EU Carbon Border Adjustment and Other ESG News

FactSet StreetAccount publishes regular company-level and summary-style ESG news. Below is our recap of key ESG developments and insights over the past week.

The Fed is widely expected to raise policy rates 25 basis points at the 3-May meeting and end their hiking campaign. The charts below show how notable thematic company share prices have performed around the ends of the prior two hiking cycles, caveating that many company-specific factors were also impacting share prices in these periods. As few renewables companies were in business in 2006, we have also included the Russel 2000 index as a placeholder for smaller companies. Figures 1 and 2 show that the Russell 2000 index (blue line) as well as SunPower (orange line) and Next Era (gray line) tended to sell-off or exhibit stable share prices into the final rate hike (black line), while they saw share price rallies after. Figure 3 shows the current set up as we approach what may be the final Fed hike of this cycle. It remains to be seen whether the upward bias to share prices will extend to this episode whenever it is that the Fed rate hiking cycle comes to an end.

Figure 1: Share price indices for Russell 2000 and select companies versus Fed Funds rate in 2006

Source: FactSet

Figure 2: Share price indices for Russell 2000 and select companies versus Fed Funds rate in 2018-19

Source: FactSet

Figure 3: Share price indices for Russell 2000 and select companies versus Fed Funds rate in 2023

Source: FactSet

Thematic performance

Thematic sectors lower on the week as small growth stocks suffered broadly. Solar, hydrogen, and cybersecurity among underperformers. PV manufacturer Enphase saw deep losses after weaker Q2 guidance despite top and bottom-line beats. Sunnova saw gains after Q1 revenue beat. Street research noted strong demand for solar in Europe though expressed caution over US names SunRun, SunPower, and First Solar.

EV makers are among the decliners as Tesla's price cuts continue to take a toll on the automaker as well as less established US names. The EV maker received several analyst downgrades this week and press noted the Model Y is now selling below the average cost of a new car in the US. Tesla's widely followed 2022 Impact Report was released, painting a positive picture for EV load and also noting only 12% battery degradation on its models after 200K miles. Fisker seeing big WTD gains after the Ocean SUV received certification in Europe. Chinese EV makers are faring better as domestic market share grows; BYD higher after overtaking Volkswagen to become the country's best-selling car brand in Q1.

Elsewhere, cybersecurity stocks underperforming as analysts suggest more rationalized company spending and difficulty accessing capital is likely to benefit firms with more holistic software solutions. US battery makers underperforming as APAC rivals continue their push to capitalize on IRA incentives. The price of lithium in China ticked up for the first time this year after five months of declines. Chile unveiled a lithium nationalization plan to protect the country's economy and environment. European wind names saw little reaction to bloc’s agreement to ramp up production of North Sea wind power and quadruple capacity by 2030.

Environment

EU agreed to set binding targets for sustainable aviation fuel; measure is expected to reduce aircraft carbon emission two-thirds by 2050. The bloc also adopted changes to its emission trading system, introducing a carbon boarder adjustment mechanism and accounting for maritime emissions. European lawmakers also back setting a 2030 methane reduction target before 2026, setting forth strict criteria for oil and gas companies to manage gas leaks; it would also apply to imports of oil and gas; a full vote on the measures is expected in the coming weeks.

The US EPA will soon propose limits on power plant GHG emissions after prior sweeping regulations were shot down by the Supreme Court; West Virginia likely to lead another lawsuit. Proposal said to require carbon capture at some but not all power plants. The Republican led House of Representatives passed a debt limit bill that would wind back some of the IRA climate spending though negotiations with Biden have not begun.  

Social & Governance

Microsoft’s acquisition of Activision was dealt a blow as UK regulators blocked the deal over concerns about competitiveness in the cloud gaming market. Microsoft criticized the decision, claiming the decision and regulatory scheme would discourage tech investment in the country. Other regulatory actions include British American Tobacco fined $635M by US authorities after a subsidiary tried to sell to N.Korea and Johnson & Johnson’s new consumer unit Kenvue facing talc injury lawsuits.

Shareholders continue to press banks on climate action. In opposition to board recommendation, 30% of Goldman Sachs shareholders backed a resolution this week for the firm to set out a climate risk transition plan, detailing how its financing activities align with greenhouse gas emissions reductions targets. A similar resolution saw nearly one-third support at Bank of America; however a call for halting financing on new fossil fuel exploration and development only secured 7% support. At Wells Fargo, shareholders voted against a Sierra Club proposal seeing a timeline for phase out of lending and underwriting new fossil fuel projects.

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