The US and renewables: A perfect accord?

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President Donald Trump’s withdrawal of the US from the United Nations’ Paris Agreement on climate change caused significant backlash for the world’s most powerful nation. Yet Newton Head of Responsible Investment Andrew Parry believes the country remains an extremely attractive base for renewables investment. Now, investors wonder what impact the upcoming presidential election might have on this growing market.

Many of President Trump’s decisions while in power have come as a global shock, and his swift decision to remove the US from the United Nations’ Paris Agreement within the first year of his presidency was no different.

The Paris Agreement (also known as the Paris Accord) is a climate change initiative created by the United Nations in 2016. The goal of the agreement is for all nations to combat climate change and aid developing countries that may need more help doing so. Its aim is to strengthen the global response to the threat of climate change by making coordinated efforts to keep a global temperature rise below 2 degrees Celsius while making extensive effort to get it to 1.5 Celsius.¹

The initiative has gained a positive widespread response, with 188 countries coming together to be a part of the agreement. The US is the only country among the 188 that has withdrawn its participation, which has prompted global concern and condemnation.

President Trump’s rationale for the move was based on his view that the agreement presents an ‘unfair economic burden’ on the US. Trump has said the agreement would cost the country US$3tn in lost economic output and 6.5 million jobs despite providing little research to back these claims. He also suggested that the Paris Agreement gives China and other large polluters an unfair advantage over the US by allowing them to continue to increase their carbon emissions.²

The earliest possible effective withdrawal date by the US would be the 4th of November this year, one day after the US Presidential Election. Trump’s stance on the agreement is clear, but Democrat presidential candidate Joe Biden has made several speeches publically supporting the pact. The political rivals also have different stances on the use of coal and fossil fuel emissions, with Trump being an avid supporter of fossil fuel use while Biden has taken the “No Fossil Fuel Money” campaign pledge that all his fellow Democratic presidential candidates took.³

But according to Newton Head of Responsible Investment, Andrew Parry, when analyzing the US energy market, it’s clear to see it is increasingly driven by pure economics, not policy and that the country has a rising demand for and use of renewables.

“Renewables are increasingly cost competitive with fossil fuels, especially coal. Despite the current administration’s support for coal, in April 2019 renewables provided more of US power needs than coal (23% vs 20%).⁴ In fact, 2019 was a record year for renewable energy investment in the US. Technological advances and the benefits of scale will increasingly drive greater adoption of renewables and potentially much lower energy costs.”

According to the consulting giant EY’s Renewable Energy Country Attractiveness Index⁵, the US ranks number one on the list.⁶ A new administration could decide to build on this momentum to drive strong growth in the sector, building jobs and spurring economic activity by using low interest rates to invest in a greener future, but irrespective of who wins the US election, Parry believes renewable energy investment will continue to grow in the country.

It’s no secret President Trump endorses the use of coal, but Parry believes it has a rough road ahead: “The fossil fuel industry is increasingly aware that it faces a challenged future,” he says “Coal, in particular, has a bleak future with demand even in the developing world set to diminish over the next decade. In our view, oil companies are also increasing their investment in renewables, carbon capture and hydrogen as they try to remain relevant in a changing world.”

Many countries within Europe take the top spots for integrating environmental, social and governance (ESG) factors within investment decisions and, although it’s taken some time, the US is finally following suit. Parry notes that ESG investing has gained popularity in the US with record inflows into ESG and sustainable funds this year, even when there were record outflows from equity mutual funds at the height of the Covid-19 crisis.

Based on environmental statements and track records, a Biden win looks more promising in terms of the US integrating more ESG practices within the nation’s companies and their investors. In contrast, Trump has previously taken a harsh stance on some more environmentally friendly business approaches. On the other hand, as ESG gains more attention and arguably becomes more ‘profitable’ in the US, his decisions could change to favor sustainable investment practices.

“Increasingly, investors in the US and around the world see sustainable strategies as aligned to their values as well as their financial needs. Sustainable themes resonate with them as they are about where the world is going and not about clinging to the past. Despite who wins, it should be remembered that ESG is finance 101 and an essential input into being a good investor,” Parry concludes.

¹United Nations Climate Change: ‘What is the Paris Agreement?’, September 15, 2020.
²BBC News: ‘Paris climate accords: ‘US notifies UN of intention to withdraw’, November 5, 2019.
³Climate-xchange.org: ‘Biden vs. Trump: Where the 2020 Candidates Stand on Climate Issues’, May 27, 2020.
The Guardian: ‘US generates more electricity from renewables than coal for first time ever’,
June 26, 2019.
⁵This index ranks the top 40 countries in the world on the attractiveness of their renewable energy investment and deployment opportunities.
⁶EY Renewable Energy Country Attractiveness Index (RECAI), May 19, 2020

Important information:

https://www.bnymellonim.com/outlook/global-disclosure/

MARK-143167-2020-09-30 GU-0092 EXP 30 Dec 2020

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