On 4 November the Republican Party in the US made significant gains in the mid-term elections and took control of the Senate and various gubernatorial posts. This splits political power decisively, with the Republicans controlling the legislature and the Democrats the executive branch (i.e the Presidency).
Immediately our inboxes filled with commentary by research analysts, telling us that political gridlock has always been good for American stocks. As explained in our last blog here, the USA represents an unusually large proportion of the global benchmark and hence our own regional exposure. So at first glance, this looks like good news.
Unfortunately there are also good reasons to be less cheerful, if, like us, you’re interested in solutions to sustainability challenges. To the extent that the Republicans can force through their agenda, there are some areas where this could be unhelpful for our themes.
Predictably, the most vulnerable areas look to be environmental protections and the shift to cleaner energy. Mitch McConnell, the new Republican leader of the Senate, is from coal-producing Kentucky and has long campaigned against what he describes as President Obama’s ‘war on coal’. Last week, when Obama signed a historic agreement with the Chinese on climate change action, McConnell’s response was to slam “carbon emissions regulations…creating havoc in my state and in other states across the country”.
This change in mood puts the renewal of one key renewable energy policy, the Production Tax Credit (‘PTC’) into some doubt. In addition, the Republicans appear intent on hobbling the long-suffering Environmental Protection Agency (‘EPA’), the US body responsible for a lot of green policy implementation. Leading this charge is 80-year-old Senator James Inhofe, the Republican appointee for Chair of the Environment and Public Works Committee, which oversees the EPA.
Senator Inhofe is on record saying that his key aim in this role is to “rein in and shed light on the EPA’s unchecked regulations”. He is the author of a 2012 book called “The Greatest Hoax: How the Global Warming Conspiracy Threatens your Future” (really) and in the same job between 2003 and 2007 he called thriller author Michael Crichton to give expert testimony on climate change.
Happily there is less cause for dismay in other areas. By and large, resource efficiency remains a ‘motherhood and apple pie’ issue: it’s difficult for politicians to oppose it. Despite some noise about an upcoming Supreme Court decision that may possibly re-open the healthcare reform debate, other signals suggest that the Republicans probably accept that the main part of that battle is over.
Even with the potential bad news on the environmental side, the election result was met with little more than a resigned sigh from the investment team here. There hasn’t been a genuinely supportive global political backdrop for sustainability since 2007, with the failure of the Copenhagen Summit in December 2009 proving a useful signpost to the policy landscape since then.
The Fund has prospered anyway: our multi-thematic approach and extensive universe allows us to find opportunities even with a backdrop of policy uncertainty. As this new phase in the American situation unfolds we will just do as we have always done: pick stocks in regions and markets where the regulatory setting is more secure.