What will a Biden presidency mean for green energy investors?

The US election was a referendum on many issues, but climate change came to the fore in a way we haven’t seen before. Under President Trump, the US became increasingly isolated in its climate policy, withdrawing from the Paris climate agreement and rolling back environmental regulations – even China accused it of a “major retrogression on climate change”. But President-elect Joe Biden is promising a radically different approach with a return to the global stage and more action at home. Investors latched onto Mr Biden’s green rhetoric during the campaign, anticipating that if he were to win, it could turbocharge the global shift towards green energy. The iShares Global Clean Energy ETF (US:ICLN) – which tracks major renewable energy companies around the world – has rocketed from around $8 at its ‘Corona crunch’ low to over $21. But with the election dust somewhat settled, it’s worth examining whether this is really the tipping point some had hoped for.

What is president-elect Biden promising to do?

Joe Biden’s campaign promised a green transformation of America, calling climate change “the existential threat to humanity”. Vowing to make it a top priority of his administration, his plans are to invest $2tn in clean energy infrastructure over the next four years, putting the US on the path to net-zero emissions by 2050.

His proposals certainly have the potential to boost environmentally focused companies. The aim to double US offshore wind capacity by 2030 and increase green hydrogen production is likely to benefit leading offshore wind farm developer Orsted (DK:ORSTED), turbine maker Vestas (DK:VWS) and the many hydrogen-orientated companies that have been gaining traction. Meanwhile, the ambition to reduce the carbon footprint of the US’s building stock by 50 per cent by 2035 plays into the wheelhouse of insulation specialist Kingspan (KGP). A focus on electric vehicles and charging infrastructure would also offer further momentum for Tesla (US:TSLA) and provide a foothold for other carmakers looking to expand into this space.

While that all sounds positive, campaigning is very different to governing – can Joe Biden actually achieve what he set out to do?

What can Biden realistically achieve?

Turning these plans into reality will depend on whether Democrats can wrestle control of the Senate – an outcome that won’t become clear until after two run-off races in Georgia in January. The absence of a majority would limit the Biden administration’s room to manoeuvre. “If past is prologue, you’re going to see a Republican senate that does everything it can to obstruct,” says Elan Strait, former National Security Council director of climate and clean energy under President Obama. Mitt Romney – the more moderate Republican senator from Utah – has vowed to oppose corporate tax increases, which are key to funding the Biden climate plan. Even a 50:50 Senate outcome would be precarious as centrist Democrats such as Senator Joe Manchin from coal-dependent West Virginia could prove unreliable.

The strongest path to bipartisan support would involve including climate actions in broader legislation, the first opportunity for which could be a coronavirus relief package. “A Covid recovery bill under a Biden presidency is likely to look very different to recent stimulus proposals,” says Joseph Keefe, president of Impax Asset Management’s (IPX) North American division. “[It] will almost certainly include environmental elements linked to job creation, in line with the approach in the Biden climate plan.” The US is lagging behind in terms of a green pandemic recovery, having only spent 1.1 per cent of its stimulus dollars on green initiatives, according to research provider the Rhodium Group, versus 18.8 per cent for the European Union.

Political obstruction doesn’t tie a president’s hands completely. “Large portions of the domestic economy operate according to regulatory requirements that are written by the executive branch as opposed to the legislative branch,” says John Morton, a partner at climate change advisory Pollination and former White House senior director for energy and climate change under the Obama administration. As president, Mr Biden could use executive orders to overturn certain actions of the Trump administration, including reinstating tougher vehicle emissions standards and the authority for states to set stricter rules than the federal government. He could also reverse the upcoming ban on energy developments along the coasts of Florida, Georgia and the Carolinas to pave the way for offshore wind projects.

President-elect Biden has vowed to rejoin the Paris climate agreement via an executive order which could be “an historic tipping point” according to Bill Hare, chief executive of research group Climate Analytics. Mr Hare believes that with US participation, the target of limiting global warming to 1.5 degrees Celsius could be “within striking distance”.

But executive actions are not invulnerable. “The Obama administration really did get up to the boundary of what they could do with regulation and of course it was challenged in court,” says Mr Strait. “We have an even more conservative court and it’s likely to be even more challenging to get any of those regulations upheld by that court.”

The world has moved on

Regardless of the what the US does, other countries are forging ahead with their climate agendas. The UK is aiming to quadruple its current offshore wind capacity to 40GW by 2030 and Chancellor Rishi Sunak recently announced that the first green bonds will be issued in 2021 to fund environmentally friendly projects. In addition, by 2025, all publicly listed UK companies will have to disclose their climate change risks in line with guidance from the global Taskforce on Climate-related Financial Disclosures (TCFD).

Meanwhile, according to a draft policy document seen by Reuters, the EU could increase its offshore wind capacity to 300GW by 2050, a significant jump from current plans for 90GW. Other countries have also joined the UK and EU in making net zero commitments – Japan has pledged to become carbon neutral by 2050 and China is aiming to do so by 2060.  

Progress hasn’t just come from governments as private enterprise shifts capital towards green initiatives. Renewable energy companies were experiencing momentum well before the US election as technological advances and increased scale drive down costs. Oil and gas majors are increasingly investing in green assets to avoid being caught out by the energy transition and BP (BP.) recently announced a partnership with Orsted for green hydrogen production.

The US stepping up to the plate won’t change the direction of global climate action, but could change the pace. “It is worth bearing in mind that the clean energy sector has managed to thrive despite four years of indifference at best and opposition at worse from the Trump administration,” says Mr Keefe. “While ambitious legislative support would provide a significant accelerant, its absence will merely slow, rather than reverse, the sector’s growth.”

A Biden win might not be the boon some investors anticipated, but while US presidents come and go, the transition to renewables will continue – Bloomberg New Energy Finance estimates that global investment in offshore wind development will reach almost $60bn by the end of the decade, up from $11bn this year. True, the shares of green energy companies are looking increasingly expensive – Orsted has an eye-watering forward price/earnings multiple of 48. But these premium valuations must be set against the wealth of growth opportunities on offer even without federal backing in the US. Those waiting for more attractive entry points could well find themselves disappointed.