Jan 20, 2021
A version of the following letter was published as an OpEd in Investment Week; minor edits were made for additional distribution.
Joe Biden’s inauguration is set to be a milestone moment for international climate policy. The officiation of the former Vice-President is set to mark a transformational shift in the climate agenda of the United States. The Trump administration spent four years undermining and overturning the international and domestic climate agenda, however as the new Democrat president takes up residency, we’re set to see a concerted effort by the US government to rebuild its position as one of the leading advocates for action on climate change.
While Biden’s inauguration could bring about change on a revolutionary scale, it’s important that investors think globally when it comes to climate investment opportunities in 2021, looking Beyond Biden to assess what other opportunities might arise as other superpowers progress with pace on the climate agenda.
Despite the Trump administration’s best efforts to revitalise the US’ flailing coal industry, the last four years have been strong for the renewable energy sector and the broader climate-related industries in the United States.
As the new President moves into the White House, an overhaul of climate policy is set to occur, and swiftly.
The US has influence on the international climate agenda, so it’s of symbolic global importance that the country will be re-joining the Paris Climate Accord. However, the domestic climate change agenda is equally important, with the new administration aiming for a net zero target by 2050, 100 per cent zero carbon electricity by 2035, and upgrading four million buildings to become more energy-efficient in Biden’s first term of office.
And with effective, albeit razor thin control of the Senate, it is likely that the Biden administration will implement further stimulus in 2021 with a strong decarbonisation agenda. Despite their limitations when it comes to stimulating demand, we would expect the tax credits for renewable energy to be further extended as part of that stimulus and, crucially, a separate tax credit for energy storage to be implemented. A Democrat-appointed Federal Energy Regulatory Commission should also help, as will faster permitting for offshore wind farms which had been consistently delayed by the Trump administration.
We would also expect the 200,000-vehicle-per-automaker cap on the current US$7,500 incentive for electric vehicles to be removed and emissions standards for automotive original equipment manufacturers to be tightened.
However, probably more significant than a Democratic win in the US presidential election, is China and its new policy commitments.
In our view, the most landmark of policy statements made last year was on September 23rd, when Xi Jinping committed China to a net-zero emissions target by 2060, with emissions to peak by 2030. While 2060 is far into the future and we must be cautious about such distant targets, achieving the net-zero goal would involve a significantly faster decarbonisation of the Chinese economy than had been expected, and a step change versus the historic policy. Xi’s statement came as Chinese authorities gathered to set the 14th Five-Year Plan, which kicks off this year. While we’ll have to wait until March to see the full detail of the plan, we have already seen a number of favourable measures including the announcement in mid-December from President Xi Jinping that China shall have a total of 1200 GW of wind / PV installations by 2030. We now have increasing visibility that the environment, climate change, clean energy and resource efficiency will be central to China’s policy ambitions in this next administrative cycle.
Putting this together, we believe that we are on the cusp of an acceleration of China’s economic transformation towards cleaner, lower-carbon ways of producing and consuming. The importance cannot be understated because China accounts for about 28% of global emissions, while the US accounts for less than 15%. China builds twice the renewable energy generating capacity of any other country, but even this doesn’t meet China’s incremental power demand growth and they are still building coal-fired power stations. Should China follow through on its net-zero commitments, the transformational potential in this region is therefore huge, and so are the market opportunities.
In the coming weeks as the dust settles on Biden’s inauguration, excitement around the US’ climate agenda is likely to reach fever pitch. While this excitement is justified, with Biden likely to herald in a new era for international climate change policy, it’s important not to overlook other opportunities potentially manifesting in other parts of the world. If China follows through on its ambitious commitments, it could emerge as one of the most lucrative markets for climate-centric investors.
Ninety One is an independent, active global investment manager dedicated to delivering compelling outcomes for its clients, managing £119 billion in assets (as at 30.09.20).
Established in South Africa in 1991, as Investec Asset Management, the firm started offering domestic investments in an emerging market. In 2020, almost three decades of organic growth later, the firm demerged from Investec Group and became Ninety One. Today the firm offers distinctive active strategies across equities, fixed income, multi-asset and alternatives to institutions, advisors and individual investors around the world.