by Sophie Chardon, Head of Sustainable Investment at Lombard Odier - Private Banking, with contributions from Dominic Tighe, Senior Sustainability Analyst, HolistiQ

Key points

• The Trump administration has confirmed its willingness to relax environmental regulations and revise budgets downwards, against the backdrop of the US withdrawal from the Paris Agreement, which will slow the country's trajectory towards carbon neutrality.
• China will now play a more central role in global climate efforts and, together with the European Union, should keep the global transition to clean energy on track.
• The Inflation Reduction Act (IRA) could be partially dismantled, particularly affecting sectors such as electric vehicles and offshore wind power.
• Investors will need to focus on less politically exposed investment themes, such as infrastructure, digitization, building energy efficiency, water management or precision agriculture.

Donald Trump's inauguration was followed by a wave of presidential executive orders, with consequences for many areas of activity. We examine the impact of the second Trump administration on sustainability-related sectors in the US and around the world.

In the first executive orders, the US international climate finance plan was revoked and President Trump again ordered a withdrawal from the Paris climate agreement.

In practice, this means that the US is no longer required to submit a climate action plan to the UN every five years. This will slow the trajectory of the US economy towards carbon neutrality, even though a complete withdrawal from the United Nations Framework Convention on Climate Change would be complicated by the US Constitution. Indeed, under the Constitution, presidential authority over treaties requires the support of two-thirds of the Senate. Finally, the revocation of the U.S. international climate finance plan means a reduction in financial and technical assistance for climate change initiatives in developing countries.

Climate leadership now belongs to China

While we see no threat to the global transition to sustainability, China will play an increasing role in multilateral agreements. At the UN climate conference in November 2024, Chinese leaders called for international cooperation and a "complete transformation of growth models". China is under pressure to step up its commitments. Between 2013 and 2021, it contributed over $34 billion to climate-related development finance, making it one of the leading providers of international climate aid. Its peak emissions target for 2030 has already been reached, six years ahead of schedule, and its emissions could fall as early as this year. This trend should help offset the slow progress made by the United States. China's motivations are economic, but also indicate that it has become aware of its vulnerability to the physical effects of climate change. At past UN meetings, negotiations between the USA and China have been at the heart of global progress. From our point of view, the fact that the USA is turning away from climate action does not mean that China is abandoning its objectives.

Outside the United States, commitments remain solid

At the UN conference in November, the UK, Brazil and the United Arab Emirates strengthened their targets for 2035, while four countries - Bhutan, Madagascar, Panama and Suriname - reported that they had already achieved carbon neutrality in greenhouse gas emissions. The Trump administration is unlikely to have any impact on the climate transition policies of other countries. This is particularly true of the European Union. The recent energy shock suffered by the region, and the report by former European Central Bank President Mario Draghi, which identifies high energy prices as one of the main brakes on European competitiveness, make it unlikely that the ambitions of the European Green Deal will be reversed.

Changes in domestic policy

Following the publication of the Executive Orders "Unlocking Alaska's Extraordinary Resource Potential", "Declaring a National Energy Emergency" and "Unlocking American Energy" (1), we expect further easing of environmental legislation. In particular, the National Environmental Policy Act (EPA), the Endangered Species Act, the Clean Water Act and the Critical Minerals Consistency Act would be affected, in order to speed up approvals for oil drilling, as well as federal infrastructure and mineral extraction projects. Further cuts to EPA budgets, a reduction in regional initiatives and a dismantling of the environmental justice program could follow, as they come under investigation by House Republicans. In addition, President Trump repealed the 50% market share goal for electric vehicles by 2030 (a goal that was not legally binding) and called for an end to waivers that allow states to limit gasoline car sales.

It is unlikely that the Inflation Reduction Act (IRA), which supports US manufacturing and clean energy (see chart), will be completely repealed. Indeed, it enjoys some support from Republicans, including in the House of Representatives. However, a gradual and partial dismantling is likely.

The segments we consider most vulnerable are electric vehicles, energy efficiency, heat pumps and offshore wind power. Technologies such as solar, onshore wind, peaking, hydrogen, nuclear and carbon capture may be less threatened than initially thought, as they have benefited from Republican support in the past. Any dismantling would delay the transition to a sustainable future. However, the overall impact depends on the profitability of each technology in the absence of subsidies. Should the IRA be fully repealed, the biggest delays would be in the adoption of hydrogen, carbon capture and offshore wind technologies, which remain largely uneconomic.

Implications for investment

In investment terms, the second Trump administration could increase sectoral and regional divergence, with the US losing momentum in sustainable investing. After the indiscriminate decline in valuations in the sustainable investment universe during the final months of 2024, earnings momentum is in the driver's seat and stock selection is paramount.

Our analysis focuses on three factors. Firstly, an attractive economic profile in an environment of volatile interest rates, to avoid policy-induced "noise". This implies a cautious approach to companies active in the hydrogen, carbon capture, offshore wind and residential solar segments. That said, specialists in energy efficiency in buildings, as well as utilities with capabilities in onshore wind, solar (with the most attractive normalized cost of electricity production, i.e. the average net present cost of electricity produced by a generator over its lifetime) and nuclear, should be less impacted in the medium term. Secondly, themes aligned with policy developments, such as infrastructure and digitization (data centers). They incorporate an increase in electricity demand, indicating that battery storage and industrial efficiency could gain momentum. Thirdly, the adaptability of the private sector: as the consequences of climate change are felt, sectors such as precision agriculture, water management, design software, recycling, consulting and diagnostic health services should all offer investment opportunities.

Even though the USA may slow down its climate efforts under the Trump administration, global momentum, particularly in China and the European Union, should keep the green energy transition on track. Investors will need to focus on those sectors that are least exposed to politics and that are poised to profitably align with long-term demand for clean technologies, infrastructure and climate resilience.

(1) "Unleashing Alaska's extraordinary resource potential", "Declaring a national energy emergency" and "Unleashing American Energy".