On the heels of former President Donald Trump’s reelection, some allocators expect a shift toward more government support for traditional forms of energy. But his policy proposals will likely have minimal implications for pension plans with billions of dollars already invested into low-carbon energy infrastructure.
“We might see less movement toward Net Zero and more towards more traditional energy going forward,” CalSTRS CIO Scott Chan said in a Wednesday investment committee meeting.
Over the past decade, asset allocators have poured the vast majority of their capital dedicated to infrastructure into funds committed to mitigating the effects of climate change through investments in battery storage, electric vehicle charging and low- and no-carbon emitting projects.
Limited partners—pension funds, university endowments and foundations—have committed $892 billion to funds with energy transition investments since 2014, accounting for nearly 80% of the total capital raised by all types of infrastructure funds, according to a PitchBook analyst note.
CalSTRs is one of the largest investors in funds with energy transition investments. Since 2014, it has committed $846 million across 27 energy transition infrastructure funds, the highest allocation to these products of all the US public pension plans, according to the note.
Clean energy boost
In recent years, technological improvements, lower operating costs and increased government support have improved energy transition funds’ return projections. In 2022, President Biden signed the Inflation Reduction Act into law, which codified billions of dollars of grants, loans, rebates, tax provisions and other incentives for clean energy and climate action.
Before Tuesday’s election, Trump was critical of the IRA and promised to axe Biden’s clean energy rules once in office and accelerate approvals of industrial and fossil fuel projects. Trump’s campaign also pledged to rescind any unspent funds from the IRA.
Still, policy researchers largely expect the Trump administration’s promises will slow the energy transition market in some ways but not destroy it. While Trump may modify parts of the IRA, like pulling back on loans, the legislation now has too much support to be repealed, according to Gautam Jain, a senior research scholar at the Center on Global Energy Policy at Columbia University.
In August, 18 House Republicans signed a letter asking Speaker Mike Johnson to keep energy tax credits in place, despite Republican-led efforts to repeal the IRA.
“Completely repealing the IRA, it’s not going to happen,” Jain said.
Drew Schardt, vice chairman and co-head of direct equity at Hamilton Lane, said Trump would be more likely to reduce red tape around oil and gas production than impede progress around renewables.
At the same time, government support for the energy transition is only one piece of the puzzle. Demand for clean energy remains, but higher interest rates have been a headwind for capital-intensive renewable energy projects.
Also, if implemented, Trump’s proposed tariffs on imports could have an inflationary effect and raise the costs of infrastructure development.
Meanwhile, oil and gas companies are preparing themselves for an inevitable peak in demand in the coming years, Jain added.
Until clear policy changes are made, CalSTR’s Chan said the fund plans to continue to pursue its long-term investment strategy.
“The risks and challenges we’re seeing are impacted by a newly appointed president and who takes the House, but those issues remain the same,” Chan said while addressing the committee. “So if I looked at our portfolio around the energy transition—I’ve discussed this with staff—as we were investing, we wanted to make sure that it wasn’t dependent on any policy moves.”
Stakeholder pressure
LPs have moved away from oil and gas investments in recent years.
Beneficiaries of pensions and endowments, and environmental advocacy groups, have for years, advocated for the investment staff to divest from funds touching fossil fuels. CalSTRS rejected calls for it to shed fossil fuel companies from its portfolio on the basis that their sale would result in losses for its stakeholders, deferring to divestment as a last resort option. Instead, in 2021, the fund’s board signed a pledge that committed to a net-zero portfolio by 2050 or sooner.
Other prominent institutions face similar pressure from stakeholders and policymakers. In October, New York City Comptroller Brad Lander announced support for a policy that would prohibit three of New York City’s pension plans from making any future investments in midstream and downstream fossil fuel infrastructure in their private equity and infrastructure portfolios. Together, the three pension funds account for approximately $207 billion in assets under management.
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