US Climate Policy a “Double-edged Sword”
Words may not always match actions in Trump’s second presidency, as investors are told to keep calm and carry on.
The reelection of Donald Trump to the US presidential office will have sent shivers down many an ESG investor’s spine.
From the potential rollback of climate policies, to fears of a hostile environment for sustainable investing, to threats of the US leaving the Paris Agreement once more – speculation has been rife.
But there may be grounds to believe that the picture won’t be so bleak after all.
“This is clearly an anxiety-inducing time for those hoping to see continued climate ambition from the world’s largest economy,” says James Alexander, CEO of the UK Sustainable Investment and Finance Association, which represents more than 300 firms with a combined US$24 trillion in assets. “While our hope is that the new administration sees the massive growth potential of sustainable industries in the US, we also recognise that the global momentum behind the clean energy transition continues to build.”
Great strides have been made, both in the US and globally, to move towards cleaner sources of energy in recent years. The International Energy Agency’s latest Tracking Clean Energy Progress showed that renewable energy represented 30% of global power generation last year, forecasting a 46% share by 2030. Last year, it said that solar photovoltaic, electric vehicles (EVs) and lighting were fully on track for their 2030 milestones.
As such, notwithstanding Trump and the Republican Party’s pro-fossil fuel rhetoric – it may already be too late to reverse the machine.
“Renewable energy growth is likely to continue relatively unencumbered regardless of the election outcome, given solar and onshore wind now require little direct subsidy support,” said Stephanie Kelly, Head of Greenwheel – the sustainability arm of asset manager Redwheel. “Offshore wind is more at risk under a Trump administration and EVs face more potential headwinds, while nuclear power is likely to enjoy support under any administration.”
Outgoing President Joe Biden’s administration was likely the “high-water mark” in terms of US legislative support for climate investment, Kelly argues, with benefits only just beginning to be felt – but other jurisdictions will continue to move apace.
It is also likely that federal-level climate-related disclosure requirements will run into the sand, due not only to legal challenges but also the Supreme Court ruling in June which weakened the powers of federal agencies.
“There will be less regulatory pressure for US companies to show action towards their climate goals, but for large corporates both multinational and domestic, EU and California regulation will mean they still have to engage in stringent climate disclosures,” says Andrew Coburn, CEO of sustainability intelligence firm Risilience. “Regardless of the Trump administration’s decisions on climate and of the US Securities and Exchange Commission’s (SEC) legal process, many will be required to comply with the Corporate Sustainability Reporting Directive (CSRD) and SB 261.”
Describing Trump’s election win as a “dangerous moment for climate action” likely to cause a chilling effect on federal, global and corporate action, Coburn however insists that the world is in a different place to 2016 – when Trump was first elected – and that “nuances” will soften the impact.
“The rest of the world is moving ahead in this transition,” Gregory Hershman, Head of US Policy at the UN Principles for Responsible Investment (PRI), tells ESG Investor. “The International Sustainability Standards Board (ISSB) has come out with its baseline climate disclosure and countries are signing up to that. Investors are operating in a global market, so they can’t ignore what Europe and APAC are doing.”
What could possibly go wrong?
Notwithstanding ongoing global progress, a number of areas in US climate policy could be at risk.
The World Research Institute (WRI) identifies 11 potential climate setbacks under a Trump presidency. The likely absence of new federal policies, for instance, could widen the gap between US climate goals and its actual emissions trajectory.
Drafted by Trump allies, Project 2025 encourages significant budget cuts to agencies leading on climate action – most notably the Environmental Protection Agency (EPA) and the Department of Interior. “With fewer resources, their ability to manage existing programmes — such as emissions reduction projects, clean energy incentives and environmental protections — will be hampered,” the WRI argues.
In addition to budget cuts, Trump has also pledged to “rescind all unspent funds” under the Inflation Reduction Act (IRA). While nearly 90% of such funds have been spent, this still leaves billions on the table, the WRI says – with reallocations likely to undermine clean energy investments and delay emissions reductions in key sectors such as electricity generation and transportation.
“There is no denying that another Trump presidency will stall national efforts to tackle the climate crisis and protect the environment,” says Dan Lashof, US Director at the WRI. “One can only hope that Donald Trump will put conspiracy theories to the side and take decisive action to address the climate crisis, but I won’t hold my breath – and neither will the global community or US state and local leaders.”
Other risks include the dismantlement of environmental justice initiatives rolled out under the Biden administration, including Justice40, which established a government-wide goal to ensure 40% of benefits derived from certain federal investments are redistributed to communities that are marginalised, underserved or overburdened by pollution.
Trump could also remove protections for land and forests by reauthorising the Farm Bill, as well as weaken the federal response to climate disasters, the WRI warns.
“A Trump presidency dampens the broader climate investment environment by calling into question the regulatory power of the EPA, state-level control of climate policy, US participation in UN climate funding, judicial partiality on climate-related rulings and supply-chain costs because of tariffs,” says Greenwheel’s Kelly. “If Trump were to pull out of the UN Climate Convention, it would be consequential for global climate funding, directly impacting public climate funds for emerging markets.”
