Sustainable Portfolios: Finding Opportunities amid Policy Shifts

Since the 2024 election, sustainable portfolios have faced a tough road as they grapple with rhetorical and legal challenges from policymakers. How much should investors read into these post-election market moves?

With the new administration set to take office, markets are already reflecting expectations for upcoming policy changes. But it’s important to take a step back. We still don’t know how quickly, or to what extent, issues discussed on the campaign trail will translate into action.

Taking a longer view can help investors capitalize on election-related volatility—particularly in areas where the markets may be overly pessimistic about potential outcomes. What’s more, focusing too much on the potential downside might obscure the evolving opportunities for thematic portfolios focused on sustainable development.

In with the New?

For sustainable portfolios, the next administration is likely to bring both new headwinds and additional tailwinds. Meanwhile, secular themes are likely to persist.

For instance, several themes are likely to benefit from additional policy support:

• Infrastructure Development: Both major political parties are committed to investing in critical physical infrastructure. And an administration focused on boosting domestic economic activity will naturally support accelerated infrastructure investment. The trend of de-globalization, or multi-shoring, is also driving manufacturing and related infrastructure investments. Companies specializing in design, engineering, and construction management services in areas like transportation, power, and water stand to benefit. Positive momentum in this theme has been aided by subsidies, which introduces some potential risk if those subsidies are altered or removed. Yet the primary subsidy program impacting this theme—the Infrastructure Investment and Jobs Act (IIJA)—is generally seen as less vulnerable than the Inflation Reduction Act (IRA), which specifically supports green capital expenditures and electric vehicles. Another key consideration? The workforce needed to staff new infrastructure projects, with manufacturing employers highlighting a gap in qualified applicants for their open roles.
• Resource Efficiency: The Trump administration is expected to continue, and possibly accelerate, efforts to bring manufacturing capacity back to the US. This will likely put pressure on already scarce resources. Companies that offer solutions to reduce energy consumption, improve water quality, or enhance efficiency in waste management and recycling may be well positioned to gain from the new administration’s pro-growth agenda.

At the same time, other areas could face heightened challenges:

• Energy Transformation: Companies driving the ongoing shift to lower carbon energy technologies face the primary risk of subsidy reductions or removals—particularly those from the IRA. However, most of these subsidy dollars are currently fueling job creation in politically diverse areas. State and local politicians are likely to push back against policy actions that could harm investment and employment in their districts. Even politicians who voted against the IRA have touted the jobs it created in their regions. We believe opportunities could arise in equities that are currently undervalued due to overly pessimistic expectations for energy transformation technologies.
• Future Transportation: Electric vehicles face a clear risk of subsidy reductions or eliminations, adding to an already weak auto industry backdrop. But lower expectations for production next year—combined with low valuations—could lend support to related stocks, in our view.

Steady as She Goes

More often, sustainable themes are expected to maintain their positive long-term outlooks post-election, though some may experience a mix of potential positive and negative effects, making them harder to categorize definitively. Healthcare stands out as one theme with heightened uncertainty. Some areas like medical devices are likely to be less impacted than exposures to vaccines and pharmaceuticals. Computing and connectivity will also encounter crosswinds. Leaders in this space benefit from positive trends in the growth of artificial intelligence. But tariffs could pose a medium-term headwind constraining strong secular growth. Other areas, like waste management and recycling, are likely to remain largely unaffected.

What Now?

Every change in administration brings policies that create a new blend of pros and cons for individual equities. This time is no exception, even for sustainability-focused portfolios. Active managers can help decipher these policy shifts, identifying the opportunities they unleash and the challenges that may loom on the horizon—while steering clear of overreactions to initial market responses.