Why the Biden climate plan may be good for some investors

Yuhan Liao | Moment | Getty Images

The Biden government is taking aggressive steps to combat climate change. Some investors will benefit from this.

President Joe Biden pledged on Thursday, Earth Day, to cut U.S. greenhouse gas emissions in half by 2030. This is more than double the country’s previous commitment to the 2015 Paris Climate Agreement forged by the Obama administration.

The White House also unveiled a $ 2 trillion infrastructure proposal last month that includes numerous measures to curb climate change.

According to financial advisors, the developments could be a tailwind for investors in so-called sustainable or environmental, social and governance funds (ESG).

Biden’s infrastructure plan

President Joe Biden speaks out during a virtual climate summit of heads of state and government on April 22, 2021 in the eastern room of the White House with 40 world leaders.

Al Drago | Getty Images

If signed, the $ 2 trillion infrastructure proposal would be seen as one of the federal government’s greatest efforts to curb greenhouse gas emissions in the country.

Many of his clean energy actions, such as funding electric vehicles, millions of additional charging ports for them, and retrofitting buildings and homes, would help the president achieve the goal of net zero emissions by 2050, according to the White House.

ESG investing had gained momentum ahead of Biden’s plan.

ESG funds received $ 51.1 billion in net new money from investors in 2020 – the fifth consecutive annual record, according to Morningstar data. Their returns were also high compared to traditional funds – 3 out of 4 sustainable funds ranked in the top half of their asset class over the past three years, Morningstar data shows.

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Financial advisors expect the president’s proposal to offer more support.

“Biden’s influence here will be helpful,” said Mark Mathers, certified financial planner and partner at Beacon Pointe Advisors in Boston.

ESG funds can provide money to promote social well-being in a variety of ways. You can invest in energy companies that do not rely on fossil fuels or in companies that promote racial and gender diversity, for example.

In March, the Biden administration announced it would not enforce a Trump-era rule that made it harder to use ESG funds in 401 (k) plans.

Do-it-yourself investors looking to get involved in climate or environmental funds should do some research to ensure the focus of a particular fund.

And when it comes to ESG, not all asset managers are created equal, Mathers said. Some are taking advantage of the funds’ recent popularity to debut investments, he said.

Investors should look for funds that have been around for a long time (advisors typically aim for a track record of at least three years) and that are run by managers who authentically focus on sustainable investing.

“Everyone has a sustainable fund,” said Mathers. “You have to find people with substance.”

Authenticity in general is something that investors can easily spot on companies’ respective websites, depending on the importance of value investing, he added.

Impax Asset Management, Pernassus Investments and Boston Common Asset Management are good starting points for retail investors new to the space, he said. (They are active managers, which means investors may pay more to access the funds compared to their index counterparts.)

I’m not creating an entirely new investment strategy based on what Biden does.

Ivory johnson

Founder of Delancey Wealth Management

It’s also important to remember diversification and asset allocation – investors shouldn’t put all of their money into solar energy, for example, advisors said.

“If someone is in a 60-40 portfolio, I’m not going to take 60%. [of my stocks] and buy those sectors, “said Ivory Johnson, CFP and founder of Delancey Wealth Management in Washington.” I could nibble on the ends. “

Biden’s infrastructure proposal contains many elements that go beyond climate change. Overall, if such a proposal becomes law, it would likely be a boon to various industries.

Sectors that could burst

Rotor blades sit on the ground next to a wind turbine under construction at Avangrid Renewables La Joya wind farm in Encino, New Mexico.

Cate Dingley / Bloomberg via Getty Images

Those sectors include materials, utilities and industrials, said Rusty Vanneman, chief investment strategist at Orion Advisor Solutions in Omaha, Nebraska.

(For example, building and upgrading roads and bridges would require construction equipment and materials like cement, advisors said of the thinking.)

And a little more comfortable these sectors are among those ready to jump when there is higher inflation.

Some economists and advisers believe inflation is likely to spike due to additional federal spending from the $ 1.9 trillion Covid aid package passed in March. That was on top of two other major pandemic relief bills that totaled more than $ 3 trillion.

“I’m not creating an entirely new investment strategy based on what Biden does,” said Johnson.

“Biden’s plan reinforces what is already happening, which is inflation,” he added. “And when you have inflation, buy those sectors.

“If Biden makes you rich, okay.”

However, federal officials such as Federal Reserve Chairman Jerome Powell have ditched predictions of rampant inflation, saying the labor market has opportunities to recover before this is cause for concern.

Chat Reynders, CEO and chairman of Reynders, McVeigh Capital Management in Boston, said some of the bigger opportunities could be outside of the classic businesses associated with infrastructure, including those related to materials and earthmoving machinery.

Instead, they could be investments in “new technologies to prepare the country for a more sustainable, climate-friendly and energy-efficient future”.

Stick to your plan and keep a long-term perspective in mind.

Kristian Finfrock

Founder of Retirement Income Strategies

Reynders believes the bill will hold promise to invest in new power grid technologies, alternative energy solutions, electric transportation, 5G technologies, automation and robotics, machine learning and AI applications.

However, not all financial advisers are necessarily optimistic.

The Biden government has been telegraphing its green energy push for a while, and much of the projected capital gains may already be priced in the market, said Michael McClary, chief investment officer at Valmark Financial Group in Akron, Ohio.

Beyond the headlines

While Biden’s historic investment in infrastructure presents opportunities for investors, advisors caution people not to consider their own schedule and risk tolerance in any decisions they make with their money.

“Remember, several times in history, presidents have introduced new laws aimed at making sweeping improvements,” said Kristian Finfrock, founder of Retirement Income Strategies in Evansville, Wisconsin. “Stick to your plan and keep a long-term perspective in mind.”

Vanneman cautioned that while thematic investing can increase returns, you can also expect more volatility in your portfolio through the approach.

Infrastructure strategies tend to be less volatile than climate change strategies, he said.

“Climate change stocks tend to be newer, smaller, low-inventory companies [or] Zero dividends and high growth expectations, “he wrote in an email.” All of these factors are general reasons why some stocks[s] are more volatile than others. “

On the flip side, he said, “Infrastructure stocks tend to be more established and have higher dividends and lower valuations.”

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