Aug 15, 2022
Despite its title, among the most significant aspects of the passage of the Inflation Reduction Act of 2022 is that it represents an unprecedented commitment to tackling climate change from the world’s largest economy.
With provisions for US$369 billion of funding for climate initiatives it provides four times more money for climate initiatives than former US President Barack Obama’s 2009 Recovery Act. As costs have decreased there will be an even bigger multiple in terms of investment impact.
The Inflation Reduction Act includes all the key climate initiatives from the ‘Build Back Better’ bill that failed to gain passage late last year but contains more offsetting revenue generating mechanisms, measures to support the energy industry, as well as significant support for nuclear power, and a strong focus on domestic production and jobs. It is an inclusive program for American energy policy and sets the country on track, according to the Senate projections, to reduce emissions by 40% by 2030, while building an energy system that should eventually provide lower cost energy over the long run. It is both material and comprehensive. Importantly, it will also allow the US to play a much stronger role at the upcoming COP27 session because the country can no longer be accused of asking others to take action they are not taking themselves.
Figure 1: Estimated 2022–2031 energy transition spending in inflation Reduction Act Bipartisan Infrastructure Law
Source: EIA, EPA, Joint Committee on Taxation, BloombergNEF. Note, chart only captures tax credits and incentives, not grant programmes or loan. Bn is billion. CCUS is carbon capture, utilisation and storage. Chart has been redrawn by Ninety One.
As is always the case with policy, the devil is in the detail. In this case the details are well designed and will support decarbonisation for years to come.
Some of the most meaningful measures for the companies we invest in include:
Companies we hold in Global Environment that are beneficiaries of this legislation include Nextera Energy, Waste Management, Aptiv, Iberdrola, Trane Technologies, and Vestas, but there is hardly a company whose business is not in some way positively affected. Importantly these are all long term 10-year incentive programmes1.
This Act isn’t a short-term sugar boost for the sector but forms the underpin for a decade of sustainable growth.
1This is not a buy, sell or hold recommendation for any particular security. Individual security performance does not represent the Strategy performance. There is no guarantee that the Strategy is currently investing and/or will invest in the securities in the future. The portfolio may change significantly over a short period of time.
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Commodity-related investment: Commodity prices can be extremely volatile and losses may be made. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Sustainable Strategies: Sustainable, impact or other sustainability-focused portfolios consider specific factors related to their strategies in assessing and selecting investments. As a result, they will exclude certain industries and companies that do not meet their criteria. This may result in their portfolios being substantially different from broader benchmarks or investment universes, which could in turn result in relative investment performance deviating significantly from the performance of the broader market.