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Trump under fire after Paris climate change exit

We explore the investment implications of Donald Trump's decision to withdraw the US from the Paris climate change accord.

Trump under fire after Paris climate change exit
President Donald Trump has announced his intention to withdraw the US from the Paris climate agreement – a move that has attracted criticism from investors and politicians far and wide.

Trump has stuck to his election promise of withdrawing from the Paris accord, a United Nations agreement that was signed in 2015 and aims to cut greenhouse gas emissions. He pointed to estimates that the pact would result in a $3 trillion loss to US GDP and would put 2.7 million American jobs at stake.

‘I cannot in good conscience support a deal that punishes the United States,’ Trump said on Thursday.

He said the country remains open to striking another deal that is deemed less punitive for the US. However, the president concluded that if this isn’t possible then no deal will be made.

The move sparked criticism from a number of leading investment groups, including the Global Sustainable Investment Alliance (GSIA), which represents sustainable investment bodies from Europe, US, UK, Netherlands and Australasia who look after $12 trillion of assets.

Simon Howard, chief executive of the UK Sustainable Investment and Finance Association and the secretariat of the GSIA commented: ‘Climate change is the gravest threat to mankind’s future and the Paris agreement is the best hope for global mitigation. By withdrawing from the Paris agreement, President Trump will slow progress, but will not stop it.’  

Aviva Investors’ chief responsible investment officer Steve Waygood expects US withdrawal from the agreement will lead to ‘financial and economic loss for the international community, as well as the US’.

‘But crucially, it does not equate to the unravelling of the hard-won accord. Markets can move ahead with clarity on the US position. The European Union and China have also indicated that they are ready to step up and provide leadership that will hopefully fill any vacuum,’ he added.

Meanwhile, Nordea 1 – Global Climate and Environment Equity fund managers Thomas Sørensen and Citywire + rated Henning Padberg described the development as a ‘blow’, but they remain positive on the forces seeking to limit climate change.

‘Political support is only one of the drivers of this mega-trend. Donald Trump aside, we remain convinced the world is witnessing a revolution in attitudes towards the climate and environment – with corporates at the forefront of this change,’ they noted.

They also point to changes in investor perception. ‘The notion that environmental benefits and good economic returns cannot be achieved at the same time has been well and truly dismissed. Despite this, the impact of climate and environment as a driver of company cash flows remains under-researched and underestimated by most market participants,’ the managers added.

Investment implications

In theory, the move should provide support for coal, miners, alongside oil and gas stocks.

However, US coal stocks, such as Peabody Energy, sold off immediately after the announcement. Natural gas and oil companies also saw their share prices come under pressure.

Oil majors Exxon Mobil and ConocoPhillips reacted to news of the US's withdrawal by reiterating their support for the accord.

Renewable energy companies also experienced share price weakness. For example, JinkoSolar Holding, which is the world’s largest solar supplier, saw its share price fall by 5.2% on Wednesday after the news broke. Its share price has since recovered, trading at $18.34, albeit some way off Wednesday’s opening price of $19.13.

The US's exit from the pact suggests that Trump's energy policies will focus on fossil fuels. Bruce Jenkyn-Jones, who is co-head of listed equities at Impax Asset Management and part of the management team of Impax Environmental Markets (IEM ), expects the oil price could stay lower for longer if more drilling takes place. He also anticipates that the president will continue to encourage fracking. 

While coal miners theoretically stand to benefit, the fund manager says it is hard to escape the fact that the sector is in decline.

His sentiments are echoed by Charlie Thomas, Jupiter’s head of strategy for environment and sustainability: ‘If you completely deregulate coal in the US, it might make it more competitive but this does not fundamentally change the story.’

The fund manager describes the US’s signal to withdraw from the Paris accord as a ‘small dip in the long-term trajectory’ towards renewable energy and the reduction of carbon emissions.

Given that there are more people employed in the US’s renewable energy sector than coal, oil and gas combined, Thomas concluded: ‘You realise this is a politically motivated approach rather than a pragmatic approach.’

Although Trump's decision has affected sentiment towards renewable energy stocks over the short-term, Jenkyn-Jones says the investment case for these companies remains strong.

'We don't think it is business as usual, but given their compelling economics solar and wind farms will continue to gain market share in the US,' he explained.

Jupiter’s Thomas is encouraged that renewable energy stocks have fallen significantly less than they did following the election of Trump. As these companies become less reliant on government subsidies, he expects they will prove increasingly robust in the face of political developments.

Danish wind turbine distributor Vestas Wind Systems, for example, was down 1.5% on Friday lunchtime, which compares to the 17% fall it experienced after the US election.

In the event that renewable energy stocks experience a sharp sell-off, Thomas said it could present his team with selective buying opportunities.

2 comments so far. Why not have your say?


Jun 03, 2017 at 02:56

It was a bad deal for the USA. Trillions of US tax payer money given to poverty stricken countries for reducing Carbon emissions. The money as we all know would have been siphoned off and stollen by local politicians. A better option would have been to give UK and USA made carbon reducing products to these poverty stricken areas and at the same time this would provide jobs in the UK and USA and reduce the politicians from stealing from their citizens.

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Jun 03, 2017 at 14:49

Absolutely right SDRL. Indeed it is my view that the UK's entire foreign aid budget should be mandated to be in the form of UK products and services and never currency.

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