Green plans for the US
Damian Payiatakis, London UK, Head of Sustainability and Impact Investing
Olivia Nyikos, London UK, Responsible Investment Strategist
With climate change a key priority for the new US administration, what might the potential implications be for your portfolios?
During his campaign, President Joe Biden called climate change an “existential threat” and framed addressing climate change as way to grow jobs, also addressing the economic impact of the pandemic.
While his full plans and initiatives have not yet emerged, and will still face many challenges, investors should assess how to mitigate transition risks and search for sector opportunities that the new administration will likely drive.
A greener direction
Over the last four years, Donald Trump withdrew the US from the Paris Accord and issued numerous executive orders to ‘roll back’ President Obama’s environmental policies (112 by one account1).
In a Biden presidency, the environment is set to move up the federal agenda. Along with the pandemic, economic recovery and racial equity, climate change is one of four stated priorities of his administration.
Biden has selected, for both environmental and wider economic roles, experienced and knowledgeable environmentalists, pointing to a prioritised climate agenda across US federal government (see table2).
The resultant impact of this swing in policy and personnel will likely to be felt throughout federal and local government and a spectrum of industries.
|National Climate Advisor||Gina McCarthy||NRDC president, former EPA administrator, led Obama-era climate policy efforts, including the Clean Power Plan.|
|Special Envoy for Climate Change||John Kerry||Former secretary of state, negotiated international climate efforts under Obama, signed Paris climate accord.|
|Energy Secretary||Jennifer Granholm||Former Michigan governor, advocated use of renewable energy and EV technology during auto industry recovery.|
|Interior Secretary||Deb Haaland||Congresswoman from New Mexico, has promoted climate, environment and public lands protection.|
|Environmental Protection Agency Administrator||Michael Regan||Secretary of North Carolina Department of Environmental Quality, leads state’s climate change interagency council.|
|Director of the National Economic Council||Brian Deese||Former Senior Advisor to Obama on climate and energy, Global Head of Sustainable Investing at Blackrock.|
|Council on Environmental Quality Director||Branda Mallory||
Southern Environmental Law Center regulatory policy director, former EPA and CEQ counsel, environmental lawyer.
|Deputy National Climate Advisor||Ali Zaidi||Former Office of Management and budget official, lawyer focused on sustainability and climate change.|
Implementing the ambitious agenda
Biden’s campaign agenda sets out the aim of establishing the US as a net-zero-emissions economy by 2050, decarbonising American electricity and halving carbon footprint of buildings in 15 years, and delivering this with a $2tn green investment plan.
The above goals look set to be driven through executive powers, fiscal policy and international engagement.
Resetting the government
As he did on 20 January, using executive orders to reverse many of President Trump’s environmental policies since 2016 may be a relatively quick first step for the new administration. But many of those policy changes could take time to implement.
Perhaps most importantly, the president required government agencies to more fully incorporate climate considerations in project calculations, notably changing in the social cost of carbon, a monetary figure that seeks to capture the negative externalities from a tonne of carbon emissions. While seemingly small, it could be a highly influential change, because this figure is used federal agencies to base their decisions on regulation and approvals.
With his subsequent orders on 27 January, other similar executive actions have added, such as making climate a national security priority for federal government, or conserving about 30 percent of all federal land and water by 2030, or pausing new leases for natural gas and oil development on federal lands and waters.
His power to appoint conservation-minded officials into key roles across government should realign federal agency focus, authority and priorities. These officials with re- empowered federal bodies can drive considerable changes in a range of industries.
For example, the Environmental Protection Agency (EPA) could raise fuel economy standards that incentivise a shift to electric vehicles. The Federal Energy Regulatory Commission could set rules to integrate renewables into the grid and accelerate deployment of battery storage capacity. Also, the agency could further explore ways to support state initiatives on carbon pricing.
The Securities and Exchange Commission could push for companies to disclose climate risks, incentivising increased investment towards cleaner energy. The Department of Labor’s oversight of some pension funds could do the same. These steps could raise the cost of capital for fossil fuels and lower that of green energy but also increase general awareness of carbon in the markets.
Greening the pandemic stimulus
Like many other countries, the US’s forthcoming spending packages to revive the economy could take on a distinctly green hue. Within Biden’s $1.9tn proposal, is an integrated green jobs plan with pledges to create “millions” of new jobs by “greening” the following sectors: infrastructure, the auto industry, transit, power sector, buildings and housing.
The plan also attempts to tackle environmental justice, supporting a “just transition” for workers whose carbon-intensive jobs are affected, supporting disadvantaged communities and supporting labour unions’ right to organise and bargain for fair wages.
