Election supercycle is making ESG investors nervous

An anti-green backlash in 2024’s global election-supercycle is already taking a toll on environmental, social and governance-focused assets, with an ultimate test still to come in the US presidential vote.

Investors have pared exposure to sectors including renewable energy and electric cars as candidates in some of the dozens of nations holding polls this year have raised concerns over the costs and speed of efforts to curb emissions.

A shift to clean energy “is just not going to be a straight line like maybe we all hoped for,” said Sarah Norris, head of ESG equities and manager of the Global Impact Equity strategy at abrdn plc, which has trimmed some holdings in renewable project developers. 

Greater uncertainty over the transition away from fossil fuels, and tougher political rhetoric, have seen clean energy firms jolted following recent polls in India, South Korea and Europe, though some have since recovered ground.

A Solactive European Renewables gauge has dropped about 3% since this month’s European Parliament election — which saw support slump for Green candidates. 

Government debt has tumbled in France with Marine Le Pen’s far-right National Rally leading polls ahead of a June 30 vote in France, and development bank SFIL SA postponed a green bond sale.

In the US, a backlash against green principles and positioning for a potential new Donald Trump presidency have contributed to a surge in liquidations of exchange-traded funds aligned with ESG goals, and seen the largest-ever quarterly outflows from products tied to the theme. 

Bets by hedge funds against the $2.2 billion iShares Global Clean Energy ETF, a flagship renewables fund, have risen to the highest in a year, short interest data compiled by Bloomberg shows. Investors are weighing both green pushback and higher-for-longer interest rates. The ETF has declined more than 22% in the past 12 months, compared with a 26% gain in the S&P 500 Index.

Pictet Asset Management’s Clean Energy Transition Strategy has reduced holdings of EV stocks and is retaining only a small exposure to renewable energy, said Yi Shi, client portfolio manager. 

Though few investors expect Trump to scrap President Joe Biden’s Inflation Reduction Act, which offers support for green industries, many are considering the impact of any renewed move to withdraw the US from the Paris Agreement on global warming, or to ease environmental regulations. 

A Trump victory would threaten $369 billion of tax incentives, grants and loans for clean energy, according to Bloomberg Intelligence. 

Mirova SA’s Co-Head of Fixed Income Bertrand Rocher said he’s stopped buying more US debt ahead of the November election because both Trump and Biden have inflation-fanning programs. 

Utility stocks — some of which have already benefited from Biden’s IRA — are a potential alternative in the US to clean energy companies, said Nordea Investment Management AB portfolio manager Johan Swahn. In Europe, data-center operators look attractive as they’re less impacted by debate over green policies, according to abrdn’s Norris. 

There is “some movement in Europe where we believe that a wait-and-see stance is warranted,” on green investments, said Ulrik Fugmann, co-head of the environmental strategies group at BNP Paribas Asset Management.