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In our May 2024 SRI Update, we highlighted the underperformance of our Sustainable, Responsible, and Impact (SRI) investment models, primarily driven by rising interest rates and an underweight exposure to mega-cap technology stocks.[1] Recent political developments—including Donald Trump’s return to the presidency and a Republican sweep of Congress —introduce new dynamics likely to impact SRI and other environmentally-focused investments.  This update explores these implications and their potential impact on these strategies.

 

Policy Implications

President Trump’s second term brings a shift in U.S. policy, some of which may create potential headwinds for SRI and ESG investments. Key anticipated actions include:

 

Targeting the Inflation Reduction Act (IRA):

The IRA was passed in 2022 and it, in part, seeks to promote clean energy and curb climate change.[2]  The act appears to be a potential target for the incoming administration based upon campaign rhetoric.

 

  • We believe that the full repeal of the IRA is unlikely due to bipartisan support for many provisions, particularly those benefiting Republican-held districts (see IRA district beneficiaries below, most of which are Republican).[3]  In addition, the Biden administration has been hurrying to get IRA money out the door before year-end, making it more difficult to claw back.

  • However, reductions in funding for clean energy initiatives, tax incentives, and grants are probable. Renewable energy has been such a focus of the campaign that we do anticipate some action.  For instance, tax credits for renewable energy installations and electric vehicles may face revisions or be eliminated altogether, and permitting for offshore wind installations may be in jeopardy.[4]


America First platform:

Other key elements of President Trump’s “America First” campaign have been reshoring businesses that have moved overseas, utilizing tariffs on imports, and the preference for negotiating bilateral agreements over global compacts.  We believe this America First approach will impact many parts of the economy, including areas that are important to SRI portfolios.

 

  • Trump’s emphasis on reshoring and import tariffs could increase costs for renewable energy technologies reliant on global supply chains.  While this may challenge solar and wind manufacturers, installers, and developers, domestic manufacturers and current renewable asset owners could see opportunities (reduced competition due to funding cuts for new entrants).  These policies may also prove inflationary, which is something we are watching for as 2025 unfolds.

 

  • It is also worth noting, clean energy stocks performed well during President Trump’s first term, and the cost has fallen while the demand for electrification has only risen since then (see Long-Term Trends section for more).


  • Lastly, President Trump promised to exit the 2015 Paris Agreement again when he gets into office after doing so during his first term.  While not directly related to markets, the political pendulum swinging in different directions every four years in the US does make tackling significant global issues like climate change more challenging.


Executive Action:

Another potential outcome of the new administration is greater scrutiny of SRI and ESG investing in general. 

 

  • For example, the administration may move to roll back SEC rules requiring emissions disclosures by companies and to make shareholder resolutions related to ESG easier to exclude.[5][6] 

  • Furthermore, the Department of Labor may seek to limit or even eliminate the consideration of ESG data in fiduciary decision-making in retirement accounts.[7]  While we do not believe that these actions would represent significant hurdles for SRI clients, they would mark a step back in progress for the movement as a whole.


Focus on Deregulation:

President Trump has made deregulation part of his messaging since launching his campaign.  While that may impact many different parts of the economy, energy and biotech are two areas most directly related to SRI portfolios.

 

  • Despite the hostile rhetoric, President Trump’s first term saw more significant investment in renewables than either of President Obama’s terms.  The declining price of renewables means they are now at or below parity with other energy sources in some circumstances (see image below and Long-Term Trends section for additional information). As the chart below articulates, we believe that economics is the primary driver of energy investment, not politics.[8]

  • Deregulation in the environmental and energy sectors is expected to favor fossil fuel development by reducing red tape and potentially opening federal land to drilling.  While it may seem counterintuitive, an increase in fossil fuel production may increase supply and drive traditional energy prices down.  From an investment perspective, that may actually make for a less compelling environment for conventional energy companies.

 

  • A deregulatory environment is typically viewed as a positive for sectors in which mergers and acquisitions are common.  Not surprisingly, biotechnology companies initially rallied as the Trump win became apparent.  However, the nomination of Robert F. Kennedy, Jr. (RFK, Jr.) to the Secretary of Health and Human Services (HHS) shortly thereafter caused a significant sell-off in biotech.  This position oversees 13 departments, including the Food and Drug Administration, the Centers for Disease Control, the National Institute of Health, Medicare, and Medicaid.  Kennedy, who holds many unconventional opinions, including that vaccines cause autism in children, is often viewed as a threat to the pharmaceutical and biotech industries.[9][10]

 

However, it is possible that the market overreacted to the nomination.  His confirmation, whether by Senate approval or recess appointment, remains uncertain, and his views clash with those of politicians on both sides of the aisle.  As a result, it remains to be seen how much latitude RFK, Jr. will be given to implement his views even if he is appointed.

