Trump 2.0, real estate risk, and global biodiversity summit

The Associated Press declared that former President Trump is set to reenter the White House, and the Republican Party will regain control of the Senate. The House is still undecided. While some votes may be recounted, we recommend that investors assume a Trump presidency.

What does it mean for international climate investing and sustainable and impact investing more broadly?
As we detailed in the Election Watch Sustainable Investing Perspectives report, a Trump Presidency and "Red sweep" outcome has mixed impact on sustainable investing depending on the area of focus. Most importantly, we note that despite campaign rhetoric and headlines, the performance of sustainability-focused strategies has historically been more impacted by macro conditions than the party governing from the White House.

On climate investments, we look at US domestic and international policy. On a domestic level, the Inflation Reduction Act has been a significant boost to activity across sectors from renewables, carbon capture, and electrification, especially in states that voted for the Republican candidate. This also matters to global investors who have been finding opportunities with US listed and private companies. We do not expect a wholesale reversal of the IRA, although parts related to EV credits could be at risk. However, a potential slowdown in disbursement from the Department of Energy seems likely.

A continuation, or possible broadening, of tariffs against China might impact US companies working toward climate solutions which have reliance on China for inputs, although we note that the relative impact here is muted compared to the status quo given existing tariffs from the Biden administration.

A swift reversal of environmental policies from the Environmental Protection Agency could be possible, following the steps of the first Trump presidency. We believe the impact of a potential reversal would not be immediate in market terms, in particular as some expectations on environmental performance are embedded in the market. For example, energy companies likely retain their focus to reduce methane leakage from operations. For global investors, with time a reduction of environmental policies in the US might mean needing to differentiate among companies leading on practices by going above and beyond.

The US Election outcome may not bode well for international climate negotiations, as COP29 (the United Nations Climate Change Conference) is set to open in Azerbaijan next Monday. Trump withdrew the US from the Paris Agreement during his last tenure, which was reversed by Biden. Negotiators will go into the meeting likely assuming the same action from the US, which could cast a shadow over any decisions. The challenge is also funding: Under the Biden administration, annual international climate finance coming out of the US reached an estimated USD 11bn in 2024, which accounted for ~10% of the current USD 100bn pledge in funding provided by rich countries to emerging markets. Comparatively, when Trump was previously in office—and when he withdrew from the Paris Agreement—this was less than USD 3bn. The impact of any US pullback would be most severely felt in emerging markets, which are both more vulnerable to climate risk and face the biggest funding gap to build resilience.

We also see possible impact for US-domiciled strategies that are explicitly marketing their focus on sustainability, impact, and ESG. We believe it now seems unlikely that the SEC would push forward with rules requiring climate disclosure from companies. A reminder to investors that large US companies with operations in Europe are subject to EU sustainability-related disclosure requirements; thus, visibility of data should continue.

We might see additional scrutiny on the use of ESG terms and an elevation to the national level of what has thus far developed as state-by-state legislation. Yet, given the state-level action of the past 24 months, we have seen managers of SI-focused strategies retain their focus on investment fundamentals tied to sustainability and spend less time on marketing. This might be positive for the maturation of the field overall, although near-term outflows and further consolidation of the number of available options are likely, in our view.

Takeaways for investors:

• A Trump 2.0 outcome is likely to represent more of a status quo for sustainable investing strategies and their performance than is widely anticipated by the market. We do not expect a wholesale reversal of the IRA and note that the investment thesis around the climate and energy transition remains robust. That said, near-term volatility is likely as the market digests the news.
• The outcome may not bode well for international climate negotiations, perhaps casting a shadow over the COP29 meeting which starts on Monday. It seems likely that President Trump withdraws the US from the Paris Agreement again, which could imperil US commitment to international climate funding. We believe this could impact emerging markets the most.
• For US investors, the state-level debate on ESG and sustainability-focused investments might rise up to the federal level, with potential more scrutiny from the SEC. This might result in further outflows in the near term. Over time, we would expect investors focused on sustainability to further focus on the fundamental investment drivers and move away from marketing efforts, which would be a step forward in the maturation of the space.

Physical and transition risks from climate change are becoming more acute for real estate, especially as the impact of extreme weather events intensifies and triggers responses from regulators and insurers. However, it is not clear whether this impact has been sufficiently embedded in the residential real estate market. We look at the US as a case study of the complex set of decisions driving homeowner behavior.

This year has seen a record number of flash flood emergencies, the highest level of risk warning, issued by the National Weather Service. About half of the emergencies were triggered by four hurricanes, including the devastating Hurricane Helene and Hurricane Milton, which are each projected to have a USD 50bn cost. Moody’s estimates private market insured losses of USD 36bn from the two storms.

Climate change translates into two types of risk: Physical risk from more extreme acute events like weather-related natural disasters or from gradual changes like sea level rise, and transition risk which includes societal changes in response to climate change.

