Licence to “drill, baby, drill”

While President Biden has been a controversial figure among climate activists, some of his policies have taken steps to achieve global climate goals. Most notably, rejoining the Paris Agreement and the introduction of the Inflation Reduction Act (IRA) in 2022.

Biden’s IRA has been hailed as the most progressive action taken on clean energy and climate change in the country’s history. It implements a suite of tax incentives intended to accelerate the deployment of clean energy. Since 2022, over 280 clean energy projects have been announced representing $282bn in investments, including by HY companies like Arcosa, Apex and more.

Under the Paris Agreement, the US has committed to achieve a 50-52% reduction in GHG emissions by 2030 from 2005 levels, which it is likely to fall short under Biden. However, the shortfall is expected to increase significantly under a Trump presidency with emissions likely to fall only 28% below 2005 levels by 2030. This could have significant impacts on achieving global targets as the US is the world’s second largest polluter and climate milestones are continuously breached.

Former president Trump has made it very clear that he intends to clear a path for oil and gas companies to “drill, baby, drill.”

His previous term set an alarming precedent for wide-scale roll backs of climate policy. In his first term he rolled back an estimated 100 environmental regulations and pulled out of the Paris Agreement, something he intends to do again in a second term.

However, his attitudes towards climate change largely contradict consumer demands for sustainable products, economic opportunity (and science, generally). A 2024 study showed that 80% of US consumers are very, or somewhat, concerned about the environmental impact of the products they buy.

This dissonance is potentially setting up US companies and their investors for significant climate related physical and transition risks as Trump imagines a business as usual scenario.

Oil and gas

Oil and gas has become a sticking point for American conservatives and it is a key fighting ground in this election cycle.

Biden has a mixed record on oil and gas, teetering between climate action and increased production.

Under Biden, the top five oil companies in the US saw a 160% increase in profits, compared to the first three years of Trump’s presidency. In 2023, the US produced more crude oil than ever before. However, this is also a result of market conditions.

During the same period, Biden temporarily suspended oil and gas leasing in the Arctic, revoked the Keystone XL pipeline, and implemented policy to shift consumption away from fossil fuels.

Biden’s IRA has introduced new costs for oil and gas companies to reduce methane leakages and the California Resources Group noted in its 2024 10K that the IRA could impose new costs to its operations. Oil and gas is responsible for 20% of global methane emissions and the IRA establishes a waste emissions charge, the US’s first tax on GHG emissions.

A second term for Biden would likely see increased restrictions on the sector and more concessions for cleaner energy projects.

Trump has promised the oil and gas industry that he would overturn Biden’s climate policies to clear the way for new drilling. It is unclear how much of Biden’s IRA Trump will actually be able to roll back, but the renewable energy tax credits are considered “low hanging fruit”.

The IRA includes massive tax incentives and subsidies for investment in clean technologies. In FY 23, through private and government sources, the US invested $239bn in clean energy, a 38% increase from 2022.

Kodiak Gas Services highlighted in its 2024 10-K that the IRA provides “significant funding” for research and development of low carbon energy production methods. And in 2023, Arcosa announced plans to open a manufacturing plant in New Mexico attributing it “to the long term positive impact of the IRA”.

Trump has also promised to increase oil drilling in the Gulf of Mexico, remove barriers to Arctic drilling and reverse rules to limit car emissions.

Auto manufacturing

The highly anticipated EV boom has yet to manifest itself as automakers roll back EV plans and sales miss forecasted growth targets.

Biden announced a target to have half of all new vehicle sales to be electric by 2030, bolstered by the IRA, which has led to over $81bn in investments and 142 projects in electric vehicles.

Ford reported in its 2023 sustainability report that it expects the IRA to have a positive impact for its customers.

However, even the IRA may not be enough to re-engage consumer interest in electric vehicles.

Ford, General Motors, Volkswagen, Jaguar Land Rover, and Aston Martin have all announced plans to scale back EV manufacturing.

Hertz senior notes traded down after the company reported a significant EBITDA loss as its push into EV’s was more expensive then anticipated.

EV sales are expected to continue to rise, although not at the rate previously projected. In 2023, EV sales represented ~8% of the US market.

Trump has promised that on day one, he will roll back every Biden administration mandate that is “brutalising” the American auto industry and the American consumer with “skyrocketing” costs. A second term for Trump will likely cause automakers to rethink their strategies as he attempts to cut back legislation that favours clean energy.

Biden’s policies have sought to dampen China’s dominance in the EV market, a reversal of those rules by Trump would likely solidify China’s monopoly over the market (read more here).

Chemicals

During Trump’s first term, he refrained from implementing bans on hazardous substances like chlorpyrifos, and forever chemicals known as PFAS.

The Biden administration however, has advanced on industry opposed restrictions through its comprehensive action plan to address hazardous substances. In 2024, Biden implemented a national standard for PFAS contamination and dedicated $9bn in funding to address PFAS and chemicals of concern contamination.

Lobby groups representing water utilities, and the chemical and manufacturing sector have filed court challenges to the rule claiming that the rule “significantly underestimates nationwide costs.”

Chemical companies were likely to already be highly exposed to litigation as a result of PFAS contamination.

Chemours for example, attributed $2.2bn of its $5bn in earnings in 2020 to fluorinated chemicals. Chemours is also one of the most litigated companies as a result of PFAS contamination and in FY 2022, it allocated $668m, 10% of its FY22 revenue, for environmental remediation liabilities. (Read more on PFAS litigation here.)

In 2023, 15 separate attorney generals had brought legal action against companies for PFAS contamination. Following the new rule, chemical companies may be subject to increased litigation and compliance costs.

Trump is likely to appoint industry-friendly people to the EPA to target the new rule. Trump may seek to provide concessions to the chemical sector to prevent the industry from moving offshore and limit an onslaught of hazardous substance litigation.

Investor response

Anti-ESG backlash has been rampant in the US, where Republican state legislatures have passed laws that ban or limit ESG considerations.

According to 9fin data, SLB issuance fell by 68% between 2022 and 2024 in the US, while European SLB issuance increased by 80%. The disparity reflects the impact of the politicisation of ESG in the US (read more on HY SLB performance here).

Under Biden, the US Securities & Exchange Commission passed its climate disclosure rules that would require companies to disclose climate related risks. The rule allows investors to conduct a robust risk assessment and engage with companies to mitigate risks (read more about the SEC rule here).

Immediately after the rule was passed, it was subject to legal challenges. Trump claims that the SEC rules will “allow climate crusaders in investment firms to punish companies that do not conform to their radical environmental agenda.” He has promised to roll back the climate disclosure rules.

Despite the discourse surrounding ESG, many US investors continue to require ESG disclosures and implement oversight as part of their risk management strategies.

A study by Sustainable Views, found that of 800 board members from public and private companies in the US (336) and Europe (288) assessed, a majority of boards have stayed the course on their sustainability strategies.

The politicisation of climate policies is at odds with the view that ESG is risk management by another name.

According to S&P, ~60% of companies in the S&P 500 representing a market capitalisation of $18trn and more than 40% of companies in the S&P Global 1200, representing a market capitalisation of $27.3trn, are at high risk of physical climate change impacts. This does not take into consideration costs associated with a transition towards a low carbon economy including regulatory compliance and technological changes.

A delayed and disorderly transition towards a low carbon economy would significantly impact the ability of organisations to conduct business.

Neither Biden nor Trump can be considered leaders in climate mitigation. However, a Biden presidency would likely consider the impact of a delayed transition on business and the economy.