The transition from one presidential administration to the next is inevitably a time of uncertainty. This is amplified when the transition is being made from one political party to another. Typically, the campaign season includes a significant degree of discussion about the policies of the candidates, so there are some broad expectations regarding the direction the new administration will take on major policy issues. In this respect, as in many others, the 2016 presidential campaign differed from the norm.
While some topics, such as immigration, were subject to debate and discussion during the primaries and the campaign itself, the issue of climate change was almost wholly absent, receiving a brief mention during the Democratic primary debates and no mention at all in the presidential debates. The topic was frequently addressed, instead, in the candidates’ campaign speeches. Secretary Clinton vowed to support the United States’ commitment to the Paris Accords and to pursue an energy and development agenda focused on reducing impacts on the environment. President Trump, in contrast, emphasized a renewed commitment to fossil fuels and pledged to exit the Paris Accords as quickly as possible.
As a result, the nation has been attempting to discern the potential impact on climate change policy of the new Trump administration. Will President Trump’s campaign rhetoric become policy or will the new administration embrace something closer to the current administration’s approach to the issue?
In reviewing Trump’s Cabinet picks thus far, we believe a new approach is coming. The nominees are largely represented by a number of climate change skeptics and/or picks that lack a definitive position on the issue. These choices appear to indicate a bias in the new administration toward appointing officials who oppose prudent action on the issue.
As confirmation hearings have begun, there has been some focus on climate change in the questions posed to Trump’s nominees for Cabinet positions. The responses demonstrate a lack of a unified policy on the issue of climate change. There is a philosophical congruence among the appointees that suggests what the administration will likely prioritize, what will be amended, and what will be abandoned.
It is becoming clearer the Trump administration will likely seek to reduce regulatory oversight of many industries by the federal government, shifting it to the states. Only where clear federal legislative mandates are in place will the new administration continue to enforce regulatory compliance. On issues related to water quality, air quality, pollutants, particulate matter, and non-federally regulated toxic emissions the onus will shift to states to ensure that their residents are safe from potentially dangerous environmental pollution. The nomination of Scott Pruitt for head of the Environmental Protection Agency is confirmation of this approach, particularly given his history of fighting for states’ rights to regulate environmental issues and his repeated litigation with the EPA to limit its powers of enforcement during his tenure as Attorney General of Oklahoma.
Its commitment to reducing regulation has been clearly articulated through the new administration’s pledge to eliminate “harmful and unnecessary policies such as the Climate Action Plan and the Waters of the U.S. rule,” arguing in the ‘America First Energy Plan’ that “lifting these restrictions will greatly help American workers, increasing wages by more than $30 billion over the next 7 years.” According to the new policy approach, "Need for energy must go hand-in-hand with responsible stewardship of the environment. Protecting clean air and clean water, conserving our natural habitats, and preserving our natural reserves and resources will remain a high priority." In parallel with this, the new administration states that it "will refocus the EPA on its essential mission of protecting our air and water."
The new administration’s approach to global agreements related to the environment and climate change remains unclear. Based on remarks by Trump and his transition team to date, it is likely that the administration will seek to amend a number of these agreements to secure more favorable positioning for U.S. business interests. Where such amendment is impractical, such as in the Paris Accords, it is expected that the administration will follow through with campaign promises and exit the agreement as quickly as possible. Moreover, due to disclosed policy positions, we see support for abandoning the Clean Power Plan. Conversely, the administration has made it a priority to increase the extraction of fossil fuels, including coal and oil, as a component of its economic and energy plans. This commitment was reflected in the Trump campaign’s policy priority to “unleash America’s $50 trillion in untapped shale, oil, and natural gas reserves, plus hundreds of years in clean coal reserves.” The position has been further articulated in the ‘America First Energy Plan,’ with the administration committing to "embrace the shale oil and gas revolution to bring jobs and prosperity to millions of Americans," and "take advantage of the estimated $50 trillion in untapped shale, oil, and natural gas reserves, especially those on federal lands that the American people own." An immediate example of the administration’s policy regarding fossil fuels can be seen in the issuance of executive orders by President Trump on January 24th to push forward the Keystone XL and Dakota Access pipelines.
These policies and actions by the new administration run counter to how most of the world is approaching environmental issues. Globally, governments have demonstrated a willingness to continue to invest in renewable energy, to achieve greenhouse gas reductions through energy efficiency and technology updates, and to pursue strategic climate resiliency policies. This approach is reflected in actions such as China’s recent commitment of $360 billion by 2020 for new and expanded clean energy projects, India’s commitment of $1 trillion by 2030 to attain 40% of its energy from renewables, and Germany’s continued commitment to produce 80% of its electricity from renewable sources by 2050 (the Energiewende).
