While clean energy has been under pressure following Donald Trump’s victory and a Republican “clean sweep”, Schroders notes that the impact that Trump has had on Schroder’s sustainable portfolio has been limited.
Olly Cairns, portfolio director at Schroders, notes that Trump’s stance on US federal support for clean energy has been clear, with his promises to repeal many of the “green new scam” policies included in the Democrats’ Inflation Reduction Act (IRA).
As such, Cairns states that it was unsurprising that shares of many renewable energy companies fell sharply following the US presidential elections.
Despite this, Schroder’s sustainable portfolios have remained “resilient” this month, adding to the positive returns that have already been generated this year.
Cairns notes that while they have exposure to energy transition funds, which have seen sharper falls, this sector is part of the “wider sustainable investment universe”.
Within equities, Schroder’s largest allocations is to sustainable businesses across sectors on a global scale, which have proven to be more resilient.
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Cairns acknowledges that while sustainable portfolios have slightly lagged behind unconstrained portfolios this year, over a five-year time frame, sustainable portfolios remain slightly ahead.
“This is consistent with our view that long-term outcomes for sustainable and unconstrained portfolios will be similar, although the journey will look different,” Cairns adds.
Impact of Trump administration
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It is evident that the incoming government will change US’s climate and energy policy landscape, curtailing or even repealing legislations and incentives included in IRA 2022.
These policy changes create near-term uncertainty within the clean energy sector, particularly with potential new trade tariffs which could impact supply chains, Cairn says.
Furthermore, Trump’s policies could result in higher inflation, driving up bond yields and affecting sustainable energy project development and consumer demand, while higher interest rates could negatively affect utilities.
However, while Cairns acknowledges that there may be further volatility under Trump’s administration, he is of the opinion that forthcoming policy changes “may not be as bad as feared”.
According to Schroder’s research, 80% of new clean energy projects worth over $1 billion are in Republican districts since the introduction of the IRA.
Additionally, Texas, which Trump won with a significant majority, is the largest renewable energy producer in the US and the fifth largest producer globally.
As such, Schroders notes that there may be more support for clean energy development within the Republican party than one might expect.
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Cairns believes that a wholesale repeal of key initiatives is unlikely and a reduction in the time horizon of incentives or tapering down of incentives into 2028 or 2029, is more likely.
Furthermore, Cairns emphasises that the energy transition is driven by factors beyond the US government policy, such as falling costs, improving technologies and rising electricity demands.
As the price of renewable energy has fallen, the economics have become “increasingly attractive”, leading to a significant increase in supply.
The performance of the clean energy sector over the past three years may have “largely anticipated” the risk of US policy changes, Cairns says.
The valuation of clean energy investments has fallen significantly since 2021 and sustainable energy stocks now trade at a discount to broader markets, despite their growth potential.
“We could well see further volatility in the clean energy sector as Trump takes office. However, we may well be nearing a trough in the sector’s earnings cycle, and with valuations attractive, the risk-reward scenario for long-term investors remains compelling,” Cairns adds.
