The election of Democrat Joe Biden as US President has buoyed the spirits of ESG investors everywhere on the strength of his progressive agenda that could roll back much of the Trump era policies.
But while Biden will be restrained by a Senate that, as at the time of writing, remains in Republican control and other political machinery left in situ by the previous administration (such as a conservative-leaning Supreme Court), the new US leader could still push through significant changes in line with sustainable investment themes.
For example, Biden has vowed to re-join the Paris Accord within days of taking office next year, bringing the US back inside the global climate change tent. Returning to the Paris Agreement should be a relatively easy step, given it simply requires an executive order from the new President. Other ESG-friendly policy efforts may be harder for Biden to implement under legislative changes that could be blocked in a Republican-controlled Senate. Nonetheless, the potential for progress on vehicle emission standards under the Clean Air Act augur well for sustainability focused investors.
The President-elect may also take a harder line against regimes known for causing geopolitical tensions or human rights abuses – such as Turkey1 or Russia – and seal a ‘freeze-for-freeze’ deal with Iran.
Of course, much could happen in the remaining weeks before Biden’s inauguration in January 2021 let alone the next four years, but we have sketched out several scenarios that could flow on from new US policies to our asset class and our portfolio.
Why clean energy will trump dirty politics
The Biden administration will take a tougher stance on fossil fuel use and fracking – to what extent will depend on Senate support. However, the President-elect is pushing for a US$2tn spending program, including US$400bn earmarked for renewable energy infrastructure to establish a 100% carbon-free electric market by 2035 (compared to 37% as at 2019).
The Biden-Sanders Unity Task Force released a plan calling for 60,000 made-in-America wind turbines alongside 500m solar panels in five years. The US already has 60,000 operational wind turbines and around 105 gigawatts (GW) of installed capacity, which makes it the second-largest country in terms of cumulative installed capacity of wind power worldwide after China (237GW in 2019)2.
However, the global wind industry is concentrated and polarised: the top five wind original equipment manufacturers (OEMs) control over two-thirds of the market globally3. Of the top five wind OEMs two are Chinese companies with little or no presence in the US, and the other three are Western multinationals with plants in the US (as well the rest of the globe)4.
Clearly, the multi-national wind firms are better-positioned to directly benefit from Biden’s ‘Buy American’ agenda but there will be spill-over effects for the whole wind industry, including for companies whose products help connect renewables to the grid and/or store the energy produced.
In our portfolio, for instance, the Brazilian company WEG could see sales of power transformers to the US market rise as the group grows its share from the current level of 4% in a US$2.7 billion market in North America5. WEG’s energy storage division should likewise benefit from the acquisition of the battery business of Vermont-based Northern Power Systems in 20196. In the first nine months of 2020, North America accounted for 46% of WEG’s total sales, with the US being 82% of that7.
Meanwhile, the global solar panel market is solidly in the hands of Asian suppliers, some of which have plants in the US, potentially ticking the Biden made-in-USA box if needed.
To meet the proposed green energy ambitions of the President-elect the US would need to significantly boost solar power generation from the 2019 level of 76 GW.
Energy consultancy firm, Wood Mackenzie (WoodMac), expects that the US solar power industry is already on track to add more than 18GW in 2020, rising to more than 20GW by 2022. The data suggests that even if the Democrats’ grand plan fails to materialise8 the US solar market is headed for significant growth.
We own Delta Electronics (Delta)9, which booked over 25% of its total sales in the US during 2019. Delta’s Energy Infrastructure division includes renewable energy, energy storage systems and electric vehicles (EV) charging.
Since 2008 Delta has also sold photovoltaic (PV) on-grid/ off-grid solutions for residential, commercial and utilities clients. The firm already has a solid presence in the US with clients in Arizona and California for its commercial rooftop solutions. As well, Delta offers modular solar system blocks that exhibit a payback period of three to six years (depending on the incentive and tax benefit).
Energy storage and charging are key elements of the green revolution. Generally, renewable technologies need batteries to store and release the energy as needed. Delta’s energy storage systems are based on Li-ion technology with a portfolio ranging from small cells to large battery cabinets or containers. In the EV charging field, Delta has worked with the US Department of Energy to develop next-generation smart-grid-capable EV chargers and the site management system, enabling comprehensive management of EV charging.
Aside from Delta, we have indirect exposure to the energy storage market via our holding of Samsung Electronics, which has a 19.58% stake in Samsung SDI – one of the leaders in the battery market for EV globally.
Samsung SDI has strongly expanded its capacity to reach 3.4 GWh (up 52.6% from 2.2 GWh), making the company number four globally after LG Chem, CATL and Panasonic: this is another industry dominated by Asian players10. The Korean firm benefits from the growing volume of Ford Escape PHEV in the US as well as Ford Kuga PHEV, Audi e-tron and BMW plug-ins11. North America represents about 10% of total Samsung SDI sales.
