As Donald Trump’s second presidential term approaches, some fear that all is lost for sustainable investing. But this period of legitimate questioning could prove useful.
Donald Trump’s large victory in the November presidential elections and the upcoming domination of the Republicans in Congress have cast a chill in the world of sustainable investment. But four years after he left the White House, the world has moved on; for business, environmental regulations are now the foundations on which industries rely, and at the same time, with Elon Musk, the White House will soon welcome the world’s most successful “green industrialist.”
Settling of accounts…
Amendments to the Inflation Reduction Act (IRA) are expected to be at the top of the new president’s agenda, but on closer inspection, the changes are expected to be modest with particular attention paid to wind energy and credits. tax granted to electric vehicles. Mr Trump calls wind power “horrible”, while eliminating tax credits for electric vehicles would benefit his new ally, Elon Musk, and hamper Tesla’s competitors, who are more dependent on subsidies.
Strikingly, some elements of the IRA actually align with bipartisan reindustrialization goals – furthermore, 60% of the tax credits benefit Republican states. Similarly, carbon capture and storage tax credits help extend oil and gas supplies, fulfilling Trump’s promise to industry leaders.
Leaving the Paris Agreement is another obvious step, allowing for an easy political victory and dealing a symbolic blow to the agreement at a time when geopolitical support is crumbling. While many US companies pledged to support the Paris Agreement following Trump’s withdrawal in his first term, we believe companies will be more discreet this time around; the “green fed up” is underway.
At the same time, we expect a further escalation in the use of human rights as a justification for the introduction of protectionist measures against China, including accusations of forced labor. Additionally, we anticipate a reversal of the IRA’s temporary relaxation of rules regarding local green purchasing requirements, effectively preventing U.S. businesses from claiming IRA tax credits unless they buy local. Overall, all of these elements could thwart Trump’s commitments to reducing inflation.
Deregulation derailed?
The level of production that many renewable energies now reach and their competitive price limit Trump’s ability to derail the global energy transition. Patrick Pouyanné, CEO of TotalEnergies, recently declared that the removal of climate regulations “will not help the industry, but on the contrary will demonize it, and the dialogue will then be even more antagonistic”. Europe’s major oil companies want a stable regulatory environment for clean energy as they begin to transition their business models, not a “Wild West” that could create oversupply in the face of weaker demand.
The harm caused by antitrust issues has also begun to dominate the sustainable investing agenda in recent years, with a tougher approach taken by the US Federal Trade Commission. We see this trend easing under a pro-business, pro-deregulation Trump administration, particularly in the area of artificial intelligence. Furthermore, despite Mr. Trump’s strained relationship with tech companies, we expect him to take a combative stance against the European Union’s heavy fines against US tech companies, including the EU Reporting Directive. Corporate Sustainability (CSRD) and the Carbon Border Adjustment Mechanism.
Take responsibility
In our opinion, ethical motives should be more frankly abandoned by the asset management industry in favor of a clear return to financial considerations to justify the consideration of ESG criteria in investment decisions. We can also expect a more interventionist SEC, rejecting shareholder resolutions at General Meetings that will be considered too activist. For fund managers, misinterpreting these subtle changes and the gray areas they involve could impact the performance of their funds.
Some point out the irony of the situation because if the practices in terms of sustainability and sustainable investment – which Trump speaks out against – had been implemented in the 1990s and 2000s, the societal program on which he won, namely the decline in living standards and the increase in inequalities for low- and middle-income populations in developed countries, would not have existed.
Irony again when reading some of the public health policies that Trump is likely to implement and supported by Robert F. Kennedy Jr (fighting chronic diseases like obesity and diabetes through healthier diets) which are in line with opinions commonly accepted by those involved in sustainable investment. However, the chronic inability of the White House, through its bureaucracy and lobbying activities, to make large-scale changes in health care suggests to us that the impact will be limited.
In conclusion, and despite real concerns, we do not expect Trump’s second term to be entirely negative for sustainable investing. It is worth remembering that his first term saw a tripling of investment in sustainable funds – although the US still only accounts for 10% of global sustainable assets – and growth in renewable electricity generation from 17% to 21%. There will be tensions around climate, but the United States is not the world; US policy can only influence markets to a certain extent and for a certain duration, and the fundamentals and economic models that underpin reasonable sustainable investing are far too strong to ignore.
Despite all the noise and debate, one thing is clear: sustainable investing is here to stay.
