On Feb. 19, 2021, the United States officially rejoined the Paris Climate Agreement. The agreement aims at limiting global temperatures rising above two degrees Celsius compared to pre-industrial levels.
The 196 countries that have ratified the agreement have agreed to set in place voluntary carbon-reducing programs to reduce greenhouse emissions and limit global warming by 2050. These are the so-called net-zero targets, meaning that the number of carbon emissions produced by humans needs to be offset by the same amount via carbon reduction strategies.
The U.S. government has pledged to take aggressive action toward this goal, and even go beyond the required targets. Together, they are working on setting strict emission goals ahead of the global Leaders’ Climate Summit, an event hosted by the U.S. that will convene leaders of the world’s largest economies and take place on Earth Day, April 22, 2021. This is great news for climate activists. But what does it mean for investors?
The country’s commitment to set carbon-reducing programs in motion is positive for investors interested in environmental, social, and governance (ESG) investments.
During the presidential campaign, Biden proposed a $2 trillion plan to move the U.S. toward 100 percent clean energy and net-zero carbon emissions by 2050. While the implementation of such a program may still encounter several challenges along the way, it is clear that the U.S. being at the center of the climate initiative provides a tailwind for solar, wind, and other renewable energy investments.
Many investors have already been actively excluding fossil fuels from investments.
“One of Biden’s proposals calls for the removal of all fossil fuel subsidies for U.S. oil and gas companies, which amounted to $17 billion, and without them, 45 percent of U.S. oil production would be unprofitable, research from Oil Change International says,” noted Kent McClanahan, head of responsible investing at RBC Wealth Management, in a recent report. “A growing segment of investors have already removed most—if not all—of these companies from their portfolios through a practice called fossil fuel free investing. …This is an example of socially responsible investing (SRI). … Fossil fuel-free investing may see increased interest under this proposal.”
Another way to align investor values with their investments is by including companies that are taking clear steps to reduce carbon emissions or that are involved in renewable energy. While the U.S. has invested less in this space than other countries, pointed out McClanahan, transitioning to 100 percent renewable energy by 2050 would bring in substantial capital investment.
“That investment could create 3.1 million jobs and reduce U.S. energy costs by $1.3 trillion, according to a Stanford University report. If the Biden plan is implemented, we’ll likely see further demand for products focused on renewable energy,” he added.
Finally, McClanahan outlined that impact investing, which seeks to create a measurable social or environmental impact, will provide investors with new opportunities. These may include new technologies such as new battery technologies, carbon-free hydrogen, zero net energy buildings, decarbonizing of industrial steel, concrete and chemical production, and many others.
“China has made an investment in new technology a priority. Biden’s plan calls for a $400 billion investment over 10 years in new clean technology,” he noted. “Any of these new technologies would present incredible investment opportunities as well as the positive, measurable effects that impact investors seek.”
McClanahan concluded that regardless of political winds, responsible investing is here to stay. While investors have already seen substantial global growth in this area, we can expect more for at least the next four years.
“This could create opportunity for a rise in responsible investing in the U.S. market and a chance for investors to consider adding responsible investing solutions to their investment portfolios,” McClanahan concluded.
