Are ESG funds doomed to fail under Trump?

Added 11th November 2016

President-elect Donald Trump might not be all bad for funds that make impactful investments in clean energy, technology or innovative pharmaceuticals, says AXA Investment Managers global head of responsible investment Matt Christensen.

Are ESG funds doomed to fail under Trump?

Trying to elucidate any one of Trump’s policies before the election has been an exercise in reading between the tea leaves.

One policy he has been clearer and slightly more consistent on is energy. Trump’s statement on energy independence, published to his administration’s transitionary website, includes avowals that he will “end the war on coal,” “rescind the coal mining lease moratorium” and “conduct a top-down review of all anti-coal regulations issued by the Obama Administration.”

Trump, who has called man-made climate change a hoax, also promises to scrap Obama’s Climate Action Plan and the Clean Power Plan and “refocus,” (i.e. dismantle) the Environmental Protection Agency.

Big pharma stocks, oil and gas giants and mining companies were some of the biggest winners the day after the election.

Shares in the world’s largest privately owned coal company, Peabody Energy, spiked by 58.5% to $13.55 mid-morning on Wednesday. Days later, the shares continue to climb, currently up 15.53% at $14.80 per share. Meanwhile, BP, Chevron and Exxon Mobil were also trading upward.

So, what does this mean for the future of responsible investment? By virtue of their ethical mandates, many of these funds exclude the very companies that have benefited in the immediate aftermath of Trump’s victory because of their low environmental, social and governance scores. Will they be able to remain competitive in this environment?

While AXA’s Christensen believes Trump may deliver on his “red meat revival” of the mining and fossil fuel industry, allocating subsidies to the sector, there could be one thing standing in his way – the fear of failure.

Judging from worldwide trends around coal, the industry is not currently considered profitable in the long-term, Christensen argued. Because a yardstick to measure the degree of Trump’s 'winning' would obviously include economic success, he may have to live up to the harsh reality that the world is moving away from fossil fuel to remain profitable, he added.

“Trump is a man who likes to win above all else. If winning and revitalising the coal industry do not look compatible, he will not pursue that route,” Christensen speculated.

Should Trump revive these traditional energy industries without pushing for innovation on the energy efficiency front, the US will find itself looking less competitive than the rest of the world.

The ESG investment industry in the UK alone is worth trillions of pounds. And Christensen said the US and Australia are currently the fastest growing markets for ESG and responsible investments. Therefore, by choosing to ignore this bourgeoning trend, Trump is putting the US at a serious disadvantage, Christensen asserted. 

“If he doesn’t stress that businesses need to address the carbon footprint of automotives, for instance, it will become more difficult to sell those products in markets that have higher clean energy standards and have access to more energy efficient vehicles. I think he’d struggle with that even in China.”

That is why under Trump, Christensen expects to see more innovation at the state level and within the private sector.

Ethical funds that strategically invest in companies that prioritise sustainability and ESG factors in traditionally ‘sinful’ areas might be in for a serious boon as well. Christensen noted that pharmaceutical company Novo Nordisk, praised for its sustainability practices, shot up with the rest of the more ethically questionable big pharma stocks on Wednesday.

Despite the uncertain of ESG investing under Trump, Christensen remains confident that come what may, responsible investing will not cease to exist. The industry has moved from “niche to norm” and not even a Trump presidency will change that.

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