Trump’s climate policy and its impact on investments

Donald Trump’s inauguration has been followed by a flurry of executive orders, with implications across many industries. We look at what Trump’s second administration means for sustainability-related sectors in the US and globally.

As part of the first executive orders, the US International Climate Finance Plan was revoked and rescinded, and President Trump ordered a withdrawal from the Paris Agreement on climate change, again.

In practice, this means that the US no longer has to submit a climate action plan to the United Nations every five years. This will slow the US economy’s path towards net zero, although a complete withdrawal from the UN climate framework would be complicated by the US Constitution. Indeed, presidential authority on treaties requires the support of two-thirds of senators under the constitution. Finally, the revocation of the US International Climate Finance plan induces a reduction of financial and technical assistance for climate change initiatives in the developing world.

Although we see no threat to the sustainability transition globally, China will play a more central role

Climate leadership shifts to China

Although we see no threat to the sustainability transition globally, China will play a more central role in multilateral agreements. At the UN’s November 2024 climate conference, China’s leaders called for international cooperation and “a complete transformation of growth models”. China is under pressure to increase its commitments. Between 2013 and 2021, China contributed over USD 34 billion in climate-related development finance, making it one of the most significant providers of international climate aid. China has already met its 2030 peak emissions goal, six years ahead of schedule, and emissions could start declining as soon as this year. This trend is likely to help mitigate the slower pace of US progress. China’s motives are economic, as well as a recognition of its exposure to the physical effects of climate change. At past UN meetings, negotiations between the US and China were central to global progress. A shift away from climate action in the US should not mean that China backs away from its goals, in our view.

Existing commitments outside the US remain strong

At the November UN conference, the UK, Brazil and the United Arab Emirates enhanced their 2035 targets, while four countries – Bhutan, Madagascar, Panama, and Suriname – have already achieved net zero greenhouse gas emissions. The Trump administration should not impact other countries’ transition policies. This is especially true in the European Union. The region’s recent energy supply shock, and report by Mario Draghi, former European Central Bank president, that identified high energy prices as one of the biggest brakes on European competitiveness, make a reversal of the European Green Deal’s ambitions unlikely.

Changes in domestic policy

Following the issuance of “Unleashing Alaska’s extraordinary resource potential”, “Declaring a national energy emergency” and “Unleashing American Energy” executive orders, we expect further curbs to environmental legislation. Specifically, the National Environmental Policy Act (EPA), Endangered Species Act, Clean Water Act and Critical Mineral Consistency Act, in order to accelerate permits for oil drilling, as well as federal infrastructure and mining projects. Additional cuts to EPA budgets, reducing regional initiatives and rolling back the Environmental Justice programme may follow, as they are subject to investigations by Republicans in the House of Representatives. In addition, President Trump revoked President Biden’s 50% EV penetration target by 2030 (which was not legally binding) and called for terminating waivers that allow states to limit petrol-and diesel-powered car sales.

…a gradual and partial rollback of the IRA is probable

The Inflation Reduction Act of 2022 (IRA), which supports US manufacturing and clean energy (see chart), is unlikely to be fully repealed since it enjoys some Republican support including their narrow backing in the House of Representatives. However, a gradual and partial rollback is probable. In our view, the most vulnerable areas are electric vehicles (EVs), energy efficiency, heat pumps and offshore wind. Technologies such as solar, onshore wind, advanced manufacturing, hydrogen, nuclear and carbon capture may be less at risk than initially thought, as they have received Republican support in the past. A rollback would delay the transition to a sustainable future, but the full impact depends on how profitable each technology is without subsidies. In the event that the IRA were fully repealed, the most significant delays would hit the adoption of hydrogen, carbon capture and offshore wind technologies that remain largely uneconomic.

Investment implications

From an investment perspective, the second Trump administration may create more sector and regional divergence as the US loses momentum in sustainable investing. After the indiscriminate decline in valuations of the sustainable investment universe in the last months of 2024, earnings dynamics are in the driving seat, and stock selection is critical.

Global momentum, especially from China and the EU, should keep the green energy transition on track

Our analysis focusses on three factors. First, compelling economics in a volatile interest rate environment, to help avoid policy-driven ‘noise.’ This implies a cautious approach to companies linked to hydrogen, carbon capture, offshore wind, and residential solar power. However, specialists in buildings’ efficiency, and utilities with capacities in onshore wind, solar (exhibiting the most attractive levelised cost of electricity, or average net present cost of electricity generation for a generator over its lifetime), and nuclear should be less affected in the medium term. Second, themes aligned with shifting policy, such as infrastructure and digitalisation (data centres). These include rising power demand, indicating that battery storage and industrial efficiency are likely to gain traction. Third, private sector adaptation: as the consequences of climate change are felt, sectors such as precision agriculture, water management, design software, recycling, consulting, and diagnostic healthcare should all offer investment opportunities.

While the US may slow its climate efforts under the Trump administration, global momentum, especially from China and the EU, should keep the green energy transition on track. Investors will need to focus on sectors that are less exposed to political policy, and on course to be profitably aligned with long-term demand for clean technologies, infrastructure and climate resilience.