U.S. Steps Back, but Climate Change Investments Won’t Go Away

by Mamadou-Abou Sarr, Global Head of ESG, Northern Trust Asset Management

The U.S. decision to pull out of the Paris Agreement might appear to put the brakes on clean energy development and investment in the U.S. However, we think the momentum of industries and technologies that sprang up from climate-change concerns can’t be stopped.

As announced by President Donald Trump on June 1, the U.S. will pull out of the agreement designed to combat climate change and keep the global temperature growth under 2°C. The change in policy is largely based on concerns over the impact to U.S. jobs growth.

Despite last week’s announcement, technically the formal notice of withdrawal from the Paris Agreement may only be given on November 4, 2019. Between now and then a lot can happen, and there already is talk that the U.S. policy shift could be a negotiating tactic to change specifics.

U.S. States Can Make Their Own Policies

The immediate reaction from U.S. businesses, cities and states — echoed by international leaders — gives us a sense that stakeholders will nonetheless continue to address climate change risk. Even with the new direction from the federal level, states in the U.S. have significant leeway on how they address environmental concerns. The largest U.S. states and municipalities have unveiled their own climate strategies, including setting ambitious carbon reduction targets, legislating emission trading schemes, issuing green bonds, and passing laws requiring the biggest polluters to disclose their carbon-related risks and divest from coal producing companies in their portfolios.

California, for example, has set a 50% renewable energy goal by 2025 (100% by 2045); the state of Hawaii also has a 100% target by 2045. California’s Air Resources Board voted to uphold auto fuel efficiency rules, Iowa and Michigan have moved to increase incentives for renewable energy. The New York Common Retirement Fund has invested heavily in a low-carbon index, clean energy and energy efficiency projects. Despite the announcement out of Washington, we don’t believe there will be a reversal of these more local efforts in the U.S. In fact, we believe there could be a surge of initiatives at the state level that could serve as a catalyst to surpass the initial targets that had once been adopted at the federal level.

Policy Has Changed, but Not the Opportunities to Invest

According to the International Renewable Energy Agency, investing in renewables could boost the global economy by $19 trillion. Investment in clean energy could generate 6 million jobs.^ In its report, Investing in Climate, Investing in Growth, the OECD claims a policy package that matches climate change targets could add 1% to average economic output in G20 countries by 2021. This would rise to 2.8% by 2050. If the economic benefits of avoiding the negative impacts from climate change (such as increased flooding) are factored in, the net increase to the value of goods and services or GDP produced by the G-20 would be nearly 5% by 2050.

The commitment to low-carbon investing has been growing globally. Some $200 billion to $300 billion is invested into renewable energy annually.^^ More than $80 billion of green bonds were issued in 2016, a two-fold growth on the previous year.* A number of large asset owners have confirmed that they will press ahead with investments in emissions-reducing technologies based on continued long-term growth in demand. And there are quite a few viable investment strategies and products positioned with the aim of capitalizing on the decarbonization trend.

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