 

Long-Term Trends:

Despite some of the challenges discussed above, several long-term trends support many of the themes represented in SRI portfolios.  For example, the demand for electricity is high and growing (see graph below).  The electrification of everything, including the artificial intelligence boom and the data centers they require, means that we need more and more power regardless of the source. 

We believe that renewable energy sources, and possibly nuclear power, can play a significant role in filling that void.  Recent analyses, such as Lazard's Levelized Cost of Energy (LCOE) report, indicate that renewable energy sources like utility-scale solar photovoltaic (PV) and onshore wind are among the most cost-effective options for new power generation (see graph below).[11] Their LCOE has declined significantly over the past decade, making them competitive with, and often cheaper than, traditional fossil fuel-based sources such as coal and natural gas.

While renewables have become more cost-competitive, the intermittent nature of sources like solar and wind necessitates complementary technologies, such as energy storage or backup generation, to ensure reliability.  However, we are confident renewables will play a bigger role in the energy mix in the future.


It is also important to remember that many large multinational companies have committed to reducing their carbon footprint as part of their long-term strategic planning.[12]  Moving toward these goals is a decades-long and costly process, so we do not believe companies will change course because of one election.  For example, the following are commitments from the Ceres Roadmap 2030:


  •  Microsoft – committed to being carbon negative by 2030 and offsetting all the carbon it has produced since its inception by 2050.  It has also launched a $1 billion Climate Innovation Fund to grow carbon reduction and capture technologies.


  • Apple – aims for all of the energy used across its vast supply chain to be generated by renewable sources by 2030.  Additionally, Apple is currently engaged in the development of low-carbon product designs and nature-based carbon removal solutions.


  • Walmart – aims to produce zero carbon emissions across its operation by 2040 without relying on carbon offsets.  Through their Project Gigaton initiative, they are also working with suppliers to avoid a gigaton of greenhouse gas emissions from the global value chain by 2030.


We believe that private sector commitments to decarbonization, paired with state and local government initiatives, provide durable tailwinds for renewable energy and green infrastructure.

 

Selective Opportunities:  Recent sell-offs in renewable energy and biotechnology stocks present potential buying opportunities in areas where long-term fundamentals remain intact.  For example, this graph captures the returns of the S&P 500 index, the iShares Global Clean Energy ETF, and the SPDR S&P Biotech ETF from October 1 through December 9.  As you can see, the clean energy ETF slid downward as the Presidential election approached, but took a steep drop immediately after Donald Trump was elected. 

The biotech ETF, by contrast, did relatively well through the election and several days past.  Again, an environment with less regulation is typically good for the biotech sector and the market seemed to agree.  It was not until RFK, Jr. was floated as a potential nominee for the Secretary of HHS that the sector sold-off, dropping nearly 12% from its recent high (it has started to rally back more recently).

 

We believe that the sell-off in both sectors represents an attractive investment opportunity for investors with long-term time horizons, as we believe active managers can navigate the changing political landscape.


Summary:

While the return of Donald Trump to the presidency introduces new complexities for SRI strategies, our commitment to SRI principles remains unwavering.  Challenges such as a hostile environment, policy rollbacks, and investment slowdowns are significant, but they also create opportunities for innovation, adaptability, and active management.  The structural momentum behind the low-carbon transition—driven by state and local-level initiatives, private sector commitments, and global trends—remains robust.  By maintaining a disciplined and forward-looking approach, we believe we can continue to deliver thoughtful SRI strategies that create positive outcomes for our clients. 

 

As 2024 comes to an end, we wish you all happy holidays and a wonderful New Year.  As always, we appreciate the trust you place in our firm as we navigate the challenging questions investing presents, and we are excited to continue our partnership in the New Year and beyond.


 

[3] Source: Ecofin, Bloomberg as of November 2024

[8] Source: Hannon Armstrong Earnings Presentation November 7, 2024

[11] Source: Lazard Levelized Cost of Energy – June 2024


Past performance may not be representative of future results and all investments are subject to loss. Forecasts regarding the market or economy are subject to a wide range of possible outcomes. These views are as of the date listed on the material and are subject to change based on changes in fundamental economic or market-related data. Please note:  ChatGPT was utilized in the efforts to create this article.  ChatGPT is a widely available artificial intelligence tool.  In this case, ChatGPT was used for the purposes of confirming research sources and structuring the article for drafting purposes.  The actual written product is from our firm’s professionals. These materials are not intended as any form of substitute for individualized investment advice. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.

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