely from the administration.

EL: There’s a lot of worries out there right now. And some of the stocks in this area are trading like that. That is creating interesting situations, particularly because it might not be as bad as some people fear. There will be [a] scale-back. There’s going to be likely less offshore wind; EV [electric vehicle] tax incentives will go. That’s going to impact EV charging. Areas that need more support are going to be at risk. Things like green hydrogen might face headwinds.

Let’s get into this in a little bit more of a granular way. We can get at least some evidence from his appointments. [At] the EPA, we’ve seen Lee Zeldin being appointed and he’s very consistently talking about deregulation. And that will loosen some of the restrictions on companies. But as a representative, he supported clean water initiatives as well. The [nominated] Secretary of State Rubio a China hawk, so, expect tariffs. That’s going to impact some of our markets too, where China’s a material part of the supply chain. It could be good for companies that have heavy domestic manufacturing and production.

Through that we we’ve seen a couple areas where there’s some potential rays of light. Trump has sometimes split and ambiguous views. He has consistently been anti wind and EVs, but he’s made more supportive comments, particularly recently around solar and clean water. He has recognised that he might need to be more flexible because of his partner, [Elon} Musk. We’ll see.

We suspect that he’ll take a scalpel instead of a sledgehammer to policy. This is in part because much of the IRA [Inflation Reduction Act] promotes American industry and jobs in red [Republican] states and also the influence of Musk. Musk is a big ‘solar presence’ through his battery and inverter business. Musk has said solar will be the main source of energy for the world in the future. Our conversations with corporates who do business with Musk indicate that the main solar tax credits could be shortened to 2028 instead of being cancelled. We think some additional mechanisms are probably at risk, the ones that are linked to climate justice. But the main one [for] domestic content is likely to stay. This is very much in line with the strategic objectives of promoting the USA. This is a policy that’s fuelling made in the USA including many new manufacturing jobs there. We actually had 18 House representatives that wrote to the Speaker previously asking to preserve the IRA tax credits for precisely this reason. There is already a demonstrable core of Republicans that want to maintain some of these tax policies.

What else? I’d say areas like nuclear, blue hydrogen grid and domestic production and manufacturing are promising. Trump is likely to take money away from the Department of Energy loan programme, the loan programme office. But he’ll also put more money into the system by reducing corporate taxes. Trump’s first administration, remember, did not stop energy transition. Renewable energy finance doubled actually from USD 16 billion in 2016 to USD 29 billion in 2020. And if one just wants to look at the markets, for what it’s worth, the Invesco Solar ETF was up almost as much as six times the S&P [500] over that time period. It’s despite Trump probably more than because of him.

It does speak to the fact that there are other variables that are important that are involved here, not the least of which is economics. Remember, under Trump’s last term, coal retirement actually accelerated and renewable installation was at a record high. A big talking point for the Republicans has been permitting reform. Permitting reform can potentially be good for renewable projects as well. This could speed things up. That’s really exciting. Some of our companies trade like environmental policies are going completely away and they won’t. Areas will recover when there’s more clarity, and that opens the door for opportunities.

DM: Thanks very much, Ed. Hopefully our listeners feel a little bit better now after hearing that explanation of how things might evolve. How do investors need to pivot though? What are the areas that they should be looking at now given the landscape you anticipate?

EL: That’s the key question. And I’d say that investors should be paying more attention to profitability, narrowing their focus to companies that have financing and have a reliable path to profitability. The idea that the government will help me until I start making money five years from now, that’s a harder path. We think that the US is an exciting dynamic place to look at relative to Europe and Asia, in part due to tariffs. Some industries need a lot of power, so, independent power producers.

Datacentres is a huge theme. And the way where that overlaps with sustainability is energy-efficient infrastructure, datacentre cooling and water supply, even energy-efficiency in the chips themselves. We’ve seen a number of deals announced in this space over the last couple of months with large tech companies looking for more power. Solar energy as well, particularly utility scale. Those are interesting grid build-out and energy storage related areas.

And food security and agriculture. In the US, farmers are a big lobby and being on the right side of them is usually a good thing politically. So those are some of the areas where we still see opportunities and investors might look.

DM: If I can summarise some of the points that you shared. If there is maybe just one message you want to leave with our listeners, [it] is that Trump is not the end of sustainable investing. There are other countries in the world. There are other parts of the US government. There are US states that are still very much committed to this area. You firmly believe it’s going to continue to grow and continue to be a profitable area to invest. Arguably, one of the fundamental drivers in all of this is that energy demands are going to continue to rise, and renewables inevitably have to be a part of that. Well, Ed, thank you very much for joining me.

EL; Thank you, Daniel.