There is a word that investors like to use in times like these: dislocation. When markets become dislocated due to stressful conditions (e.g. tariffs), it means that asset prices are diverging from typical rational calculations of value. Uncertainty and volatility are so high that risk and opportunity can be found in equal measure, which may benefit active investors seeking to generate alpha.

Not only are we facing wild market swings, but from a U.S. perspective, sustainability issues have become embroiled in a policy and legislative quagmire. Pressure from the Trump administration is leading companies to reduce disclosure about decarbonization strategies to address material climate risks. The administration is also seeking to prevent the explicit use of non-financial factors such as environmental and social considerations in making investment decisions. Thankfully, market dislocations tend to be short-lived, but some of the policy and legislative impacts on the sustainability landscape are likely to run long and deep.

After legal rulings in late May that struck down and subsequently reinstated many of the Trump administration’s tariffs, it became evident that near-term trade turmoil will drag on even longer. But no matter the result of the formal implementation (or lack thereof) of any tariffs, one thing is clear: energy security and independence from U.S. trade reliance has leapt up to be a top concern around the world – including, and perhaps especially, for Canada. Countries and regions besides ours that have spoken up about the need to diversify their energy sources include Japan, South Korea, China, Europe and the U.S.

As always, we expect the investment case for some areas of the economy to grow stronger, while prospects for other areas are likely to weaken. On the winning side, due to Canada’s need to expand trade relations with non-U.S. partners, we count domestic infrastructure, transportation and logistics, all of which must be aggressively built out to support self-sufficiency and take advantage of east-west trade opportunities. We also see related benefits to the domestic labour force. Our positive outlook on nuclear power over the long term has not changed, and in fact has grown more positive with the rapid rise of power demand from the technology sector. We are bullish on critical minerals, especially copper; utilities, especially distribution and transmission; energy storage; natural gas; and pipelines, especially if they export liquid natural gas to countries seeking to reduce reliance on coal.

In response to U.S. trade challenges, Prime Minister Mark Carney has said his administration is “going to aggressively develop projects that are in the national interest in order to protect Canada’s energy security, diversify our trade, and enhance our long-term competitiveness – all while reducing emissions.” The government’s plan to accomplish this, while scant on detail at this point, is underpinned by a handful of key initiatives that include more support for critical minerals, fast-tracking and incentivising so-called Projects of National Interest, building out an east-west electricity grid (a “historic nation-building project”), and investing in the country’s conventional and clean energy potential to reduce reliance on the U.S. and build relationships with “reliable partners.” It should come as no surprise that the proposed legislation intended to kickstart all this activity, known as the One Canadian Economy Act (Bill C-5), is divisive. There is a long list of concerns and warnings from affected parties related to Indigenous rights, environmental impact, the entrenchment of the conventional energy industry, the potential for government overreach, and other challenges. It’s fair to say that everyone agrees the government must take swift action to encourage and support Canada’s economic independence. The task at hand – and it’s a big one – is for all players to do everything in their power to carry out this development in a responsible manner. And that includes investors.

One of our impact managers that is focused on the domestic fixed income landscape has almost a 70% allocation to Canadian bonds under the theme of climate change as of March 31. Within that theme, they are prioritizing clean transportation, energy efficiency, and renewable energy, with the top ten holdings largely issued by federal and provincial governments. The point being, there are profitable investment opportunities to be had that support the build-out of domestic clean energy, and if the government is able to follow through on its nascent strategy with responsible implementation, those opportunities are likely to grow.

It’s also clear the government intends to balance support for renewable energy and conventional fossil fuels, recognizing that if we expect this all to happen relatively quickly and with as little economic disruption as possible, conventional energy sources will continue to be relied upon and supported, though with more constraints on production and emissions. Maintaining balance here is crucial not just for a successful energy transition, but for a just energy transition—one that considers the economic and social needs of all rightsholders and stakeholders, including workers. The Canadian Association of Petroleum Producers states that the oil and natural gas industry directly employed about 150,000 people in 2023 and generated another 750,000 indirect and induced jobs. The organization also states nearly 7% of the industry’s workforce identify as Indigenous, versus 3.9% of the Canadian workforce average. In short, we see investment opportunities in renewable and conventional energy industries, and not necessarily at one another’s expense.

The International Energy Agency points to electrification of the power grid as a critical aspect of the transition to a low-carbon economy. In simple terms, electrification entails the replacement of technologies and processes that operate on fossil fuels with “electrically-powered equivalents.” Examples include a gasoline-powered car being replaced by a battery-powered version, or a gas boiler being replaced by a heat pump. One of our investment managers considers electrification to be the most promising opportunity in the energy sector, with impacts felt in many areas.

