Energy is on the ballot
2020 elections have significant ESG implications.
If current polls and prediction markets hold, Joe Biden will become the 46th president of the United States. The impacts on environmental policies and the Energy sector are certain to be a change from the status quo. Solving climate-related issues appears to be a unifying goal on the blue side of Capitol Hill, and Biden has endorsed the Green New Deal in all but name. His Clean Energy Plan earmarks $2 trillion for a variety of “green investment” initiatives that would serve as a massive tailwind for industries and companies that are positioned to ride the wave.
No sector of the market has witnessed more volatility in 2020 than Energy. Already pressured by OPEC supply tensions, the price of oil plummeted in early spring amid fear of a sustained collapse in demand due to a global recession spawned by Covid-19. The S&P 500 Energy sector is still down roughly 40% nine months into a year that saw the broad market post a record-fast 50% return off March’s bear-market low. While a second Trump term likely would bring minimal change to existing oil & gas regulations, Biden views revamping U.S. power generation as a key component of what many consider to be the most ambitious climate-change agenda America has ever seen. Achieving a carbon-free power sector by 2035 and boosting investment in clean energy innovation are top priorities. Hundreds of billions of dollars of green energy subsidies would make solar, wind and other alternatives big winners if the White House changes tenants.
This would not be friendly to traditional oil & gas companies. One could envision a variety of negative headlines, including speculation about fracking bans, export controls and a carbon tax. But Biden historically has acted as a moderate, making him more likely to choose a middle ground that may simply disrupt, not derail, traditional Energy sector business models. Two plausible levers to pull would be altering the existing tax structure on fossil fuels and heightening environmental regulations. Neither action would devastate the oil & gas industry, but it would add another secular headwind to a sector many investors already are shunning.
While fossil fuels have dominated energy production and consumption, the sector is no stranger to technological innovation. Game-changing advancements, from the advent of hydraulic fracking to the efficiency of photovoltaic cells, have reduced the cost of “dirty” and “clean” energy alike. Major oil & gas players also are not sitting still. For example, setting precedent for the industry as a whole, BP and Repsol have committed to a net-zero de-carbonization path.
Our in-house climate experts from EOS at Federated Hermes have been actively engaging senior leadership of global oil & gas companies for over 15 years. A collaborative dialogue around long-term carbon price assumptions, future-proofing alternative energy investments and greater disclosure around plans to reduce emissions are relevant and material risk factors investors are incorporating into their security selection. While transparency on these topics may be higher in other regions, a new administration with greater alignment to the Paris Climate Agreement and a low carbon public policy may push U.S. energy companies and their investors to transition to greener pastures.
Of course, we’re still a month and a half away—and potentially significantly longer than that—from knowing whether status quo or change will win the election. If it’s the latter, the E in ESG could well take center stage in the years ahead, creating risks and opportunities for Energy companies and investors.