Short and Sharp – Picking sides in ESG: Trump vs. asset managers

Readers, welcome to my new regular column, Short and Sharp. This column consists of fortnightly articles, focused on current market discussion topics, taking a strong point of view and without using a lot of ink – short and sharp.

Last week, as I enjoyed one of the UK’s warmest starts to June on record, President Trump withdrew the United States from the Paris climate accord, a global agreement to reduce carbon dioxide (CO2) emissions. With environmental, social and, governance (ESG) a rapidly growing trend amongst institutional investors, it’s natural to question this investing focus in the aftermath of Trump’s decision.

The United States is the second-largest CO2 emission producer globally, so it would be blindly optimistic to assume no environmental impact from Trump’s decision to withdraw from the Paris accord. As a result, investors should be prepared for some level of uncertainty and volatility in the sectors impacted. But these effects may not be so significant. Sustainable development and ESG investing is increasingly moving beyond political decisions.

President Trump has frequently pledged support for the coal industry, following it up with last week’s decision. But he can’t halt the technological progress that is making renewable energy increasingly price competitive. Solar power is expected to be the least-expensive electricity technology in most of the world by 2030, and onshore-wind costs are projected to fall an additional 40% by 2040. In transportation, advances in battery technology are pushing down battery costs, making electric cars more competitive. As in most industries, price is everything – politics can only influence corporates at the margin.

Remember too that S&P 500 companies get more than 40% of their sales overseas. As a result, they have no choice but to stick with the Paris accord. The five most valuable U.S. companies – Apple, Alphabet, Microsoft, Amazon, and Facebook – all support the Paris accord.

Investors are also piling pressure on oil companies to demonstrate that those enterprises can keep production costs low. The day before Trump’s decision, a majority of shareholders of Exxon Mobil Corp (the world’s biggest listed oil major) voted to force it to disclose how climate change would affect its business.  The proposal asks Exxon to stress test its assets against various scenarios, including falling oil demand as a result of emerging technologies that support renewable energy sources. Note – this vote took place even as the U.S. involvement in the climate accord was already in doubt. Corporates are clear on the realities of the energy outlook.

The market reaction to Trump’s announcement was muted, clearly demonstrating that the future of energy is less dependent on politicians than on economics. So while there may be some negative implications for ESG investing in the short term, the driving forces behind renewable energy are still intact. Even the “most powerful man in the world” can’t stop the tech train.

 

Also this week: the UK’s General Election on Thursday 8th June. Recent polls suggest that a strong Tory majority is no longer guaranteed. Follow Principal blog for my thoughts on the election results and their implications for Brexit negotiations.

The ECB’s monetary policy meeting is also on Thursday. Keep an eye out for our new Central Bank page to see if my expectations for a change in forward guidance are met.

 

 

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