U.S. manufacturers that rely on materials and components from countries affected by import tariffs will be negatively impacted. By the same token, if retaliatory tariffs are in place, as they are in Canada as of this writing, this has a negative effect on domestic manufacturers that import materials and components from the U.S. Further complicating the situation is that electricity itself may be subject to tariffs, and certain parts of the U.S. are important importers of Canadian electricity.

Despite the set-back of trade turmoil in relation to electrification of the power grid, we believe there is enough momentum and long-term strategic thinking by industry and governments to support the investment case well into the future. Our managers with expertise in this area point out that valuations are low, and that private equity activity has been higher versus a year ago. They see opportunity for companies involved in grid stability and efficiency, as well as battery storage systems for enhanced reliability.

As an example of progress on this front, we can point to the Oneida Energy Storage facility in Ontario, which became operational in May. The majority owner, Northland Power, states it is “the largest grid-scale battery energy storage facility in Canada and within the top five clean energy storage projects in the world.” The facility was developed in partnership with the Six Nations of the Grand River Development Corporation and the Mississaugas of the Credit Business Corporation, among other corporate partners.

The prime minister has explicitly called out enhanced support for critical minerals as a feature of his energy plans for the country and a significant aspect of his rebuttal to U.S. tariffs. In an effort to reduce reliance on other countries and protect domestic jobs, he has proposed a new First and Last Mile Fund, intended to connect the origin of critical minerals, i.e., through mining, with their supply chains.

Critical minerals such as cobalt, lithium, copper, aluminum, titanium, and molybdenum are required for many products tied to advancements in technology and clean energy, including electronics, batteries, renewable energy generation and transmission, compound semiconductors, and other uses. Potash and phosphorous, important ingredients in fertilizers, are also on Canada’s list of critical minerals. The government has pledged to accelerate exploration and extraction from recycling, and to make additional investments in tax credits. The U.S. and Europe also have new policies in place, demonstrating global recognition of the need to secure access to these resources to improve energy security.

Another critical mineral the government has identified is uranium, where Canada is undisputably a world leader and has been for many decades. And now that nuclear power is gaining recognition for a range of benefits over fossil fuels as well as its renewable energy peers, the long-term opportunities in the industry are looking more tantalizing.

One fast-growing source of demand for nuclear energy comes from the technology sector, specifically large data centres that power cloud computing and artificial intelligence. Players in this burgeoning space include Meta, Amazon Web Services, Google, and Microsoft, all of which are striking deals with nuclear power providers. An analysis by the U.S. Energy and Information Administration points out that nuclear is ideal for this use case as data centres require an always-on, reliable power source that nuclear is uniquely suited for. Further, tech giants are striving to live up to commitments to eliminate their carbon footprint, and nuclear power produces no direct carbon emissions. The arrangements made by these companies involve re-starting or extending the life of existing reactors and investing in the construction of new small modular reactors, or SMRs.

As an example of Canada’s leadership potential in this area, Ontario Power Generation is building North America’s first SMR in Darlington, Ontario, an established location for existing nuclear power generation, with plans to build an additional three units at the site. The first reactor is expected to be connected to the grid by the end of 2030.

For NEI’s part, we continue to stress the importance of responsible mining as the world’s demand for these critical minerals ramps up. Responsible mining is a focus theme for our engagements this year, and our Head of Stewardship Jamie Bonham sits on the board of the Initiative for Responsible Mining Assurance. The need to speed up the project approval process to get shovels in the ground faster must be carefully balanced with the input of all stakeholders, the consultation with and inclusion of rightsholders, and careful management of environmental impact. It won’t be easy, but that’s the job.

Beyond trade upheaval and the fractious debate over the best way forward for Canada, there is also President Trump’s One Big Beautiful Bill Act to contend with, which passed the House of Representatives on May 22 and must now work its way through the Senate. That legislation retracts certain climate-forward initiatives put in place by the Biden administration in its Inflation Reduction Act. Of course, anything can happen, and that is being demonstrated to us daily both in terms of market swings and policy upheaval.

If we are to seize the opportunities we see in this dislocated market to improve outcomes for our investors, and do so in a manner that promotes long-term sustainability, we must be prepared to act on the information we have available. Despite environmental concerns arising out of U.S. policy and deep uncertainty over trade, evidence points to continued capital flows into clean energy projects. It’s good business, plain and simple—but we must pursue the opportunities responsibly.