Mike Appleby

Will Trump kill investment returns for sustainable funds?

Mike Appleby

This article was first published by Alliance Trust Investments on 2 December 2016.

Mike Appleby, Investment Manager, addresses the concerns around Trump's potential negative impact on the renewable energy sector and why he still believes ATI is well positioned to navigate these political uncertainties.

In the ATI Sustainable Future team we are fundamental bottom up stock pickers and as such do not position the portfolio based on macro-events. That said, we are cognisant of macro changes and how this will affect the companies we invest in. There is much conjecture about what Trump will do, and this is pertinent to Sustainable investment strategies as there are concerns that Trump will implement changes that will negatively affect the structural changes and investment themes we have positioned our portfolios to be exposed to.

Of our twenty three investment themes, the one potentially most at risk from the US pulling back from decarbonisation is Increasing electricity generation from renewable sources. It is feared there will be a reversal of the trend of promoting lower carbon electricity generation that has gained significant traction globally. A knee-jerk reaction from commentators is that Trump will potentially pull out of the Paris Agreement (Global Agreement to limit global warming to 2 degrees centigrade), reverse The Clean Air Act, and Obama’s progress on promoting renewable power while promoting the extraction of coal and opening up hitherto restricted resource areas to exploitation (Arctic and others).

I would caution the belief that Trump will find it any easier than previous presidents to deliver on his numerous statements made in the heat of the campaign trail. Despite Trump having a majority of republicans in both houses, this does not mean all republicans support all of Trumps policies. For instance, the proposed tax rate cut coupled with expected fiscal stimulus will result in higher government debt which many republicans will fight vehemently against. Similarly, the ability to “cancel” the Paris Agreement on climate change is intrinsically linked with an international community who all want to see this agreement deliver results. China have already warned of dire consequences of the US pulling out. It could trigger a trade war, which we hope those close to Trump will realise is something to council him to avoid. It is worth pointing out that climate sceptics are in a considerable minority on the international stage – it’s not going to be like attending a fossil fuel lobby group in Texas – quite the opposite.

It is too soon to judge what will happen.

There are some economic reasons which will also come into play, such as: coal is uneconomic due to the cheap price of natural gas (not renewables or clean air legislation limiting their use), so promoting its use is unlikely to result in anything other than higher power prices; tax incentives to promote renewables were approved recently and it is not a given to assume this can easily reversed. In addition states have their own renewable portfolio standards (targeting more renewables) which Trump will struggle to unwind, and finally, with global oil and US natural gas prices being so low, it is highly unlikely that any company is going to commit spending billions of dollars on new exploration in such expensive areas when the oil price is below $50 per barrel. It doesn’t make economic sense.

While the surprise win by Trump is definitely not positive for investors looking for progressive legislation to promote a lower carbon economy, it is too early to assume that progress on combating climate change will stop, or more unlikely still, reverse. It’s also worth remembering that renewables (solar and wind) are becoming more cost competitive, the medium term outlook for renewables is still good and increasingly renewables are set to become the cheapest power generation option – so building new coal fired power stations looks economically naive (they will not be able to sell their power when there is essentially marginally free electrons coming from renewables), it also makes little ecological sense. We believe coal fired power or the coal value chain will remain structurally challenged and therefore a bad investment.

Despite the obvious winners of decarbonisation being renewables, we have very little exposure to pure-play renewables because we see lots of growth but fierce competition means we believe profits unpredictable and medium-term investment returns low. We prefer to play this theme by:

Avoiding the incumbent thermal generators, who are getting their capacity factors (how much power they can sell, essentially) killed by renewables.

  • While we do see opportunities in renewables, we see more compelling investment opportunities in energy efficiency. These may be companies involved in electronics power management, companies which provide kit to make our infrastructure more intelligent or improve fuel efficiency in cars or it could be companies building efficient light emitting diode lighting and building insulation.

Trump’s win does not naturally fit with progressive investment and is not welcome, but we have a broad set of investment themes which make economies more efficient, healthier, safer and more resilient as well as a broad range of regions to invest in. We are confident of successfully navigating through uncertainties – even of reactive, increasingly popular right wing political influences.


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Key Risks

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Friday, December 2, 2016, 12:00 AM