Is the US on the verge of a green wave?

The rapid increase in Environmental, Social and Governance (ESG) investing has, in recent years, been somewhat halted at the US borders. Holding 11.9 trillion USD in sustainable assets, compared with Europe’s 14 billion USD, American investors are evidently bearish on ESG investing under the Trump administration.

In Donald Trump’s first term in office, sustainable investing faced excessive regulatory and political scrutiny; beginning in effect with President Trump’s decision to exit the Paris climate change agreement in 2017. Since then, the President has either scaled back or eliminated 150 environmental measures – possibly explaining investors’ reluctance to adopt American sustainable assets. The upcoming US election on November 3, however, threatens to change this trajectory for sustainable equities and fixed income options in the US.

Joe Biden, the Democratic Presidential candidate, has promised 2 trillion USD in clean energy investments, which could precipitate a sharp rise in enthusiasm for renewable energy in the US, should he emerge as the 47th President of the United States. Biden aims to achieve 100 percent emissions-free power by 2035 and, in the second presidential debate against Donald Trump on October 23, claimed that he would trigger a “transition from the oil industry”. Michael Zezas, Morgan Stanley Head of US Public Policy Research, said that “Biden’s more progressive policy platform could bring greater government involvement” in pushing sustainable measures.

The Democrat’s policy aims have fuelled growing sentiment for ESG options in the US, impacting prices for metals such as copper. Electric cars contain more than three times as much copper as an internal combustion car and hopes of a ‘blue wave’ in early November has driven the metal’s price above 7,000 USD per tonne in recent weeks. Max Layton, analyst at Citigroup suggests “investor interest in gaining exposure to the ‘decarbonisation’ theme is on the verge of reaching fever pitch”. The potential for a Biden victory should keep copper as the commodity to watch.

Following the Big Tech Antitrust hearing in late July, the US antitrust subcommittee, along with the democrat-controlled House of Representatives, recommended the breakup of large tech companies. While Biden has not directly endorsed this view, a victory for the Democratic candidate may come with increased pressure to curb the power of big tech. This would likely induce rippling affects in the ESG market, driving investors away from funds screened for certain ESG criteria, many of which have major holdings in large tech firms. A key index-tracker to watch is Vanguard ESG US Stock ETF, whose five largest holdings include Apple, Amazon, Alphabet and Facebook.

Alternatively, a second term in office for the incumbent is likely to signal a continuation of the status quo. A Trump victory is likely to place renewable energies under scrutiny and could lead to a cooling off for sustainably sourced investments, deepening the trend of the US lagging behind its European peers on ESG commitments.

Despite all this, it is possible that either outcome will have a negligible effect on an already inexorable demand for ethical investing. There is a growing consensus, even among US

Republicans, that progressive investments are necessary to combat climate change. For example, Trump’s attacks on the wind industry has drawn opposition from Iowa’s wind industry which, according to the American Wind Energy Association, has created 10,000 direct jobs and attracted 19 billion USD in investments. This has led Joni Ernst and Chuck Grassley, Iowa’s two Republican senators, to publicly distance themselves from Trump. As investors increasingly turn to sustainable options in an attempt to outperform the benchmark, a school of thought growing in popularity, it is appearing inevitable that a green bull market is on the horizon.

Analyst: Jack Walsh

Sector Head: Sophia Li

Editor: Harry Forbes-Nixon

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