How have ESG stocks reacted to the US statement on climate disclosure?

Combating climate change has moved up the global agenda, particularly since Joe Biden took over the US presidency from climate sceptic Donald Trump.

In keeping with this focus and ahead of Biden’s climate summit last week, climate envoy John Kerry said the US is likely to follow Europe in requiring companies to disclose their climate risk in annual reports.

“The developments may be a tailwind for investors in environmental, social and governance (ESG) funds, according to financial advisors,” reported CNBC last week. Indeed, ESG factors were already gaining traction with investors before Biden’s clean energy-focused $2trn infrastructure plan: ESG funds recorded $5.1bn of net new money from investors in 2020 – a fifth consecutive record year, according to Morningstar data as reported by CNBC. ESG funds have also returned for investors: 75% of sustainable funds ranked in the top half of their investment category over the past three years, say Morningstar.

  

What did US climate envoy John Kerry say?

Ahead of Biden’s inaugural two-day climate summit last week, climate envoy John Kerry said that the US would “join with Europe” to begin requiring financial institutions and companies to disclose information on climate risk. It’s too early to say yet when the US reporting mandate might take effect, or how the US might collaborate with Europe, reports the FT. Kerry forecast that companies having to disclose climate change risks will trigger significant shifts in capital investments globally.

In March, acting head of the US Securities and Exchange Commission, Allison Herren Lee, said the US regulator was “enhancing its focus on climate-related disclosures”, and planned to update its guidance for the first time since 2010. Meanwhile, the European Commission is undergoing a review of its rules on non-financial disclosure, including climate risk reporting.

Last year, the UK said it would begin requiring certain companies to include emissions and climate risk information in annual reports by 2025, in line with the taskforce on climate-related financial disclosures (TCFD) framework, established at the 2015 Paris climate accord, according to the FT.

 

What happened at last week's climate summit?

As the US upgraded its pledge to cut greenhouse emissions in half by the end of the decade at the virtual summit of 41 world leaders, Kerry said. “We all need to build out our capacity way beyond what it is and begin to shift out of coal dramatically.” Biden wants the global transition to renewables like solar and wind, electric vehicles (EVs) and other technologies to be accelerated. “Every country will need to invest in new clean energy technologies as we work forward to deal with net-zero emissions,” the US president said.

“Every country will need to invest in new clean energy technologies as we work forward to deal with net-zero emissions” - President Biden

 

Biden stated that the country was rejoining various international alliances to accelerate innovation in renewable energy and reduce emissions from agriculture. Microsoft [MSFT] co-founder Bill Gates said “using just today’s technologies won’t allow us to meet ambitious goals” and that new investments in clean energy innovation, plus government and private sector support, were vital in eliminating emissions. However, the Guardian reports that Republicans, who pulled out of the 2015 Paris climate accord under Trump, remained opposed, saying that China is the world’s worst polluter and that any transition to clean energy hurts American oil, natural gas and coal workers.

 

US climate shift fuels gains for EV and solar stocks

While the US climate envoy predicts major changes to investment flows in the months and years ahead, EV and solar stocks received an immediate jolt after the latest climate headlines last week. Tesla’s [TSLA] share price gained 5.58% on Wednesday 21 April, rising to $744.12 at the close.

Solar stocks had made stellar gains following the summit: Enphase Energy [ENPH] was up 21.71%, SolarEdge Technologies [SEDG] had jumped 19.14% and First Solar [FSLR] had risen 12.71%, to Monday 26 April’s close. The gains weren’t confined to US stocks either, with China’s Daqo New Energy [DQ] up a whopping 10.06% over the week to 28 April’s close.

These gains helped to propel Solar to the top of the weekly leaderboard on our theme performance screener, up 10.93% at Monday 26 April’s close. Enphase Energy, SolarEdge, First Solar and Daqo make up four of the top five highest-weighted constituents in the tracked Invesco Solar ETF [TAN].

“Suddenly people are going to be making evaluations considering long-term risk to the investment based on the climate crisis” - John Kerry

 

That said, the sun was unable to keep shining on solar stocks indefinitely. A sharp selloff on 28 April saw Enphase and SolarEdge close down on the week yesterday, while First Solar has managed to claw back to a 4.61% gain on the week (as of 28 April’s close). The drop is likely to have been triggered by renewed optimism for the oil theme, as well as the standard dip in enthusiasm that often follows rapid gains.

Despite this correction, moves to align with Europe on climate disclosure, as well as the other commitments now being made by the US, could lead to a significant shift in investments from fossil fuel and into ESG-focused funds. Clean energy is set to play a major role, according to Kerry: "Suddenly people are going to be making evaluations considering long-term risk to the investment based on the climate crisis."