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Some of President Donald Trump’s pro-business policies may inadvertently prove supportive of the sustainability transition
We see areas of the new administration’s agenda that could unlock further growth opportunities in technology and other sectors, benefiting many of the themes covered by our portfolios
Ultimately, however, we believe that much of the shift to a lower carbon economy is happening for economic and efficiency reasons – unlikely to be derailed by policy change.
Since his inauguration on 20 January, President Trump has issued a series of executive orders and statements spanning climate policy, health and energy. These had been well-publicised in advance and contained few surprises.
At LOIM, we will continue to closely monitor announcements from the new administration, for signs of likely policy directions. We expect that equity markets may overreact or underreact to the initial rhetoric, presenting opportunities for active investors.
Though the tone of the messaging may be hostile to the transition, we believe the removal of political uncertainty, a pro-business environment, a focus on deregulation and reshoring could well prove positive for private investment in infrastructure, grid and networks, semiconductor manufacturing and smartification.
How much does policy matter?
Once again, President Trump has ordered a US withdrawal from the Paris Agreement, originally signed in 2015. He also did this during his first term, and the US later returned to the agreement under President Biden. While the latest withdrawal will disappoint many, it has been widely anticipated by markets and investors.
Within ourPlanetary Transition Strategy, we focus on profitable and growing business models with strong moats in structurally advantaged markets. These businesses are deploying capex with the aim to disrupt markets and generate growth across electrification and digitisation.
We have always steered clear of industries that rely largely on government policy support. Hydrogen and offshore wind are two examples. If that policy support were removed, they would struggle to make a decent return on invested capital.
Within our TargetNetZero range, we favour companies that are decarbonisation leaders, but invest across all industries, including in high-carbon sectors. This allows us to maintain exposure to all areas of the economy close to benchmark, making our portfolio more resilient to sector rotations.
Combined with robust risk management, this approach has consistently positioned us to navigate economic and market shifts effectively, ensuring alignment with the benchmark performance.
Shifts in public policy might be seen as risking a disruption to the net zero transition. However, we believe that decarbonisation, too, is happening primarily for economic, industrial, engineering and efficiency reasons, rather than normative or political ones. We believe it is therefore unlikely to be derailed by the new administration and remain committed to implementing a disciplined and truly diversified investment approach that provides exposure to the net zero transition and the innovative companies driving it.
Sound economics
During the first Trump presidency, the US’s withdrawal from the Paris Agreement sparked the creation of the ‘We Are Still In’ coalition, bringing together states, cities and businesses that signalled their continued commitment to climate objectives. State-level regulation, in the form of mandates, permits and standards, stepped into the role that federal regulation had played – California being a prime example.
During that same term, costs of solar, batteries and electric vehicles continued to fall, with markets for these products expanding globally. The cost of solar power dropped from USD 350/MWh in 2009 to USD 55/MWh in 20161, right before the Trump presidency. During the first Trump administration, this trend continued unabated, with levelised costs falling further, to a low of USD 36/MWh by 20211. The number of electric vehicles in the US increased fivefold during the same period, based on data from the International Energy Agency (IEA).
At the same time, despite the administration’s political support for coal, at least 11 coal power companies went into bankruptcy – no longer able to compete with new sources of energy. Today, coal carries a levelised cost of between USD 69-168/MWh, compared with USD 29-92/MWh for utility-scale solar, according to analysis by Lazard2.
For us at LOIM, the first Trump presidency strengthened our conviction that for economic, technology or environmental transitions to be successful, they must first and foremost be driven by sound economics. Ultimately, we believe the transition to an electrified and renewably powered economy will happen because of the demonstrated cost advantages of these technologies, which are driven by innovation cycles, the modularity of technologies and basic engineering principles.
Exception, not the rule
Of course, policy and political support still play a role, and can either delay or accelerate transitions. In the case of the new Trump administration, its policies have been well-anticipated with markets having responded and adjusted their projections in recent months.
On the energy front, we expect that some key provisions in the Inflation Reduction Act (IRA) will be rolled back. Some energy sources, including hydrogen and offshore wind, as well as technologies such as carbon capture and storage (CCS), are presently uneconomic without subsidies, and they are likely to be negatively impacted by the new administration’s policies.
