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What does US return to the Paris Agreement mean for investors?

After a brief departure, US president Joe Biden reaffirmed his country’s commitment to the 2015 Paris Agreement on 19 February 2021.

His predecessor, Donald Trump, announced in 2017 that he intended to withdraw from the climate change pact.

But, in accordance with article 28 of the agreement, he was unable to give notice until three years after the US signed up.

The legally binding international treaty on climate change was adopted by 196 parties at COP21 in Paris on 12 December 2015.

It entered into force on 4 November 2016.

This means that the three-year period after which the US could exit the agreement ended on 4 November 2019.

However, it takes 12 months to come into effect after notice is given.

Meaning that the US withdrew from the Paris Agreement on 4 November 2020 only to sign up again less than four months later.

To get a better understanding of how much the U-turn will impact the ambitions and expected success of the agreement, Expert Investor spoke to Lazard Asset Management, Kempen Capital Management, Goldman Sachs Asset Management and Janus Henderson.

‘Understand how commitments are translated into strategy’

Jenny Anderson, co-head of sustainable investment and ESG at Lazard Asset Management:

“In contrast to the Trump administration, president Biden has made addressing climate change a top priority and rejoining the Paris Climate Accord shows he means business.

“While the slim Democratic majority in Congress may limit Biden’s ability to pass legislation, including the $2trn climate-related investment plan he campaigned on, he does have tools at his disposal, such as overseeing regulatory policy and executive orders.

“We expect he will use these generously to take action on climate change.

“Biden’s green policy and increasing ambition on net-zero from government and companies presents an array of risks and opportunities for investors.

“These are increasingly reflected in policy, capital markets and investor preferences, including more climate-related disclosures by companies; greater popularity of sustainable investment strategies; the rising use of climate-related financial instruments; and recent strong performance in ‘pure play’ companies and investment themes, like clean energy.

“We believe the investment landscape will continue to evolve in this direction and investors will need to incorporate climate risks into their analysis, not least in understanding how net-zero commitments are translated into a credible corporate strategy and capital expenditure plans.

“Finding companies at the forefront of change and avoiding those most exposed requires an understanding of both complex new policies and the far-reaching implications of climate change itself – an active, bottom-up approach, supported by strategic and intentional voting and engagement activity will be crucial.”

‘Maybe the US will follow’

Ivo Kuiper, senior portfolio manager, Kempen Sustainable Equity fund at Kempen Capital Management:

“If we want to the transition to a green future to speed up, it needs the support of the world’s largest economy. That the US government is rejoining the Paris agreement is clearly an important step in that direction. Currently, the US emits 15% of global CO2 emissions, the second highest emitter after China.

“However, it looks like the new Biden climate-conscious administration will impact the ESG agenda positively. This provides a supportive context for more environmentally friendly and sustainability-related regulation.

“Both Europe and China already have committed to become net carbon neutral by 2050 and 2060 respectively. Maybe the US will follow.

“It is satisfying to see that, alongside governments, companies are also taking on more responsibility and drive positive change.  The list of companies that commit to carbon neutrality is growing rapidly and includes giants like Microsoft, Apple, Amazon, L’Oréal and Unilever. We believe that, to a very large extent, companies shape the future, and by investing in and engaging with sustainable companies our aim is to contribute to this change.”

‘Viable without government subsidy’

Luke Barrs, head of fundamental equity client portfolio management in Emea and Asia ex Japan at Goldman Sachs Asset Management:

“The Biden administration has put the fight against climate change and the need for greater environmental sustainability back at the top of the policy agenda. Re-joining the Paris Agreement on day one and targeting carbon neutrality by 2050 will channel a wave of growth, innovation and capital to the green economy.

“Clean energy, the circular economy, electric vehicles and other green technologies have long been areas in which the US has lagged Europe and China, where adoption rates are higher and innovation has been stronger.

“But, with many green technologies now economically viable even without government subsidies – with many renewable energy sources already at cost parity versus traditional resources – this shift in focus in the US can add further impetus to the ongoing global transformation.

“With governments, companies and consumers committed than ever before to make a change, we believe we are in the early stages of a green revolution that can rival the scale of the industrial revolution and the speed of the digital revolution.

“Against this backdrop, we believe the companies providing impactful solutions to key environmental issues can benefit from meaningful secular demand tailwinds over the coming decades and we remain overweight these ‘solution providers’ across our portfolios.

“This includes, in our view, businesses engaged in the areas of clean energy, resource efficiency, sustainable consumption and production, the circular economy, and water sustainability. In this context, we welcome all government attempts to integrate environmentally conscious investments into recovery proposals.”

‘Hostility to climate change’

Hamish Chamberlayne, head of global sustainable equities at Janus Henderson:

“President Biden has put the climate agenda at the front and centre of his policy objectives and his climate plan is the boldest of any US Presidential candidate in history.

“With the EU and China also escalating their commitment to green investment and decarbonisation, the stars are aligning for a globally synchronised clean energy and technology investment boom.

“As we look to the next several years, we are optimistic. We see some very persistent and bankable investment trends that are closely aligned with sustainability and our investment framework.

“We do expect to see some reversion to old norms, as the vaccines are rolled out, but we believe this pandemic has accelerated and cemented some trends such that many of the societal and economic changes we have experienced will prove durable.

“While Trump’s presidency did not do as much damage to the decarbonisation trend as initially feared, his hostility to climate change, and his efforts to undo environmental regulations and undermine global political co-operation, have certainly not helped progress.

“This new administration’s changes cannot come too soon – while 2020 witnessed the steepest decline in greenhouse gas emissions in history it is also on track to be one of the hottest years.”

Kirsten Hastings

Kirsten is international editor of Expert Investor and International Adviser, covering global news stories about the financial services industry. She joined Last Word Media in October...

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