US rejoining Paris climate agreement will galvanise investment in ‘green economy’, say managers

green economy

President Joe Biden signed an executive order to reinstate the US in the Paris climate agreement on his first day in office, raising investors’ expectations of a surge in the sustainable investment sector.

It will take 30 days before the US officially re-joins the climate accord, but the Biden administration has also signalled that it will push forward a raft of environmental measures including a USD2 trillion spending package, revising rules that limit the ability of pension funds to invest sustainably, and reconsidering carbon pricing.

“Biden orchestrated the original involvement of the US, and an early recommitment by the US government to the Paris Agreement has not been a huge surprise,” says Joshua Kendall, head of responsible investment research at Insight investment.

Biden has pledged to make the US carbon neutral by 2050, with an interim target of decarbonising the US power sector by 2035, with particular focus on real estate, water, transportation, and energy infrastructure.

“As a result, next year’s United Nations Climate Change Conference, to take place in the UK, is likely to take on new importance. The conference could be an opportunity for the US to again take the lead on climate change, a role which over the last four years has been assumed by the European Union,” says Kendall.

Sébastien Galy, senior macro strategist at Nordea Asset Management, says that the green economy is a secular trend that will be “reinforced” by the US joining the effort. 

Sustainable investing already accounts for a third of all assets under management in the US, and a recent BlackRock survey found that investors plan to double their allocations to sustainable products over the next five years.

“This will likely lead to large-scale development of wind and solar power, electric vehicles, batteries, and funding for new fuels. It could also mean the introduction of carbon pricing, which the President favours, as well as rolling back pro-pollution measures by the Trump administration,” says Galy.

Signs of a change of heart when it comes to carbon pricing are beginning to show, with the US Chamber of Commerce hinting that it could be open to the idea on Tuesday. So far, individual states such as California and Massachusetts have introduced cap-and-trade programmes.

Kendall believes that carbon border taxes could be next on the agenda, subject to Congressional approval. “The tax effectively charges a financial penalty to imported goods that have in-built carbon emissions within their production. Exporting nations with high carbon (led by China) will be most negatively impacted,” says Kendall. 

A carbon border tax would have an impact on all sectors that rely on imported goods, and place manufacturers who outsource their production at greater risk.

More than 3,000 US economists and all living former chairs of the Federal Reserve have endorsed a carbon tax, notes Kendall, making it “possible a Biden administration will seek to advance this policy to align with an expected EU carbon border tax”. The EU is set to introduce the instrument at its borders by 2022.

Elena Tedesco, a portfolio manager in emerging markets ESG strategies at Federated Hermes, says that the US re-joining the Paris Agreement will bolster international co-operation on climate change.

Tedesco says that the 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”.

Under the so-far unresolved Article 6 of the Paris Agreement, carbon credits may be allowed to be traded between countries.

“If adopted under US support, Article 6 could set a way to reward Brazil financially for the vast carbon storage abilities of the Amazon.”

Tedesco notes that its Amazon-saving powers will depend on the carbon price, but says that Brazil may benefit from a “more constructive” stance in international climate negotiations under Biden’s leadership. 

Brazil recently announced its plan to reach net zero emissions by 2060, which was criticised for being contingent on the country receiving USD10 billion every year in international sustainable development support grants.

Biden has already been making positive noises when it comes to helping emerging economies reduce their carbon emissions, including his requirement that the International Development Finance Corporation reduce the carbon footprint of its portfolio and prohibit investments in coal-fired power plants.

“Most tellingly, the US will look to introduce “green debt relief” for developing countries that make climate commitments, a timely initiative with growing Covid-19 related debt issuance and need for poorer countries to undertake climate mitigating action,” Kendall adds. “While details are lacking, this will require close monitoring by emerging market debt investors.”

Other moves that Biden may make on the path to net zero include reversing the decision by Donald Trump’s US Department of Labour that made it more difficult for fiduciaries of pension plans to invest in ESG and sustainable funds. The rule has been listed for review by Biden’s transition teams.

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Madeleine Taylor
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