Many of these subsidies were introduced by the IRA and will probably be seen as “excessive spending” by Republican lawmakers, even if they have been noted to benefit Republican states more than Democratic ones.
Such technologies, however, may be the exception rather than the rule, as electric vehicles, solar, batteries, industrial energy efficiency and heat pumps are already past or nearing cost tipping points, making them competitive with or without subsidies – limiting the impact of such policy changes. Some impact, however, may nonetheless occur owing to reduced support for renewable energy production tax credits, or the easing of regulations to accelerate the buildout of transmission and distribution infrastructure.
Some positive impact
However, counterbalancing these potential decisions, we expect the incoming administration to also make modifications to federal project permitting processes to make them less burdensome, thereby speeding up the initiation of new federal infrastructure and energy projects.
The removal of regulatory red tape – a key talking point for the new administration – should be seen as a positive for infrastructure investments, which include transitions in the energy system. Additionally, it is possible that incremental increases in the demand for power (from AI, data centers, reshoring) may offset some of the negative impact as the administration takes an ‘all of the above’ approach to electricity generation.
Biofuels may be another area that benefits. The Trump administration appears to be taking a positive view on this form of energy, with an executive order aimed at unburdening the development of such fuels from government bureaucracy. Biofuels are a smaller part of the energy system today, but one that we have long held exposure to in our portfolios, as an area likely to see continued structural growth – including through their use in aviation fuels.
Food and health systems
On the health front, President Trump has also issued orders to withdraw from the World Health Organisation (WHO). This, too, is the second such announcement, the first time being in 2020 – a decision subsequently reversed by President Biden.
The US contributes around 20% of the WHO’s budget3. The loss of these funds will be sorely felt by the organisation and could impact international collaboration on health issues such as polio, emergency operations, data sharing and research partnerships. Projects funded by the WHO range from essential health provision to the development of healthcare infrastructure, infectious disease monitoring and response, and preventive policies for chronic diseases. The US withdrawal could reduce funding for high-impact interventions dependent on foreign aid – unless other donors step in.
From an investment perspective, however, the WHO accounts for only 0.1% of global health spending4, so that impact on listed health-care companies is likely to be marginal, beyond indirect sentiment impact on some vaccine developers. With respect to domestic policies, we also believe that under the new administration, changes to the health-care system will be gradual, given the complexity of regulations and political opinion on the topic.
One area that may draw more attention is the intersection of health and food systems, with the new administration having signalled some interest in reviewing dietary guidelines and regulation of food additives. Even ahead of inauguration day, some government agencies had already tilted their stances to align with the incoming administration – with the FDA banning a red food dye that has been banned in Europe since the 1990s.
Changes in food systems and nutrition, and their relevance to health challenges represent a major theme in our strategies, and the strengthening rhetoric around improving the food system in the US may unlock new opportunities in this space.
Industrial opportunities and technology
In the lead-up to the election and inauguration day, rhetoric of the returning president has heavily focused on putting “America first”, including the introduction of possible tariffs, and support for the reshoring of key industries.
While some US equities have already responded positively, the US small and mid-cap segments may see additional benefit moving forward, and support for US industry presents further opportunities related to many of the themes we invest in. Amongst others, we expect US semiconductor industries to benefit – and perhaps the battery industry, which has attracted fewer negative comments than other new energy technologies.
Furthermore, we expect further support for digitalisation, smartification and autonomous technologies – including autonomous driving. This, too, may unlock further growth opportunities, not only in technology sectors, but across wider industrial segments leveraging these technologies for efficiency and process optimisation, benefiting many of the themes covered by our portfolios.
Our conviction
Ultimately, while language may shift from a focus on climate and decarbonisation, to innovation, infrastructure and affordability – we believe these are two sides of the same coin. Indeed, at LOIM we have been early adopters of the view that the sustainability transition should be seen, first and foremost, as a technology revolution.
We remain convinced that the end-state of the economy will be net zero, nature positive, socially constructive and digitally enabled. While the timing of the transition and the attractiveness of individual themes will continue to evolve, we believe the opportunities are as varied as ever.
This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice.