Set against a backdrop of market volatility and uncertainty stemming from the covid-19 pandemic, responsibly invested and ESG funds have seen a huge wave of inflows in 2020. As hopes grow for better climate action under President-Elect Biden, Adam Lewis assesses how the industry is responding.
According to figures from the Investment Association, responsible investment funds witnessed a record level of demand over the first three quarters of 2020, with more than £7bn invested into mandates seeking to have a positive impact on the world.
To put this growth into context, over the same three quarters last year, the total amount invested into the space was £1.9bn.
In a year clouded by uncertainty, responsible investment funds are a beacon for how savers can put their money to work to support positive change globally."
Similarly, the global funds network Calastone reported record inflows into ESG strategies in September, at a time when demand for active funds in general has been flat.
"In a year clouded by uncertainty, responsible investment funds are a beacon for how savers can put their money to work to support positive change globally," says Chris Cummings, chief executive of the Investment Association.
While Cummings said the asset management industry can be proud responsible and sustainable funds are reaching new heights of popularity, it also true some of the demand for ESG funds stems from performance.
The more defensive nature of what these portfolios invest in, plus avoidance of those sectors hit hardest by the pandemic - such as airlines, oil and gas companies, and financials - has lead many such strategies to outperform IA Global peers this year.
Given this performance, it is little wonder many eyes in the responsible investment world were set firmly on the US presidential race.
While President Donald Trump has still to concede the keys to the White House, former Vice President Joe Biden has now passed the threshold of 270 electoral college votes.
While carbon emissions did fall under Trump's tenure, the World Meteorological Organisation recently declared we are at growing risk of exceeding the target of 1.5oC above pre-industrial levels before 2024.
With Biden set to take over in January, investors are currently examining the environmental implications of the upcoming change in leadership and how the resulting investment opportunities.
Biden's ambitious agenda
Katie Deal, Washington analyst at T. Rowe Price, says US President-elect Biden has an ambitious climate agenda.
This is headlined by his pledges to eliminate carbon dioxide emissions from the US electric power industry by 2035 and position the country to achieve carbon neutrality by 2050.
"With $2trn in federal investment, Biden aims to achieve three goals: create jobs, modernise critical infrastructure and support the growth of green technologies - with an eye toward putting the US on the cutting edge of the energy transition," she says.
In framing his environmental and climate policies as components of larger economic proposals, Deal says this suggests federal investment in green infrastructure could be a fundamental feature in a recovery act.
However, she adds this depends on Biden's ability to get legislation through the Senate, the battle for control of which is set to run until January.
"We expect his administration to increase federal scrutiny of US oil and gas operators, as Biden has promised to crack down on greenhouse gas emissions, including methane leaked into the atmosphere by oil and gas operations," Deal says.
"We also expect agencies to tighten regulatory requirements for issuing permits - leading to higher compliance costs for oil and gas wells, pipelines and other fossil fuel infrastructure."
Biden has also proposed leveraging federal tax credits and streamlining regulations to incentivise the manufacture and adoption of renewable energy - including massive federal investment in grid modernisation.
Deal notes that these and other policies could enhance "secular tailwinds" for electric utilities.
John Kisenyi, a sustainable global equities analyst at Mirabaud Asset Management, says many of Trump's rollbacks on green policy, such as withdrawing from the Paris Climate Agreement, relaxing emission standards and deregulating the oil and gas sector, were enacted via executive order.
"These can be swiftly undone via the same means by his successor, which we are likely to see early on in a Biden presidency," he says.
"From a regulatory perspective we are likely to see stricter methane emission rules from oil and gas wells, the inclusion of climate analysis in pipeline permitting decisions and more ambitious fuel economy targets for cars and light trucks."
Kisenyi says this will move impact various sectors within the economy. One example is US autos, where Biden hopes to use tax credits to raise electric vehicles' share of passenger sales to 25% by 2026 in comparison with 5% under Trump.
While rejoining the Paris Climate Accord will be largely symbolic, Ben McEwen, a climate analyst at Sarasin & Partners, says it will demonstrate geopolitical engagement and stimulate broader action.
"While US policy frameworks clearly need reorientation if we are to meet the goals of the Paris Climate Agreement, we should also remember the economics of decarbonisation are ever more evident," McEwen adds.
"This should ease the path of the transition, regardless of political discord."
While Sarasin's McEwen is concerned about the impact of likely congressional gridlock on the scale of Biden's climate ambition, Duncan Goodwin, manager of the sustainable focussed Premier Global Alpha Growth fund at Premier Miton, is unperturbed by the degree of balance in the House of Representatives and the Senate.
"Despite an apparent lack of support for alternative energy from Trump over the last four years, the sector has progressed nicely," Goodwin says.
"In terms of specific green winners under Biden, we believe that US solar has to be front and centre."
Irrespective of policy changes regarding tax breaks and incentives, Goodwin argues the underlying growth in demand and the acceleration in demand for utility scale solar power in particular, as opposed to residential, looks set to underpin the market for many years.
"Pledges of carbon neutrality by major corporates such as Microsoft and Alphabet, alongside national pledges from China and more recently Japan, should keep global supply chains tight," he says.
"European oil companies also looking to invest into alternative energy markets may provide more competition and lower margins for developers, and hence we see the great upside for equipment suppliers, particularly those domiciled in the US, such as First Solar."
Goodwin adds: "We are looking out more for policies that could overstimulate an already tight and tightening market rather than investing on the hope that extra green incentive emerge."
Green bond boost
Outside of equities, Bram Bos, lead portfolio manager of NN Green Bond fund at NN Investment Partners, says heavy investment in sustainable infrastructure and clean energy under the Biden administration could lead to an inaugural green US Treasury issue and further boost the global green bond market.
"Biden's win paves the way for a transformative shift in US climate policy," says Bos.
"Biden is committed to rejoining the Paris Climate Agreement and investing heavily in sustainable infrastructure and clean energy to tackle the existential threat of climate change.
"The need to fund these investments will be a pivotal opportunity for the US to enter the green bond market as a sovereign issuer.
"This could prompt other governments worldwide to follow, sparking a significant growth in the global green bond market."
A version of this article was first published by our sister title Investment Week