President-elect Donald Trump has advocated policies to promote the interests of oil, gas, and coal companies and reverse President Joe Biden’s administration’s actions aimed at mitigating the effects of climate change. If enacted, how might Trump’s actions affect the energy transition and what impact might it have on investors?
The effects of climate change are increasingly evident. Extreme weather scenarios have the potential to affect, to influence, to shape, to diminish areas like housing, agriculture, and insurance and can lead to economic and social disruption.
Scientific consensus on climate change has led countries across the globe to pursue policies to mitigate climate change and adapt to its new realities. As a result, the global economy is undergoing a secular energy transition to reduce its dependence on fossil fuels that give off planet-warming carbon emissions. This process is also called decarbonization, and the ultimate goal is net zero carbon emissions. However, for the foreseeable future, fossil fuels will likely remain in use in hard-to-abate industries like shipping, cement, chemicals, and steel.
Climate Change as an Investment Issue
The energy transition necessitated by climate change introduces investment risks and opportunities. Here’s a quick tour of some of the terminology and industries affected.
The risks fall into two categories. Transition risk is determined by how companies adapt their strategy to new realities of a decarbonizing economy. Physical risk stems from the impact of climate change on infrastructure, real estate, factories, and natural resources like timber.
Decarbonizing the economy depends on clean energy, electrification, and energy efficiency. Clean energy results from generating power using noncarbon energy sources like solar, wind, and nuclear power. Electrification requires improving the capacity and resilience of the grid to supply electricity for activities that currently depend on fossil fuels like transportation, heating, and air conditioning. Improving the energy efficiency of buildings is critical since they account for 40% of total energy use and 75% of electricity use.
Climate investment opportunities involve new technologies developed to bring about climate change mitigation and adaptation. Climate solutions funds invest in green bonds, green infrastructure, electrifying transport, battery storage, smart grids, energy efficiency, renewable energy, smart water, and clean technology.
Market forces are an important factor driving the substitution of renewable energy for carbon-based energy. In the past decade, the cost of solar has fallen by 90%, onshore wind by 70%, and batteries by more than 90% and will continue to fall as technology improves, whereas the price of natural gas fluctuates with the market.
Utilities whose fuel portfolios are tilted toward renewable and nuclear power stand to benefit from decarbonization and electrification. In 1997, more than half US power was generated by coal. In 2023, renewable energy (21%) accounted for more energy production than either coal (16%) or nuclear (19%), while natural gas produced 43% of overall power generation. The proportion of renewables in the overall energy portfolio is expected to continue rising as its costs fall and barriers to implementation are addressed.
Potential Impact of Trump 2.0
For sustainable investors, here are some key points to expect from the second Trump administration. The incoming administration has promised to push US climate policy in a direction at odds with the global consensus on climate.
• The US withdraws from the nonbinding Paris Accords, as it did during Trump’s first administration. Disengagement forfeits US leadership and leverage in global climate negotiations. World leaders are preparing for this eventuality, noting that it provides an opening for China—the world’s largest carbon emitter—to assert its influence, based on aggressive decarbonization plans and global market leadership in key technologies like solar and electric vehicles. China is volunteering climate-related aid for developing countries that would showcase its technological leadership and enhance its diplomatic influence. This could come at the expense of US competitiveness in the energy transition.
• Looser restrictions on coal, gas, and oil extraction. The US is already the world’s leading producer of oil and natural gas, so many industry experts believe these policies will not have a pronounced impact on output in the near term. However, the policies could support US production over the longer term at a time when most countries have pledged to move in the opposite direction. This threatens to undermine both progress on decarbonization and global cohesion on combating climate change.
• Also, looser rules on emissions. Part of Trump’s deregulation agenda, would have a direct negative impact on decarbonization.
– More relaxed rules on methane emissions from natural gas production. Methane is the primary component of natural gas and one of the most carbon-intensive greenhouse gases, more than 80 times more potent than carbon dioxide when it comes to warming the atmosphere.
– Repeal of regulations on coal-fired power plants aimed at reducing greenhouse gas emissions, particulates emitted into the atmosphere, and pollutants discharged into waterways.
• Tariffs could have macroeconomic consequences detrimental for the energy transition and climate solutions investments in the US. Tariffs can be used for revenue enhancement, industrial policy, or in trade negotiations. Since tariffs are ultimately taxes paid by consumers, they could lead to higher inflation and interest rates, as well as slower growth. If this happens, it will undermine the profitability of solar and wind installations, which depend on long-term project finance and have been hurt by high interest rates in recent years.
If adopted, these policies would likely benefit the economic fortunes of fossil fuel companies in the short-term. But they would position the US at odds with most countries on climate policy and potentially slow the inevitable transition to a low-carbon economy.
Countervailing Forces
Some factors may mitigate some of Trump’s stated policy objectives.
• Limited cuts to the Inflation Reduction Act. A significant amount of funding has already been allocated, and some parts of the law are hard to change because of how it was written. In addition, there is Republican resistance to rolling back the act because of its popularity, as it has contributed disproportionately to manufacturing and job growth in red districts.
• Companies recognize the imperative to address climate change. Two thirds (on a revenue-weighted basis) of the largest 2,000 global companies have net zero targets, though progress toward these targets is at an early stage. A 2024 Deloitte survey “marks a potential sea change in what benefits and opportunities companies see from their actions” related to climate and sustainability. For these companies, climate change is one of the top three strategic priorities. More than 90% of these executives “believe their company can grow while reducing GHGs and … the world can achieve economic growth while reaching climate goals.”
• Companies value stable policy regimes. Uncertainty inhibits long-term investment decision-making. Exxon CEO Darren Woods, a critic of aggressive decarbonization efforts, stated that “[o]ne of the challenges with this polarized political environment … is the impact of policy switching back and forth as political cycles occur … and administrations change. That’s not good for the economy.” Asked about Trump’s plan to withdraw from the Paris Accords he noted, “I don’t think the challenge or the need to address global emissions is going to go away. Anything that happens in the short term would just make the longer term that much more challenging … I’ve been advising that we have some level of consistency.”
Where Are we Headed?
Climate change is expected to bring about substantial technological innovation and economic transformation in the coming years and decades, so investors should consider their beliefs and strategies for navigating these changes. The incoming administration has promised to push US climate policy in a direction at odds with the global consensus on climate. But the jury is out on whether these campaign promises will translate into concrete policy actions or whether market forces already in motion will counterbalance these efforts.
Investors are left to grapple with the uncertainty posed by the new administration as they consider how to address climate risks and opportunities in their portfolios—and whether, decades from now, this moment will be seen as a fundamental divergence or a bump in road on the way to the energy transition.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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