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Environmental markets

17 May 2017

Jon Forster, Co-Manager of Impax Environmental Markets, explains why drivers of the environmental sector are increasingly beyond political intervention.

Investors in environmental markets are, understandably, concerned about the implications of a Trump presidency. Trump campaigned as a pro-coal, climate change sceptic and his cabinet is packed with foes of environmental regulation. 

However, we believe that whilst the impact is mixed, much of the negativity is likely overdone. The legislative and regulatory mechanisms, together with pure economics, will drive healthy growth in the areas in which Impax Environmental Markets (IEM) invests. 

We’re also confident that by investing globally across a diverse range of markets, including energy efficiency, alternative energy, water, waste and sustainable food and agriculture, we can safely navigate any challenges that we may encounter. 

Focussing on the US, we outline why we believe environmental markets will continue to thrive well beyond the Trump presidency.

The negativity on prospects for renewables is overdone

Concerning US renewables policy, we don’t expect changes to existing policy mechanisms for several reasons. First, with bipartisan support, the subsidy mechanisms were recently extended to fade out in the early 2020s. 

We expect this arrangement to be honoured, not least because renewables is now a significant job creator. For example, in the US in 2015, the solar industry created jobs 12 times faster than the overall rate throughout the country. 

Second, much of renewables growth is driven by state-level policy - not Federal. It’s also notable that whilst Trump has commenced proceedings to cancel the Clean Power Plan, which was to be an important market driver from the mid-2020s, 17 states have voiced their intention to carry on as before. 

Finally, the last few years have seen dramatic falls in the cost of renewables, which are increasingly able to compete, unsubsidised, against natural gas- and coal-fired capacity. Take-up will accelerate further as the price of battery storage continues to fall, allowing renewables to supply power when the wind isn’t blowing or the sun isn’t shining. 

Let’s also remember that IEM’s exposure to renewables globally is only around 10%, and US renewables holdings currently account for approximately 3 - 4% of the portfolio.

Pure economics drive many markets in which IEM invests

At the same time, many environmentally focused companies have built business models that don’t rely on subsidies or regulatory support. Rather, they help their customers to reduce resource use and therefore cut costs. 

Industrial energy efficiency, for example, offers some of the highest returns on investment that companies can make with their capital expenditure.

A commitment to increased infrastructure spending

President Trump has stated his intention to boost infrastructure spending - a plan for which there is broad bipartisan support. This should benefit environmental markets, especially new water infrastructure. 

While considerable uncertainty remains on the exact nature for delivery on the ground, as well as how to integrate new initiatives with existing mechanisms, water infrastructure has been specifically highlighted as a focus area for investment - spurred on by the high-profile lead poisoning incident in Flint Michigan, which has been linked to the state’s outdated distribution network.

The investment case gathers momentum

Promises to cut corporate tax rates will also benefit the environmental markets sector, which largely comprises small and mid-cap firms, and rising interest rates shouldn’t pose issues for environmental firms, as they tend to carry relatively low levels of debt.

If a business-friendly Trump administration is prepared to put economic pragmatism ahead of the ideological preferences of parts of its base, it will recognise – and reward – the economic potential of environmental markets. 

This all leads us to conclude that the drivers of environmental markets continue to gather momentum and the reasons for investing in environmental markets are as compelling as ever.

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