The Trump administration’s potential policy shifts come with certain risks. Climate change models clearly point to an increase in the frequency and severity of extreme weather events such as hurricanes, blizzards, droughts, and heat waves. In 2016 the U.S. experienced fifteen such extreme weather events with total damages of over $46 billion, compared to eight such events in 2015 resulting in only $19 billion in damage. This increased risk is problematic for residents, communities, and businesses. It will also begin to be priced into markets, as more investors demand to be compensated for taking such risk when investing in communities. Credit rating agencies such as Moody’s and S&P have already begun to evaluate risk resulting from extreme weather when assigning credit ratings to issuers in at-risk geographies.
It is clear that investors are not ignoring climate change issues. Increased attention to the issue of climate change will produce winners and losers in the public markets. According to the US SIF Foundation's 2016 Report on U.S. Sustainable, Responsible and Impact Investing Trends, the number of investors including climate change related criteria in their investment evaluation has increased by 400% from 2014. There is currently at least $2.15 trillion in U.S. markets that is invested with such criteria in mind. Globally, there are over 1,500 signatories to the United Nations Principles for Responsible Investment, representing $60 trillion in assets under management. This level of concern, and the resulting pressure on the equity or debt pricing of entities with negative outcomes in a climate aware world, will create challenges for companies, municipalities, and nations that fail to address climate impacts.
As a result of investor pressure, it is expected that market exchanges and financial regulatory bodies will continue to push for more disclosure and action on environmental issues, including climate change. According to the Sustainable Stock Exchanges Initiative's 2016 Report on Progress, "Fifty-eight stock exchanges, representing over 70% of listed equity markets, have made a public commitment to advancing sustainability in their market...12 exchanges currently incorporate reporting on environmental, social, and governance (ESG) information into their listing rules and 15 provide formal guidance to issuers...23 additional stock exchanges have committed to introducing new ESG reporting guidance for their listed companies in the past year." U.S. companies operating abroad, and foreign companies with U.S. operations, must be aware of these emerging requirements and comply with them so as to ensure continued access to global capital markets. This is aside from regulatory frameworks, such as the EU Emissions Trading System, designed to encourage not just transparency, but credible action on the reduction of greenhouse gas emissions. As countries work toward lower total emissions, carbon constraints will become a reality of business.
Another risk created by ignoring more environmentally conscious policies will be the likely loss of business opportunities and associated jobs. According to Bloomberg New Energy Finance, global investments in renewable energy totaled $315 billion in 2014, $348.5 billion in 2015, and $287.5 billion in 2016. As countries implement commitments like those outlined above, economies that embrace the production of equipment for renewable energy will benefit. Depending on the path the new administration takes, the U.S. could either capitalize on this opportunity by taking a progressive approach to renewable energy and technology or risk being left behind.
The number of people employed in the renewable energy industry surpassed that employed by the oil and natural gas extraction industry for the first time in 2015. Green jobs accounted for 3.6 million openings in 2013, 3.8 million openings in 2014, and over 4 million openings in 2015. With renewable energy now representing over 13% of the total energy generated in the United States, and with the U.S. making up 17% of the global investment total for renewables, any policies that put the growth of this sector at risk also risk the loss of associated job growth and investments.
What does all this mean for investors concerned about the environment and about climate change? And in particular, what does it mean to fixed income investors who are seeking positive environmental outcomes as part of their investment strategy?
We believe the bright spot for 2017 will be the municipal bond market. A large number of states and municipalities have been vocal since the presidential election about their continued commitment to address climate change and to meet renewable energy targets. These states and municipalities will be looking to the public markets for financing support for many of their environmentally responsible projects, giving investors the opportunity to support such approaches both regionally and nationally. SNW will continue to assess and invest in these opportunities for our clients, helping to ensure that there is a market for issuers committed to positive environmental outcomes.
That is the short-term answer to the question, “What does all this mean for investors concerned about the environment and about climate change?” The answer over the long term is more complicated and will depend on how the new administration’s policies are worded and implemented, not just regarding climate change but also for tax structures and infrastructure investment. As the country moves further into 2017 and begins to receive more clarity on both policy wording and implementation, the longer-term picture will become clearer.