What investors need to know about Green Deals

Green Deals aimed at delivering fiscal stimulus and addressing climate change are under discussion in the EU and US and could have far-reaching effects for companies in a number of sectors.

The views expressed are those of the author at the time of writing. Individual teams may hold different views. The value of your investment may become worth more or less than at the time of original investment.

Green Deals aimed at delivering fiscal stimulus and addressing climate change are under discussion in the European Union (EU) and US, and they could have far-reaching effects on companies in a number of sectors. As debates about the plans’ scope and implementation continue, and as the political landscape shifts ahead of the US election in November, we are assessing the potential investment implications in the near and medium term.

Modeled on the New Deal programs launched by US President Franklin Roosevelt in the 1930s as a means of reviving a moribund post-depression economy, the EU Green Deal and US Green New Deal are increasingly viewed by some policymakers as crucial for economic and employment growth.

EU Green Deal

The proposed EU Green Deal sets two overarching goals: to achieve carbon neutrality across Europe by 2050 and bolster greenhouse gas (GHG) emissions-reduction targets to 55% over 1990 levels. To reach those goals, several mechanisms are under consideration, including:

  • Setting a carbon border tax on carbon-intensive imports
  • Strengthening efforts around climate proofing, resilience, and preparedness
  • Developing a power sector based on renewable energy sources (complements rapid phasing out of coal and decarbonizing natural gas)
  • Establishing a €500 billion recovery fund to support these initiatives

At some point, I would expect to see language included in the proposal aimed at coordinating emerging carbon- and climate-reporting constructs, such as the EU taxonomy.

In general, market participants appear to view the EU Green Deal as an innovative way to spur economic growth and development while addressing looming climate challenges. I believe this important dual objective increases the odds that some form of this legislation will pass.

US Green New Deal

The proposed US legislation will likely move forward only with the election of Democratic presidential candidate Joseph R. Biden. Former Vice President Biden, who has put his own spin on the original plan developed by Democrats following the 2018 elections, includes a series of economic incentives and regulatory mandates.

Incentives:

  • Invest US$1.7 trillion in federal clean-energy projects
  • Increase clean-energy research and development
  • Evaluate potential nuclear-power research

Policies and regulations:

  • Mandate net-zero carbon emissions across the US by 2050
  • Rejoin the Paris agreement
  • End fossil-fuel subsidies and boost standards on methane regulations
  • Develop new fuel-economy standards aimed at ensuring that 100% of new sales for light- and medium-duty vehicles will be electrified
  • Increase efficiency standards for buildings and appliances
  • Ensure all government installations, buildings, and facilities are efficient and climate-ready
  • Require corporate emissions and climate-risk disclosures

Biden’s plan does not explicitly mention carbon pricing. Given the current recession, I think the odds of carbon-pricing measures passing in the near term are low, even with a Biden presidency. However, the multitude of carbon-pricing proposals introduced by the 116th Congress — with some Republican co-sponsorship — suggests that elected officials are thinking seriously about carbon as a negative externality and, potentially, as a risk to long-term economic growth.

Potential investment impact

I believe both Green Deals mostly benefit sentiment in the short run. It will take time to enact any proposal, so while fundamentals like earnings or cash flows are unlikely to be affected in the near term, I anticipate this will change quickly once the regulations are implemented. Both proposals have high-level investment implications. Carbon-disadvantaged businesses with poorly positioned legacy assets, high carbon-emission footprints (Scopes 1, 2, and 3), or with an inability or unwillingness to conform to regulation and reporting requirements may be challenged.

On the other hand, carbon-advantaged companies or those that evolve to meet new standards may fare better, seeing opportunity sets accelerate as governments steer policies and capital toward addressing climate change.

I expect the legislation to create potential tailwinds for:

  • Utilities that favor renewable power
  • Renewable asset owners, including yield cos
  • Solar and wind companies
  • Energy-efficient solutions for industrial and residential buildings
  • Smart-grid technology
  • Electric vehicles and their supporting infrastructure
  • Refiners investing in biofuels or renewable diesel
  • Fossil-fuel companies that can diversify by adding lower-carbon sources
  • Carbon-capture and carbon-storage solutions

The EU Green Deal and the US Green New Deal were proposed to address climate change, mitigate economic inequality, and forge new paths to economic growth and development. While it remains unclear whether and how much of each plan will be enacted, the recent coronavirus pandemic has been a reminder of the world’s vulnerability to systemic risks and the need for proactive legislation that can spur growth and avoid prolonged economic disaster.

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