By Andrew Wetzel, CFA, Principal, Managing Director of Sustainable Investments
Looking back on 2025, many of the risks we highlighted a year ago have become reality. The policy shift in Washington was dramatic and fast-paced. The Trump administration rolled back environmental regulations, incentive programs supporting climate transition, and corporate sustainability programs. In addition, tariff negotiations were used to persuade allies to soften or delay sustainability frameworks and legislation in Europe and other places. These actions have had a dramatic effect on sustainability initiatives broadly and as envisioned, “greenhushing” – communicating less about active sustainability efforts – has become pervasive. This is the new operating environment.
Despite anti-green environmental policy in Washington, the worst-case scenario for legislative reform did not come to pass. Instead, as we discussed in July, Inflation Reduction Act (IRA) adjustments in the OBBBA were broadly manageable for the energy transition industry. Capital formation in Republican-led states and a clear need for new power generation were the primary drivers of a somewhat less draconian approach. Residential and EV credits were cut, utility-scale renewable power development captured a 12-month safe harbor period that enables 4 years of runway, and a handful of areas maintained or captured more support, including energy storage, critical minerals, geothermal, nuclear, fuel cells, and some manufacturing.
The combination of policy clarity and revised guidance on safe harbor rules created a more stable business environment. For investors, a reduction in uncertainty along with valuations at depressed levels sparked a turn in energy transition equity performance. The S&P Clean Energy Transition Index bottomed near 10x forward earnings in early 2025 and after passage of the OBBBA, the index returned 20% through yearend, double the MSCI World Index return.
Now, in early 2026, the broad sustainability outlook is for more of the same. We expect continued pushback out of Washington, corporate greenhushing, and a generally positive environment for energy transition businesses outside of EVs. With some level of clarity around the playing field, our primary goal as investors is the assessment of fundamental value creation. Businesses and technologies that can scale with clear demand drivers, opportunities to reduce costs, and tailwinds from tax policy should yield an attractive set of opportunities in the year ahead.
As our prior work on power demand and hyperscaler climate commitments has highlighted, there is a clear upward inflection in demand for clean baseload electricity. Higher power prices should support continued, though likely somewhat diminished, growth in mature renewables. A rising power price environment with OBBBA tailwinds should create a more dynamic and higher growth set of opportunities in areas outside of mature renewables. As the chart below shows, financing for energy transition businesses is on track to increase by about 50% in 2025 based on Q4 estimates, clearly supportive of growth.
The investment themes we will explore in more detail in letters through 2026 include:
A Nuclear Renaissance – Capital is being deployed across a diverse set of assets and technologies in the US and globally. Existing nuclear generation asset owners are investing in capacity expansion and restarts of mothballed facilities. The US government is partnering with private businesses to jumpstart the buildout of new large-scale reactors. Companies pursuing new advanced reactor technologies and SMRs (small modular reactors) have raised significant private capital and are increasingly supported by government efforts to fast-track testing and streamline permitting.
Geothermal Advancements – As a clean baseload source of energy, geothermal maintained tax credits in the OBBBA for projects starting construction by 2033. New geothermal technologies, generally referred to as enhanced geothermal systems or EGS, enable a potentially significant expansion in site availability. Traditional hydrothermal development requires very specific geohydrological conditions, while EGS creates necessary conditions through drilling techniques. The National Renewable Energy Laboratory estimates as much as 7.4 terawatts of resources, more than 5x installed US power capacity, could be made available through EGS.
Power Grid Modernization – The existing power grid is straining as demand increases and supply solutions are progressively diverse, intermittent, distributed, and bidirectional. Delays are mounting, interconnection times for new supply and new demand are lengthening, and traditional expansion and upgrade projects take many years. Solutions include behind-the-meter generation and storage, software optimization of distributed resources, demand flexibility, advanced metering and other technologies. BNEF estimates that US grid investment will rise 19% from 2024 through 2027 as demand for electricity surges.
In all of these research focus areas, there are direct beneficiaries and then many secondary beneficiaries in underlying supply chains. It is in these “picks and shovels” areas that the most attractive investments are often found. As growth accelerates, supply chains often become bottlenecks, creating pricing power on constrained supply. Despite political headwinds, opportunities remain for sustainable investors.