Would US Private Capital Flows into Climate Solutions Remain Strong in a Second Trump Administration?

Yes, we believe that private investment in climate solutions would continue apace in a second Trump administration, given strong demand for clean energy, supportive and resilient US government policies, and robust investment opportunities that will continue to be attractive to many investors.

Long-term capital flows into climate solutions reflect market-driven structural tailwinds. The drivers of this increasing demand for climate solutions range from the rapidly growing demand for clean energy from artificial intelligence (AI) to the climate adaptation needs driven by increasingly volatile weather patterns. With power consumption from generative AI expected to skyrocket by 70% annually through 2027, ¹ companies are looking to sustainable infrastructure managers for reliable sources of renewable energy and to venture capitalists for promising early-stage technologies that improve energy efficiency. Meanwhile, the changing global climate has created an urgent need to adapt our existing built environment to withstand increasingly volatile and extreme weather.

In addition to market trends, governments have taken decisive actions to foster investment in climate solutions, policies that are not easily undone. The economic impacts of the Inflation Reduction Act (IRA) of 2022, along with the Infrastructure Investment and Jobs Act (IIJA) (2021) and CHIPs and Science Act (2022), have begun to be felt across the United States. More than $18.4 billion of federal investment ² was deployed into clean energy and transportation projects in fiscal year 2023, which stimulated private investment in climate across manufacturing, energy, and industry. The total investment for these areas grew by 67% in 2023, compared to the 12% year-over-year increase in 2022. While these early indications are encouraging, most of the projected $1.2 trillion federal investment has yet to be spent and should further stimulate private investment flows. ³

The economic benefits of these climate policies have touched communities across geographic regions. More than three-quarters of announced clean energy investments have been made in Republican congressional districts, ⁴ and many are projects that some Republican lawmakers have indicated they will defend. ⁵ Full repeal of the IRA under a Trump administration is unlikely, given these attractive economic benefits and any amendment to the law must be passed by Congress. That being said, risk of amendment is higher under full Republican control of Congress. Provisions that likely have lower risk of amendment by a Republican-led Congress include solar and wind tax credits, as well as some technology tax credits (e.g., carbon capture, biofuels, and nuclear-related) with bipartisan support. Other tax credits and rebates (e.g., electric vehicles, energy efficiency) and loan/grant programs are likely at higher risk of amendment. Separately, a second Trump administration could weaken the IRA through interpretation and, subsequently, implementation. The US Supreme Court’s overturn of the 1984 Chevron Deference, which has substantially weakened the power of federal agencies, may further weaken IRA implementation. However, it is worth noting that 2020, the final year of the first Trump administration, marked the first time on record that renewable energy sources surpassed both nuclear and coal in the United States. ⁶

Regardless of the political environment, the landscape for climate-focused investors remains attractive, which should continue to encourage flows into the space. Well-positioned managers combine their technical expertise, operational experience, and investment discipline to invest in disruptive technologies that seek to replace incumbent processes on a purely economic basis. For example, Cruz Foam’s bio-based packaging materials seek to replace conventional single-use plastics in the multi-billion dollar packaging industry while being 30% cheaper. ⁷ Meanwhile, the latest Energy Innovation study finds that 99% of US coal plants are more expensive to operate compared to replacement by renewable energy. ⁸ In addition, demand from limited partners remains strong as investors have become increasingly focused on climate as an investment theme, with 77% of respondents to Cambridge Associate’s 2022 Sustainable and Impact Investing Survey investing in the theme compared to 38% in 2018.

Experienced long-term investors should remain committed to investing in climate solutions regardless of the short-term political shifts. Even with the uncertainty of an election year, US investors and businesses cannot afford to be left behind in the global energy transition. Given the market demand for climate solutions, supportive US government policies, and a robust investment landscape, we expect that private capital flows into climate solutions will remain strong in a second Trump administration.

Di Tang, Senior Investment Director, Sustainable and Impact Investing

Alice Blackorby, Senior Investment Associate, Sustainable and Impact Investing

Footnotes

1. https://www.morganstanley.com/ideas/ai-energy-demand-infrastructure
2. Excluding retail investment; https://rhg.com/research/clean-investment-monitor-q4-2023-update/
3. https://www.markey.senate.gov/imo/media/doc/five_years_in_a_green_new_deal_world_-_020624pdf1.pdf
4. https://www.cnn.com/2024/06/16/climate/clean-energy-investment-republicans/index.html
5. https://www.bloomberg.com/news/articles/2024-08-05/red-state-republicans-say-they-ll-defend-biden-era-green-jobs?sref=IUS5JOJ3
6. https://www.eia.gov/todayinenergy/detail.php?id=48896
7. https://www.atoneventures.com/portfolio
8. https://energyinnovation.org/publication/the-coal-cost-crossover-3-0/