During the first Trump administration, the Department of Labor passed a rule making ESG investments more difficult, which Biden subsequently reversed – thereby also permitting pension funds to consider ESG criteria as part of their strategies. The new Republican administration could revisit this, as well as impose limits on ESG-related shareholder proposals filed during proxy season.
“We’re watching what is going to happen to regulations that were put in place under the Biden administration, including the rule that enabled fiduciaries to consider ESG factors where they provide retirement plans,” said Bryan McGannon, Managing Director at the US Sustainable Investment Forum (US SIF). “The SEC climate disclosure rule was finalised and is now in the courts, so we’ll see if it stands or not, and what the next administration does as a result. They may try to rewrite the rule, or avoid enforcing it. There are a number of options.”
Recent reports suggest Trump and his team are already preparing executive orders and declarations, which could relocate the EPA out of Washington, or scrap federal agency departments working to end pollution in a way that disproportionately affects poorer communities.
“Let’s not sugarcoat things: the outcome of the 2024 US presidential election represents a setback for climate action. The incoming administration has been very clear that it does not prioritise confronting climate change,” says Mindy Lubber, President at investor network Ceres.
“Yet I am still optimistic about the enormous challenge in front of us. The private sector has been a clear driver of climate action and the clean energy economy. Investors and companies have invested trillions in capital, built and adopted innovative technologies, and created the infrastructure to power our homes and businesses.”
Skin in the game
If several areas of US climate policy are at risk, the IRA – which funded more than US$300 billion in clean energy investments last year – should be safe for the most part.
“There’s so many different aspects to the IRA that they won’t scrap it entirely – nor would they want to, as many aspects appeal to Republican voters,” said Michael Field, European Equity Strategist at Morningstar. “Eighty percent of IRA-subsidised projects so far are located in Republican strongholds and have created jobs in some segments of the US geography that are under-industrialised.”
Field describes the situation as a “double-edged sword”, saying that while Trump can’t be seen to support renewable energy too heavily – he won’t want to turn off the taps on projects that are proving beneficial.
“Some 40% of the US population does not believe climate change is a significant issue, the majority of which forms the voting base of the Republican Party,” he adds.
Members of the House Republican Conference have gone as far as addressing a letter to House Speaker Mike Johnson, urging the government to “prioritise business and market certainty as you consider efforts that repeal or reform the IRA”, and warning that prematurely repealing energy tax credits would undermine private investments.
“Energy tax credits have spurred innovation, incentivised investment, and created good jobs in many parts of the country – including many districts represented by members of our conference,” the letter reads. “We must reverse the policies which harm American families while protecting and refining those that are making our country more energy independent and energy secure.”
Last week, Exxon CEO Darren Woods demanded tax incentives established through the IRA be maintained, as the oil and gas giant prepares to invest US$20 billion by 2027 in carbon capture and storage technology, hydrogen fuel, and lithium mining for EVs.
“There’s always a lot said on the campaign trail, but when you get into the work of governing it’s a lot harder: politics is one thing – policy is another,” says Hershman. “There’s a lot of fear-mongering and rhetoric – we saw this with the anti-ESG campaign over the past two years. But even places that are traditionally the hometown of coal communities are gaining from this transition, so there is an incentive to continue.”
From a legal point of view, annulling or even scrapping parts of the IRA would also be a considerable undertaking.
“To remove the IRA you would need another act of Congress – but does the new administration want to pick that fight?” argues Peter Malyshev, Partner at law firm Cadwalader. “The net effect [of rolling back US climate policies] is just not going to be that big, because there is no federal scheme to speak of right now. The voluntary carbon market, for instance, only represents a few billions, so it’s a drop in the ocean. As such, the key message is: stop being nervous, and stay the course.”
More division
The challenges to the clean energy transition from the second Trump presidency have been underlined by choice of Liberty Energy CEO Chris Wright as energy secretary. But with the US direction of travel now settled, the world has turned its attention to COP29 in Baku.
An early breakthrough in negotiations last week resulted in the adoption of global carbon market standards and mechanisms, helping to end years of stalemate around Article 6 of the Paris Agreement.
But with the US more likely than ever to renege on its climate pledges, one may question the credibility of any commitments made during COP without buy-in from the world’s second-largest emitter.
“It is unlikely that US election results or any change in administration will have a direct impact on the groundbreaking passage of carbon market standards this week, as they are not contingent or otherwise reliant upon the country’s participation in the Paris Agreement,” assures Levi McAllister, Energy Partner at Morgan Lewis. “For entities based both in the US and abroad, the standards introduce new opportunities for investment and to meet emission reduction targets and goals.”
Given America’s role on the global stage, however, it is paramount that it stays engaged on climate issues, McGannon insists.
“There will be a lot of pressure on the US to remain [in the Paris Agreement] – whether it meets its targets will be a different story,” he says. “We will continue to advocate that it’s vital to be at the table and not defer global leadership on climate issues to other actors in the world.”
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