Ideas Farm: Trump the environmentalist

  • Trump’s climate-change inaction may have cause more deep-rooted action further down the chain
  • The cost of ESG best-practice can’t be dodged
  • But the investment opportunities from ESG are plentiful
  • Loads of idea-generating data including ESG fund managers’ favourite international stocks

There won’t be many trumpeting Donald Trump’s environmental achievements as a key legacy of his time in the White House. However, just because he’s been a policy slouch in this area does not mean his one-term presidency has not given climate-change causes a shot in the arm. 

While the logic is counter-intuitive, the evidence seems to point to a significant build up in environmental action during his four years as President. Indeed, the policy void he created in this area, seems to have been viewed as a  call to arms by many big companies along with local and regional governments. 

The UN reckons pledges to reach net zero by the end of the century have doubled in under a year. Meanwhile, an associated report from data-driven research group EviroLab, released during September’s “Climate Week”, estimates that net zero pledges by local governments and regions would now reduce CO2 emissions by 6.5 gigatonnes, if achieved. That’s more than the entire annual emissions from the US. In addition, the report puts corporate net zero commitments at a 3.5 gigatonne CO2 reduction, larger than the EU’s total annual emissions.

Meanwhile for UK investors, a totemic moment occurred early in 2020 when fossil-fuel giants Shell and BP both nailed their colours to the net-zero mast.

The fact that faced with a lack of climate-change leadership from the world’s largest economy, organisations are doing it for themselves, may make commitments more deeply embedded than would have been the case had organisations been dragged kicking and screaming toward net zero by a US President that was an environmental zealot.

However, with Joe Biden set to take charge in January, it looks likely the US will be playing regulatory catch up. This could have major ramifications for companies that have only done the regulatory minimum over the last four years. It could also mean, investors start to see a starker divergence in the fortunes of green winners and losers.

While some like to paint environmental, social and governance (ESG) best-practice in a wholly positive light (“doing well by doing good” etc), for many companies, going green means internalising what were previously external costs, such as the impact of pollution and greenhouse gas emissions. 

For many companies, going green will ultimately mean some assets become obsolete and profitability is permanently reduced. From an investment perspective, this is bad news even if the consequences of inaction are worse still. This is reflected in the incredibly low valuations attached to the shares of companies like Shell and BP. And while the market can often mis-price risk, it is much rarer that it is proved totally deluded in the broad messages it sends.

But there are huge also opportunities for companies that are able to play sustainability to their advantage: anything from reinforcing their brands, as is the case with Estee Lauder; to providing the world with green energy, as Orsted does; to offering green solutions to others, as is the case with power backup group Generac. 

These are all companies that feature on this week’s list of ESG fund managers’ favourite international shares. The complexity in assessing the merits of companies from a sustainability perspective means our ESG favourites lists (we published an update of the UK focused version last week) should offer a source of profitable insight for many years to come, and as US policy-makers play catch up.