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Environmental markets: economics set to outstrip political head winds

13 Feb 2017 - by David Richardson

Investors in environmental markets are, understandably, expecting strong headwinds from a Trump presidency. Candidate Trump campaigned as a pro-coal, climate change skeptic. His proposed cabinet is packed with nominees who are strong foes of environmental regulation. And the Republican Congress is unlikely to go out to bat for aggressive environmental protection.

However, against these political headwinds, powerful economic forces are at work. The underlying drivers advancing many environmental technologies are, increasingly, beyond most regulatory intervention. Meanwhile, consumers and companies are increasingly seeking more sustainable products and services.

The last few years have seen dramatic falls in the cost of many environmental technologies, especially in renewable power and energy storage. Renewable power technologies are increasingly able to compete, unsubsidized, against natural gas- and coal-fired capacity. Take-up will accelerate further as the price of battery storage continues to fall, allowing renewables to supply power when the wind is not blowing and the sun is not shining,

At the same time, many environmentally focused companies have built business models that do not rely on subsidies or regulatory support, rather they help their customers reduce resource use, and therefore cut costs. Industrial energy efficiency, for example, offers some of the highest returns on investment that companies can make with their capital expenditure.

There are also seismic changes underway in public perceptions of sustainability. Consumer survey company Nielsen found that more than three-quarters of Millennials are prepared to pay a premium for sustainable products and services, up from 50% in 2014. Some of the world’s most successful companies are responding: some 84 companies have recently announced that they will source all their power from renewable sources from 2017.  Individuals and companies are driving demand for environmental technologies that will continue regardless of policy signals from the new administration.

Moreover, policy changes by the new occupants of the White House will be harder to implement than many assume. Trump will have to work through Congress, where there is support on both sides of the aisle for renewable energy and environmental technology. Congress extended crucial tax credits for wind and solar technologies at the end of 2015, and there is little appetite for their repeal. And efforts to roll back existing regulations are likely to face stiff legal challenges.

Meanwhile, the States control powerful policy levers to support environmental regulation and technologies. They have the power to set renewable energy targets – Ohio’s Republican governor, John Kaisich, recently vetoed a bill to freeze the state’s rising renewables goals. California retains the right to set vehicle emission standards that, given the size of the state’s car market, strongly influence the entire auto industry. California’s incoming attorney general has promised to defend the state’s environmental policies.

All this presumes, of course, that a Trump Administration is an implacable foe of the environmental markets. This is unlikely to be the case. Trump himself has called for a focus on clean air and clean water . There are substantial majorities – including among Republican voters – in favor of clean energy and reductions in carbon emissions. Red States such as Texas, Oklahoma and Kansas are leading the country in wind energy investment. And North Carolina is second only to California in new solar farms.

Also, there are already a number of Trump proposals that will benefit the sector. The new president’s plans for $500 billion of infrastructure spending have already helped spur a rally in stocks linked to water infrastructure. Promises to cut corporate tax rates will benefit the environmental markets sector, which largely comprises small and mid-cap firms, and rising interest rates should not pose issues for environmental firms, which tend to carry relatively low levels of debt.

If a business-friendly Trump Administration is prepared to put economic pragmatism ahead of the ideological preferences of parts of its base, it will recognize – and reward – the economic potential of the environmental markets sector. It also raises enormous opportunities for job creation: for example, the solar industry created jobs 12 times faster than the overall rate of job creation in the US in 2015.

As candidate and president-elect, Trump has been nothing if not unpredictable. If this continues into government, investors can expect high levels of volatility – which itself provides opportunities for disciplined active investors. But while we can expect the unexpected from the White House, there are broader forces at work that should give investors confidence that the underlying investment thesis for environmental markets remains compelling. 

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