Back at the table
Rejoining the Paris Accords was one of the campaign promises on which Biden delivered on the first day of his presidency. However, resigning in itself is primarily symbolic.
This likely puts the US back to where it was four years ago. At that point, US greenhouse gas emissions were flat and it was not on track to meet its nationally determined contributions (NDCs), which set maximum national greenhouse gas emissions totals by a certain date.
The new set of NDCs for the US will require a steep cut in emissions, especially to meet the net zero target by 2050. In addition, the NDCs will need to be sufficiently ambitious to assure green groups at home and key international counterparties that the US can regain a leadership role in setting the global climate agenda.
Investor risks and opportunities
As the new US administration refocuses on climate to help deliver its commitments and transition to a lower carbon economy, investors should be on the lookout for risks and opportunities in their portfolios.
As we’ve explained in prior Market Perspectives, climate breakdown generates broadly two kinds of material financial risks for portfolios – physical risks arising from acute or chronic changes in weather patterns, and transition risks arising from the shift to a low carbon economy.
With renewed, and accelerated, emphasis on climate change by the US, risks for investors will emerge primary in latter category over various horizons.
In the short term, policy risks are likely to be to the fore given the potential shifts in governmental regulation, standards and approvals. The administration’s withdrawal of support for the Keystone XL pipeline is a clear example of how quickly a change in government stance can affect the value and viability of commercial enterprises.
In the short to medium term, companies may face increased technology and legal risks. With fiscal policy and regulation supporting new technologies that enable a transition to a low-carbon, energy-efficient economic system, winners and losers likely will emerge. Additionally, potential costs of lawsuits and payouts could increase with calls for the establishment of an Environmental and Climate Justice Division, at the Department of Justice, to prosecute anti-pollution cases and cases brought by communities disproportionately affected by climate change.
Finally, increased momentum around a green agenda may increase market risks as purchasing decisions for companies and consumers shifts supply and demand for certain commodities, products and services.
Uncovering growth opportunities
While portfolios face investment risks, focusing on green investment opportunities with a longer time horizon may help investors to endure short-term volatility and find growth prospects too.
In Outlook 2021, we reviewed how many national efforts across the world to stimulate green growth could generate various entry points across three trends. These include addressing climate change and energy needs, reducing environmental footprint and conserve biodiversity and ecological systems.
Three specific sectors seem worth watching in coming months to see how much they are influenced by President Biden’s policies. Even though current plans don’t delve into specifics on how the goals might be achieved, or how they might emerge after being through the policymaking process.
Green infrastructure and housing
At its core, Biden’s climate plans link the environment with potential jobs growth to help overcome the economic impact of the pandemic. This has included calls to create employment by building greener infrastructure, improving energy efficiency in buildings and constructing 1.5m new sustainable homes. As well, it proposes upgrading green community infrastructure in terms of water and waste systems and electricity grids.
The aim is to modernise 4m buildings and 2m homes over four years as well as providing incentives and financing to electrify home appliances and install more efficient windows.
Biden’s plan calls for overhauling the American transportation industry to reduce pollution by creating more public transit and pushing for more hybrid and electric vehicles (EV). Among other ideas, proposals include giving citizens rebates to trade in petrol vehicles, incentivising auto companies to offer more zero-emission vehicles, and investing in EV charging stations.
The president also has proposed zero-emissions public transportation in cities with 100,000 or more residents. This would include light rail networks and installing infrastructure for pedestrians and cyclists.
No transition plan or NDCs is achievable without addressing the energy sector. The president’s aim is to eliminate carbon from the US power sector by 2035. Already, many utilities are setting goals net-zero carbon by 2050, but support in the form of incentives and research likely will be needed to accelerate the process.
Additionally, the aim is to spur greater investment in solar (utility scale, rooftop and community) and onshore and offshore wind turbines while continuing with nuclear and hydropower options.
The intention is to encourage new energy technologies through more research investment and tax incentives for carbon capture storage and to reduce the cost of green hydrogen to the cost of conventional hydrogen within a decade.
It's not easy being green
Whatever the reality, the direction and rate of US activity on climate change has categorically shifted for at least the next four years
However, the new administration’s stance on climate will face headwinds and risks. Democrats hold slim Congressional majorities, with several key representatives from carbon intensive states, and environmental plans may face opposition from certain Democrats and likely most Republicans. In addition, some of the more than 200 federal judges that were approved under the Trump administration could block federal bodies from acting too expansively.
Whatever the reality, the direction and rate of US activity on climate change has categorically shifted for at least the next four years. And investors should take note and prepare their portfolios for the likely opportunities and risks from this structural change.