The new US administration could amp up subsidies for electric, hybrid or hydrogen fuel-cell cars vehicles by offering rebates and/or tax incentives. Biden said his plan for dealing with climate change includes also building 500,000 electric vehicle charging stations on US highways as well as investing in clean energy public transportation systems such as electric buses.
As cautioned earlier, Democrats might not be able to come good on all their green energy promises given they probably won’t control both houses of the US government. But regardless of the political outcomes, energy transformation is a global structural trend driven by more than sustainability considerations. Fossil-free fuels are becoming increasingly competitive versus legacy ones thanks to a colossal drop in the levelised cost of energy per megawatt hour (LCOE)12 and EV battery costs.
In other words, the green revolution is also about economics rather than just climate ethics, which should encourage Republicans to support the trend. For stock-pickers, though, the devil, as usual, will be in the detail with issues such as incentives (and who gets them) likely to favour some companies over others.
And, as a reminder that stock markets focus on details, it’s worth noting that in spite of Trump’s unabashed support for the US fossil fuel industries, the sector has lagged amid the structural transformation: oil companies have underperformed the S&P 500 for years as investors embraced the idea that (loosely regulated) data is the new oil.
During Trump’s tenure numerous US states set green energy targets. In a statistic little noted by the almost former President, from 2016 to 2019 coal-fired electricity generation declined by 22% in the US as solar and wind energy production grew 40%.
Protecting the rights of Dreamers
Along with a clean energy agenda, Biden will likely adopt a more conciliatory immigration policy than his predecessor. The Democrat is also expected to seek long-term solutions targeting the causes of migration, which could include increased US engagement and aid towards Central America.
Biden said during his campaign that protecting ‘Dreamers’ will be a priority. While the Deferred Action on Childhood Arrivals (DACA) programme started by former President Obama in 2012 affects less than 650,000 young people, the vast majority of them were born in Central and South America: Mexican-born children represent over 80% of the DACA cohort13. Hence, protecting the rights of Dreamers will send a positive message to America’s southern neighbours, in contrast with the Trump militarisation of the frontier and his infamous ‘wall’.
The next step – although very unlikely in the event of a split Congress – might see Biden seek deeper reforms including a pathway to citizenship for the millions of undocumented immigrants in the US from emerging market countries.
Evidence suggests that official citizenship papers help immigrants get better jobs at a higher salary14. If the Biden administration can turn millions of undocumented immigrants into citizens, the value of remittances sent to Mexico and the rest of Latin America could increase by billions of dollars.15
In addition, a softer stance on immigration could have a small positive effect for Indian IT companies such as HCL Technologies and Tech Mahindra in our portfolio.
According to Forbes, US tech companies will be relieved if a Biden administration returns to Obama-era immigration policies because Trump made it difficult to attract and retain talent in a globally competitive world.
Indeed, this year the US tightened the issuance of work visas, including those issued under the H-1B programme, which is often used by big tech companies to bring in high-skilled immigrants from China and India to the Silicon Valley.
A more benevolent immigration policy could allow emerging market IT companies to send their high-skilled workers to work on projects in the US and save costs. Admittedly, such a move would not be a game-changer – the US is already a core market for the likes of HCL and Tech Mahindra16 and the two companies have established a strong local presence in the country. But a more open attitude to allowing high-skilled workers into to the US would still help, especially if coupled with Biden’s promised plan for US$300bn support to breakthrough technologies including research and development (R&D) in fields ranging from EV to 5G and artificial intelligence (AI)17.
Trees climb the agenda
As discussed previously, Biden promised to re-join the Paris climate agreement within days of taking office in a move that will give a significant boost to global climate policy efforts.
Potentially, the imminent Democrat administration may pressure the Brazilian government to act against deforestation in the Amazon, including by dangling the carrot of Article 6 in the Paris Accord (assuming that the US re-joins it). Article 6 covers international carbon markets and other forms of cooperation, but the clause has remained unresolved since the rest of the Paris accord was introduced. If adopted under US support, Article 6 could set a way to reward Brazil financially for the vast carbon storage abilities of the Amazon.18
Naturally, any Amazon-saving powers of Article 6 would depend on the carbon price and other technical details, but Brazil could theoretically benefit from a more constructive stance in international climate negotiations under Biden leadership. The Brazilian Environment Minister Riccardo Salles has signalled an opening to negotiations by saying that Brazil could pledge to carbon neutrality by 2060 (or earlier) if other nations and investors sponsor the conservation of the Amazon forest with US$10bn per year.19
The Democrat administration may also have responsible investment implications in emerging markets for geopolitics, the fight against Covid-19, mandatory ESG disclosures for US-listed companies, rules that may make it easier for US pension funds to invest in ESG vehicles among other developments: time will tell; for Biden the clock starts ticking soon.
This is an extract from the Q4 2020 ESG Materiality Newsletter which will be available soon.