Hedge funds face reality of anti-ESG

by William Mathis, Greg Ritchie, Saijel Kishan and Ishika Mookerjee

Few asset classes suffered as painful a blow in the hours after Donald Trump’s election victory as those associated with ESG. 

But the selloff is starting to look a bit too deep, according some hedge funds and financial firms tracking the fallout.

“The market is straight selling renewables,” said Per Lekander, chief executive officer of London-based hedge fund Clean Energy Transition. “Overall it’s not wrong, but it’s doing it indiscriminately, so this creates opportunities.” 

He says that ultimately, “this is a buying opportunity. Give it a week and then buy.”

A Trump win was always going to be a rude awakening for investors embracing environmental, social and good governance metrics. The Republican Party has long railed against ESG, characterizing it as a “woke” perversion of the goals of capitalism. The GOP’s resounding election victory left ESG sectors such as wind energy suffering huge losses, with Danish turbine maker Vestas Wind Systems A/S, for example, losing more than a tenth of its market value on Wednesday.

The WilderHill Clean Energy Index dropped as much as 6.7%, its biggest intraday loss since early August. Solar companies were hit especially hard: Sunnova Energy International Inc. was down as much as 52%, First Solar Inc. fell almost 20% and Sunrun Inc. was down as much as 30% in New York.

“Following an expected knee-jerk negative reaction, we believe there could be compelling buying opportunities for certain stocks and sub-sectors,” JPMorgan Chase & Co. analysts including Mark Strouse said in a note to clients on Wednesday. 

They’re now among skeptics noting that the key assumption behind the selloff — a mass repeal of climate-friendly policies implemented during the Biden administration — may be unfounded. 

The main piece of legislation thought to be in the crosshairs is the Inflation Reduction Act of 2022, which introduced game-changing tax credits for everything from electric vehicles to solar panels. A repeal of the IRA would require the backing of Congress. However, it’s not clear the many Republican states that benefit from it would back such a move.

“There’s not a chance in the world that Republicans coming from southern states that have got thousands of new jobs are going to do that,” Lekander said. “It would send a death certificate for those politicians.”

It’s more likely that any “changes to the IRA will be made with a scalpel” rather than with “a sledgehammer,” the JPMorgan analysts wrote. Especially corners of the legislation designed to encourage local manufacturing and production are unlikely to face a full repeal, they said.

With many Republican states profiting from climate-friendly legislation, “we expect only moderate impact and consider a repeal of the act as only likely in the case of a red sweep,” according to Greg Hirt, chief investment officer of multi-asset strategies at Allianz Global Investors. 

It’s a view that now has a number of investors tracking extreme market moves within sectors associated with ESG, in the hope of picking up some valuable assets on the cheap. 

Hirt and his team, which includes Michael Krautzberger and Virginie Maisonneuve, also note that a US retreat from green policies would hurt its international standing and instead “boost China’s drive to become a global leader in climate technologies.”

Matt Patsky, CEO of Trillium Asset Management, says the selloff in green stocks may indeed be “an overreaction and that could be a buying opportunity for us.” 

Trillium, which manages $6 billion from its main office in Boston, is among those now analyzing its portfolios to see whether the sudden slump in valuations offers a low-cost path to beefing up holdings.

Trump’s win is “a setback, no doubt,” Patsky said. But the “long-term trend line in the energy transition is irrefutable.”

The special relationship between Trump and Elon Musk also makes it hard to imagine Republicans pushing policies that would hurt EV giant Tesla Inc., where Musk is CEO. In fact, Tesla is among companies set to “press forward with aggressive US investments in EV portfolios and supply chains,” Bloomberg Intelligence analysts Steve Man and Peter Lau wrote in a note after the election. 

Lekander at Clean Energy Transition says that for green manufacturers based in the US, the outcome of the election may even be “positive.” 

“The market believes, as it did in 2016, that Trump is massively bad for renewables and there aren’t facts for that,” he said. 

Analysts at Morgan Stanley also reckon that “risks to clean energy spending from the election result are more limited than appreciated,” according to a client note sent late on Wednesday. They list First Solar, Bloom Energy Corp., GE Vernova Inc. and NextEra Energy Inc. as stocks to buy.

“The need for renewable power will continue to grow, even if subsidies decline and economics worsen,” the Morgan Stanley analysts wrote.

Maria Lettini, the CEO of the US SIF, which is the country’s umbrella organization for sustainable investing, said she’s committed to “working with the next administration and other newly elected officials across the US.”

Meanwhile, Trump’s full-throated support of the fossil-fuel industry means dependency on oil and gas will be “rejuvenated,” said George Boubouras, head of research at hedge fund K2 Asset Management. And that has meaningful ramifications for how to shape green energy bets going forward, he said.

“Without a doubt, the energy transition is going to be recalibrated,” Boubouras said. “But I don’t think it’s going to be as bad as some people say.” Instead, this is “just a recalibrated play,” he said.

“Projections of fossil fuel demand span further than a four-year presidency term,” said Citigroup Inc. researchers led by Anita McBain. “Long-term investors will likely maintain the view that globally we are transitioning to a low-carbon economy, despite a potential short-term change in pace.”

The upshot is that, even with Trump as president, the “energy transition will continue to be a part of portfolios,” Boubouras said.

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