Real estate can be impacted by both physical risk—as we have seen in recent disasters—but also by transition risk, in particular as insurance providers increase rates or exit specific markets, impacting home value. There is some early evidence of this becoming a trend: Major insurers like AllState, StateFarm, and Farmers Insurance have scaled back their operations in California and Florida, citing the rising costs from rising hurricane or wildfire risks. Consistent with the record number of flash floods in the country, according to LexisNexis, nearly half of all claims in 2023 were catastrophe related, and hail-related claims have increased by nearly 58% since 2022. The costs are being passed on to homeowners with the average cost of home insurance increasing 21% nationwide between 2015 and 2023, according to LexisNexis.

But has this changed the behavior of homeowners and impacted home prices? The answer is not straightforward as climate risks manifest differently across states and issues like rising insurance costs are weighed against other elements. However, it looks like the states that have seen the highest growth rate of new homes built are also seeing the higher financial impact from weather events (Figure 2).

The tide may turn, however, as climate risk data is becoming more available to underwriters and homeowners. Fannie Mae and Freddie Mac, two government-sponsored enterprises that play a crucial role in the housing financing system in the US are now both integrating climate data in their analysis. Also, consumer-facing websites like Realtor.com and Zillow will show buyers a climate risk rating for properties, bringing the information to the forefront.

Takeaways for investors:

• Physical and transition risks are becoming more apparent globally and across real estate sub-asset classes, in particular as data on physical risk becomes broadly available.
• Looking at the US residential real estate market as a case study, it's unclear whether the risks are currently being reflected in home value, homeowner, and investor decisions.
• As more data becomes available, investor focus may shift to companies with less exposure to carbon-heavy assets or to climate risk.

COP16, themed "Peace with Nature," took place last week in Cali, Colombia. This was the first biodiversity conference since the adoption of the Kunming-Montreal Global Biodiversity Framework in 2022, which outlined four goals and 23 targets aimed at halting and reversing biodiversity loss by 2030. With a 2019 study (Deutz, A. et al, 2020) estimating a USD 700 billion gap between current biodiversity finance and future needs, COP16 marked a pivotal moment for mobilizing financial resources and solutions to achieve these goals.

Key objectives at COP16 included evaluating the implementation of the Global Biodiversity Framework through updated National Biodiversity Strategies and Action Plans (NBSAPs). These plans are crucial for guiding national efforts in biodiversity conservation. Another critical focus was establishing a robust monitoring framework to enable transparent reporting on progress. Financial mobilization was a central theme, particularly for target 19, which aims to secure USD 200 billion annually by 2030 to address the financing gap. While the two issues remained unresolved, talks yielded agreement on key topics like the operation of the Cali Fund (to share benefits from the use of genetic nature data) and the creation of a subsidiary body dedicated to indigenous peoples and local communities.

UNEP FI and Finance for Biodiversity forecast that USD 1.45 trillion could flow into biodiversity finance by 2030. However, current biodiversity financial flows are approximately USD 208 billion annually (BNEF), primarily from public sources focused on nature protection. Private investment is essential to close the financing gap and has been mainly directed toward mitigating biodiversity loss, largely due to lack of scalable investment opportunities and data from corporates. The Taskforce on Nature-related Financial Disclosures (TNFD) announced in Cali that USD 17.7tr in assets under management are now committed to TNFD reporting, indicating support from the private sector to the nature preservation goal. We welcome this data point as positive but expect that the quality of reported data from TNFD signatories will likely take time to become useful for investment decision-making.

We distinguish between investing for nature and in nature. Investing for nature aims to optimize the use of natural capital and avoid further biodiversity loss. Under this approach, investors can consider solutions providers addressing major biodiversity loss drivers, such as land use and pollution, as well as companies that are showing leadership in mitigating their operational impact. In the fixed income space, investors may consider green bonds that target nature/biodiversity loss, like waste management and pollution control and nature-based assets, as well as blue bonds that target supply management and wastewater treatment. Investing for nature has evolved rapidly in recent years, but still faces challenges related to data availability and quality, as well as a lack of consensus on metrics for nature and biodiversity. In the future, we expect nature data to be more easily linked to value chains to better determine the impacts of companies on nature/biodiversity.

Investing in nature targets positive impact on nature as an outcome, alongside financial returns. These strategies are mainly available in the private market space. Examples include regenerative agriculture and ecosystem restoration. “Nature positive” solutions are usually monetized through production (regenerative agriculture) or through the sale of carbon/biodiversity credits and offsets (nature-based-solutions).

Takeaways for investors:

• COP16 focused on addressing the USD 700bn financing gap to meet biodiversity goals set by the Kunming-Montreal Global Biodiversity Framework. Though no agreement was reached on this, both public and private sector contributions to fund biodiversity efforts remain crucial.
• The investing for nature approach aims to enhance the use of natural resources while preventing biodiversity decline. However, challenges remain, including limited data and the absence of standardized biodiversity metrics.
• The investing in nature approach seeks to reverse biodiversity loss, mainly in the private market space. These solutions are currently more advanced in the market but faces risks such as illiquidity, typical of private market investments.