Think the incoming U.S. president will be universally bad for sustainability portfolios? Think again. We sat down recently with Lenka Martinek, managing partner at Sustainable Market Strategies, who makes a strong case that despite the anti-ESG backlash, thematic sustainability investing will be alive and well for the next four years.
Donald Trump is synonymous with “anti-ESG.” How can this be good for investors that adhere to purchasing stocks using both financial and non-financial criteria to deliver superior longer-run returns?
The turn away from ESG investing has been under way for quite some time and is unlikely to slow anytime soon. U.S. ESG-focused ETFs have already had two consecutive years of net outflows, and U.S.-listed companies have already taken the hint that ESG is no longer a sales or marketing advantage—they have been working fast to erase the phrase ‘ESG’ from corporate speak. The chart below shows the precipitous dropoff in the number of mentions during quarterly earnings calls.
The trend should not, however, be interpreted as a death knell for investors who focus on sustainability. In fact, Trump’s first term (2017–2021) was an excellent time for many thematic sustainability funds, and many equity sectors moved in a contrary fashion to consensus expectations:
- Despite the mantra “drill, baby drill,” clean energy stocks massively outperformed U.S. oil & gas stocks from 2017 to 2021.
- On the campaign trail prior to 2017, Trump made ‘tough on crime’ a central calling card. But by 2021, prison stocks had lost half their value.
- Despite a rollback of over 100 environmental rules during Trump’s first term, the companies that are responsible for the testing and certification of air and water quality across a variety of industries (e.g. Bureau Veritas, SGS) saw a steady appreciation in their stock prices and had a similar performance to major global equity benchmarks from 2017 onwards.
So you’re suggesting that these same themes will do well again over the next four years?
No, it’s unlikely that these same sustainability themes will do well over the next four years because the macroeconomic backdrop has changed considerably. The point is that despite the anti-ESG trend, successful investing remains about understanding the macroeconomic backdrop and anticipating the needs and desires of the future. As climate change and related environmental challenges continue to mount at a time when social inequalities are ever-present, investors will find sustainable opportunities both despite and because of Trump’s future policy focus.
Walk us through some of the potential areas that might do well because of Trump.
There are high odds that the Trump presidency will exacerbate inflation. After all, economic theory, borne out in practice time and again, shows us that large fiscal deficits (which are expected thanks to the extension of tax cuts under Trump) stoke inflation. Tariffs are also inflationary—historically, about half of the cost of tariffs is assumed by producers (via smaller profit margins) and the other half by consumers (rising prices).
Pile on a restrictive immigration policy that will further constrain an already cyclically and structurally tight labour market, and labour costs will face upward pressure, all else being equal.
Nowhere will the labour squeeze be felt more acutely than in agriculture, and it will likely be enough to aggressively feed through to grocery store prices. A recent article in The Atlantic estimated that if the Trump administration were to enact “the largest deportation operation in American history, somewhere between 40 and 50 percent of the people who plant U.S. crops would leave the domestic workforce.”
Already, food inflation has been running hotter than overall CPI due to structural reasons: the global population continues to increase, with the middle class growing most quickly. On the supply side, it is unlikely that more of the Earth’s land surface can be dedicated to food production, and climate change is also making food production as we know it more complex.
Though the nomination of Robert F. Kennedy Jr. as secretary of the Department of Health and Human Services (HHS) is not yet a done deal, RFK’s desired policy path would unequivocally result in higher food price inflation. The current U.S. food system is designed to maximize yields at the lowest cost. But an overhaul that includes solving for multiple variables—i.e., improving human health and environmental outcomes—will not come without a financial impact for consumers. How food is produced, and at what financial and human cost, will be a growing theme in sustainability portfolios.
You mentioned tariffs. To what extent do you think reshoring will happen and is America really “exceptional”?
We have written extensively over the past several years about the rising dominance of fiscal policy that has occurred since 2010. Since that time, both Republican and Democrat governments have announced major fiscal packages that have totalled over US$9 trillion. And these spending packages are increasingly being used to deploy industrial policy. We view tariffs as part of a wider toolbox to deploy industrial policy.
Investors may recall that soon after Biden was elected, the White House published a list of key priorities for the government. The list included, among other things, climate change, health care and COVID-19. These priorities were reflected in the spending bills of the past four years, and to a great extent (the proliferation of AI notwithstanding) they were apparent in the growth prospects and stock performance of U.S. companies.
There is a strong consensus that at the top of Trump’s priority list is the reshoring of U.S. manufacturing, as well as other key industries critical to national security and autonomy. To be sure, manufacturing reshoring and rebuilding should be viewed as a continuation of a trend that got under way with Biden’s Inflation Reduction Act, since the bill inherently favoured onshoring jobs and production in key sectors. In this sense, many of the excelling companies that have benefited over the past four years will continue to thrive in the years ahead. Sustainability-focused investors should look for industrial companies that generate most of their revenues in the U.S. and that support resource efficiency, climate adaptation and automation, as these will be in high demand. Some of these companies are highlighted in the table below.
What else do you see as an investment theme in a Trump world?
Should the U.S. withdraw from the Paris Agreement, as is likely under Trump, there are high odds that the planet will not stay below a warming of only two degrees in the coming decades. In other words, our attempts at climate change mitigation will not be sufficient, and about half of the world’s population will be increasingly exposed to climate hazards, such as heat stress, drought and floods. On this basis, it makes sense for investors to make greater space in their portfolios for companies focused on climate change adaptation.
The climate adaptation trade can take many forms, from betting on the long-term success of the most prepared insurance companies and banking on the increased demand for data from firms that feed insurance models, to positioning for increased spending on resilient infrastructure. We think that all of these areas deserve more investment attention.
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