Donald Trump, green de-growther?
The president’s draconian tariff regime has crashed global financial markets and dramatically increased the chances of a recession (unless, as BlackRock’s Larry Fink says, we’re already in one).
But if the dark clouds have a silver lining, it may be that the sudden global contraction could reduce greenhouse gas emissions, as did the Great Financial Crisis of 2008 and the Covid-19 shutdown of 2020.
Could Trump, who famously called climate change a hoax, have a secret plan to cut carbon and steer the planet away from the 3 degrees Celsius trajectory we’re currently on?
That may sound fantastical, but perhaps no more so than the administration’s stated policy rationales for the steep tariffs, which are drawing widespread condemnation from even some Trump allies. The baseline and reciprocal tariffs, reaching as high as 50% for some countries, won’t magically establish domestic supply chains and create jobs overnight. An economic slowdown typically might bring interest rates down, but not if it also comes with steep inflation.
Major banks are preparing for worst-case climate scenarios, along with worse than worst-case trade disruptions. “We now expect a 3°C world,” Morgan Stanley analysts warned last month.
If Trump stands firm on tariffs, “It could send us into a period, at least temporarily, of degrowth,” said Garvin Jabusch, chief investment officer of Green Alpha Investments, which backs companies addressing risks of climate change, resource degradation and widening inequality. That would lower emissions, at least for a while, he said.
Recessions and pandemics — not global climate talks or corporate pledges — have been the only forces that have succeeded in lowering emissions, by curtailing economic activity. During the pandemic lockdowns, emissions dropped as much as 27% in some countries, as air travel, work commutes and manufacturing slowed to a trickle.
But emissions have historically bounced back when the economy recovers. A more lasting and effective way to mitigate systemic risks, Jarbusch said, is “a thriving economy that can continue to grow and thrive without crashing through the planetary boundaries.”
Tariffied investors
No one wants a recession, especially a self-inflicted one. But the extreme uncertainty is already stalling renewable energy and other projects, freezing investments and chilling the long-awaited thawing of the IPO market. Publicly traded private equity firms such as KKR, Apollo and TPG have lost as much as a third of their value since the start of the year.
Large institutional investors are looking to shed their stakes in illiquid private equity funds, the Financial Times reported. Many are looking to secondary markets, where such stakes are trading at steep discounts.
Tariffs and other actions that constrain cross-border flows “have the potential to increase costs, decrease margins, reduce the competitiveness of products and services offered by portfolio companies and adversely affect the revenues and profitability of portfolio companies,” warned KKR in a December SEC filing. A trade war also “could chill or limit business opportunities,” it said.
Affordable and even market-rate housing developers, likewise, are bracing for the tariffs and economic fallout. Costs for construction materials are expected to rise by 6-14%, said Susan Weingartner of sustainable real estate investment firm Cambia Capital. Some of Cambia’s developers anticipated the tariffs and have secured construction materials in advance.
“To get these projects to pencil to the return profile that we need to deliver to our investors, it’s going to be extremely difficult,” she said. “That’s where the science and the art of underwriting come in.”
The tariffs landed particularly hard on clean tech companies and investors. Solar panels imports from Southeast Asia, geothermal drilling gear from the EU and Japan, uranium from Canada, and electrical grid transformers from Mexico and Canada are all in the crosshairs. “The full tariff list reads like a climate tech supply chain map,” wrote CTCV, which put together a handy chart detailing the impact on clean energy sectors.
“It just feels like the only goal was uncertainty,” said Jason Scott of Spring Lane Capital, which provides project equity for infrastructure projects in food, water, energy, transportation, and waste markets. Like many clean tech participants, Spring Lane kept an open mind when the new administration began, and hoped for progress on permitting reform and grid modernizations.
“But tariffs inconsistently done and poorly communicated with an uncertain outcome are really destabilizing for investment.”
The irony, of course is that Trump’s purported goals – the reshoring of critical supply chains, abundant energy, high-quality jobs, and lower energy bills — were all being met with the accelerating deployment of distributed energy, the rapid adoption of electric vehicles and other elements of the low-carbon transition that was helped along by historic federal investment under the Biden administration.
“It’s almost like we’re running the playbook designed to hand China global leadership,” said Green Alpha’s Jabusch. “We’re making it too hard to trade with us. We’re taking labor out so we’re not as productive. We are throttling science and innovation and letting it go offshore. Every one of those brains that leaves here isn’t just disappearing. They’re going to another economy.”
Uncorrelated assets
The market carnage may serve to highlight the resilience of impact investments, many of which are less correlated with swings in public equity markets.
“When it becomes obvious in these moments that legacy strategies and approaches are risky and volatile, the opportunity cost to invest in impact assets uncorrelated to public equities becomes lower,” says longtime impact investor Antony Bugg-Levine of Bugg-Levine, Inc. He said an African agricultural fund that returns, say, 10%, or even a deposit in a US community bank that pays 4% annual interest “suddenly looks better in comparison to the cratering equities market.”
To be sure, the impulse to hunker down and ride out the storm may win out. That was the case after the 2008 financial crisis, even when microfinance investments in emerging markets fared better than stock markets in developed economies.
“With the benefit of hindsight we see the seeds in those years of a new generation of investors, in family offices and foundations especially, who came out of that experience more ambitious about their impact investing and less inclined to accept that the old ways of doing things were unassailable,” Bugg-Levine said.
Investors are laser focused for now on their existing investments. “We’ve doubled down on a focus on our portfolio companies, to make sure they have the capital to get through what could be a rocky six to 12 to 18 months,” says Spring Lane’s Scott.
Tariffs and economic turmoil may slow clean tech investment, but they won’t change the fundamental economics of falling costs curves associated with clean energy, he said. Scott expects that, once the tariffs filter through the market and the US Congress passes a tax bill, investment activity will pick up, especially for steady-yielding projects that don’t rely on government incentives.
“We hear from European investors, or we hear from big pension funds, foundations, endowments, insurance companies, they’re taking their foot off the gas, but they’re not going anywhere,” he says. “Most of these investors we talk to are pretty long term.”
“There is a lot of dry powder and there are a lot of great investment opportunities,” he adds. “And I do think there are enough mission-driven investors, especially in energy transition, but also in these other impact areas, to keep the ball rolling.”
