There are plenty of ethical concerns about the current incumbent of the White House, but should investors worry about ethical approaches to US equities?
Research last year by academics from the University of Texas at Arlington and the Bloomsburg University of Pennsylvania found sin stocks, which include companies that operate in the gambling, tobacco, alcohol, and weapons industries, generated higher returns under Republican presidencies and congresses.
This linked the phenomenon to greater political donations from vice sectors to Republicans and was despite the broader market being stronger under Democratic control.
No president has been as aggressive as Donald Trump in seeking to roll back regulations and environmental protections. This suggests environmental, social and governance (ESG) and socially responsible investment (SRI) strategies may suffer on a relative basis under his administration.
Much of the focus has been on Trump’s environmental policies. These include his enthusiasm for the coal industry and his moves to loosen restrictions on drilling for oil and gas.
There are good reasons to suspect ESG investors will not miss out on a coal renaissance. Simon Clements, co-manager of Liontrust’s Sustainable Future funds, said coal’s primary enemy is cheap natural gas rather than regulation, and Trump has shown no inclination towards deflating the shale industry.
The same market forces apply to oil, because of the several executive orders in April that will permit more exploration activity.
‘Trump wants to take the brakes off oil production in the US, which would actually be negative for the oil price,’ said Mike Fox, Citywire A-rated head of sustainable investments at Royal London Asset Management.
‘One of the reasons oil has fallen recently, despite Opec [Organization of the Petroleum Exporting Countries] cuts, is the belief more oil will be produced in the US.’
Renewable energy seems more secure despite Trump’s lack of support for solar and wind. ‘We’re glad it’s happening now and not five years ago,’ said Fox. ‘Five years ago, solar power needed government subsidies to become commercial. Those subsidies have worked and now solar is competitive.’
Clements said that, as a technology, renewables are becoming cheaper and, therefore, more attractive over time. Traditional resource projects can become more expensive over time as the cheapest assets are developed first.
Karina Funk, head of sustainable investing at Brown Advisory, has avoided such issues. ‘We do not expect the Trump administration to have an impact on our strategy,’ she said. ‘We do not invest in companies that rely on government subsidies that might be eliminated or reduced.
‘We do not consider companies that justify their value proposition on government support as having attractive business models.’
Clements said buoyant sentiment about the economy under Trump could stimulate SRI stocks. ‘An environment where companies are more likely to invest benefits these companies massively,’ he said.
Most organisations with capital expenditure requirements now target energy efficient options, such as LED bulbs. Optimism advances their spending plans, so manufacturers of such goods are boosted.
These types of opportunities excite ESG investors, despite wider scepticism about Trump’s green agenda. One of Fox’s largest holdings is Alphabet, Google’s parent company, thanks to its commitment to researching artificial intelligence and self-driving cars.
‘We try to find companies innovating in a way that can have a materially positive influence on society,’ he said.
The SRI revolution will not be derailed by the populist revolution. Apart from anything else, it just would not make business sense.