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The impact of tariffs on sustainability topics, in particular climate change (in real economy terms) as well as climate-related investments will be negative if tariffs remain at similar levels. Interestingly, although markets had one of the worst days since the COVID-19 pandemic, indices tracking stocks with exposure to environmental themes like transition to a low-carbon economy, renewables, and water, were positive on the day after the announcement. In our view, the one-day reaction largely reflects investors taking refuge in defensive sectors like US utilities—which make up significant portions of these indices. Indeed, on Friday the sell-off expanded, bringing with it all sectors as the S&P 500 lost another 6%.

Beyond the factor-related investment drivers, the current tariffs create further barriers for global progress toward climate objectives. US tariffs to China stand now at 54%, and China’s tariffs on the US stand at 34%, in addition to any prior barriers. In particular, China imposed restrictions on any US imports of some critical rare earths and materials which are used across renewable energy technologies, from solar to nuclear.

China and the US account for a significant portion of global emissions. Thus, this further decoupling of the two economies cements challenges for US companies to import components key to decarbonization-related technologies. President Trump’s tariffs on China are in addition to the tariffs imposed by President Biden, including 100% tariffs on Chinese-made EVs, 50% on solar cells, and 25% on batteries and a range of critical minerals key to solar and wind energy growth. Therefore, as it pertains to climate-related technologies, the tariffs on China were likely only incrementally negative.

What is newly challenging are the significant tariffs on Vietnam, Thailand, Cambodia, and Malaysia which together constitute over 80% of the US's solar panel cell imports, according to Bloomberg. This remains fluid, however, as Vietnam is reportedly lowering its own tariffs, which might create an opening for a trade deal.

The impact of these tariffs may be somewhat offset by US domestic capacity for solar panel production. It has expanded to over 50MW since the Inflation Reduction Act, which would be enough to meet local needs based on research from SEIA, a US solar industry association. We note domestic companies with exposure to solar companies such as FirstSolar and NextEra, saw their stock price rise 4.9% and 2.4%, respectively, the day following the tariff announcements. Global (and China-based) solar companies such as Sungrow, JinkoSolar, and Longi saw their stock prices fall 7.3%, 5.6% and 1.3%, respectively, over the same time period.

Looking across other low-carbon technologies, in 2023, the US imported USD 1.7 billion worth of wind turbine components from Europe, Mexico, Vietnam, and India. Finally, 25% tariffs on automobile imports may affect the growth of EVs and hybrids offered by US automakers. Even Tesla, which produces all its cars for North America in California and Texas and tops the Cars.com American Made Index, is expected to experience some impact from tariffs given the company sources many of its raw materials and battery components from abroad. Ultimately, tariffs are likely to push clean tech costs higher at a time when clean tech already costs significantly more in the US compared to other countries; for example, solar costs under USD 200 per kW in China but nearly USD 450 in the US.

In terms of emissions capacity, the sell-off in energy stocks on Friday suggests market fears of an economic downturn. Lower economic activity does result in lower carbon emissions; however, this is not a durable approach as we have learned the last five years since the COVID-19 pandemic.

Investor takeaways:

• In the immediate aftermath of the US tariff announcement, environmental-related indices performed better than the broad market. In our view, this is because of the defensive nature of some investments, rather than a more positive picture for climate-related technologies.
• Further decoupling from economies which supply critical components for these transition-related technologies could pose a longer-term challenge. Trade-related uncertainty is high, but rates may decrease over time.
• Despite slower relative growth compared to other regions, renewable energy generation capacity in the United States has continued to increase, and over the longer term it is supported by increasing electricity demand.
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Investor takeaways:

• Increased electrification and digitalization will require significant investment in grid infrastructure, storage, and flexible energy solutions and are expected to drive additional demand for renewable energy, nuclear, and natural gas.
• Regulatory simplifications in the EU aim to unlock additional investment capacity, but the US-imposed tariffs present potential headwinds across the board.
• Investors should focus on clean energy transitions, infrastructure upgrades, and technologies enabling flexibility and efficiency.

Investor takeaways:

• Lithium is essential for a low-carbon economy, but sourcing it challenges sustainability due to high water usage and lack of transparency on carbon emissions.
• One approach to gaining exposure is through equity or fixed income securities of lithium-mining companies that prioritize factors such as water usage and carbon emissions.
• Investing in lithium presents challenges due to low liquidity in the futures market. Other opportunities include equities of ESG leaders with exposure to transition commodities.