PMC Weekly Review - June 9, 2017
A Macro View: Trump Says Au Revoir to Paris Accord
Impact investing—playing a starring role on the investment landscape—is the intentional practice of aligning values with investments to achieve both a financial and social return. It often examines environmental, social, or governance (ESG) factors in the investment decision process. The ‘E,’ or environmental component, has been a key concern for impact investors as the results of climate change have begun to materialize. In the last two weeks, the E factor has landed center stage, with the US pulling out of the Paris Agreement (also known as the Paris Climate Accord (“the Accord”)) and simultaneously deciding to no longer contribute to the Green Climate Fund. Investors, both impact and non-impact alike, ask what leaving the Accord means for jobs and economic growth, while impact investors wonder if progress towards a greener economy has stalled.
The Accord, signed in 2015 by 195 countries, aims to mitigate global warming by monitoring, cutting, and reporting each country’s carbon emissions. The overarching goal is to maintain the global average temperature rise to below 2 degrees Celsius over preindustrial levels. On a five-year basis, each country is responsible for disclosing its carbon emission goals and its progress towards targets. Although hardly perfect, the Accord was monumental in that most countries adopted the first universal climate deal.
Despite that more than one-half of registered American voters support remaining within the Accord,1 last week, President Trump announced his decision to withdraw from the Paris Agreement, citing its negative effect on job growth, particularly within the fossil fuel industry, as one of the reasons. Referencing a National Economics Research Associates (NERA) report, Trump argued that the Accord “could cost Americans as much as 2.7 million in lost jobs by 2025.” However, the report acknowledges that the benefits of reducing emissions were not considered, meaning that the jobs created in the renewable energy sector would likely counteract most of the loss.
Other economists and experts argue that exiting the deal will neither create nor bring back jobs that have been lost due to automation and technology advances in the fossil fuel industry. Coal is an example. The industry has experienced a steady decline in jobs since the 1980s—in 1985, approximately 178,000 people were employed in coal mining. By 2000, that number dropped by more than half to 74,000, and as of December 2016, just 50,000 people were working in the mining industry.2 Productivity is not the only culprit in these lost jobs. Natural gas, a cheaper and cleaner source of fuel, has also gained traction, with consumption rising 40% between 2007 and 2016.3 For the first time last year, natural gas surpassed coal as the largest source of US electricity generation.4
Conversely, growth in renewable energy employment has been steady, and impact investors have been encouraged by the data. In the past year alone, employment in the solar industry has increased 25%, topping 370,000 jobs and solar employment now accounts for the largest segment of workers in the electric power generation sector.5
With or without the US’s engagement in the Paris Climate Accord, the green energy train has left the station. Although prior government support and regulations may have played a part in driving the renewable energy expansion, a couple of facts are clear. First, many of the “dirty” jobs have continuously declined, long before the Obama Administration’s positive disposition to renewables. Second, outside of government support, investors, businesses, and many state policies have embraced cleaner energy sources. In 2015, the US was the second-largest investor in renewable energy, contributing over $44 billion to new projects.6 Additionally, leaders in both states and businesses echoed their support for the Accord after the announcement, with many vowing to help pick up the slack, the current administration’s decision notwithstanding. President Trump may be attempting to pump the brakes, but many would argue that clean energy’s future is already here.
1 Yale Program on Climate Change Communication, 2017
2 FRED, U.S. Bureau of Labor Statistics, 2017
3 U.S. Energy Information Administration, 2017
4 U.S. Energy Information Administration, 2017
5 U.S. Energy and Employment Report, U.S. Department of Energy, 2017
6 Global Trends in Renewable Energy Investment, 2016
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2017 Envestnet. All rights reserved.