The new US law driving sustainable investment opportunities

The US Inflation Reduction Act is the most ambitious environmental energy policy in a decade, says Regnan’s MAXIME LE FLOCH. Here’s how it should benefit investors

• US Inflation Reduction Act changes incentives
• Investment opportunities across the economy
• Find out Regnan Global Equity Impact Solutions Fund

THE title of President Biden’s Inflation Reduction Act is all about prices.

But the long-term impact is about the environment — and boosting manufacturing and infrastructure in the world’s biggest economy.

“That opens up opportunities for investors,” says Maxime Le Floch, a senior analyst with Regnan Global Equity Impact Solutions fund.

“The implications of the IRA are unfolding as we speak. It’s clearly going to have a transformational boost for some industries like wind and solar.

“The onshore wind market in the US had a flat trajectory, but now it’s more attractive.

“For other industries which were less competitive, the Act transforms their economics. That’s the case in technologies like hydrogen and carbon capture.

“It’s the most ambitious environmental energy policy we’ve seen in the last decade and it’s transformational.”

How it works

The policy, which focuses on tax credits, is well designed and easy to implement, says Le Floch.

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“It’s a supply push policy. It makes greener alternatives cheaper, rather than other approaches which focus on making high-carbon products more expensive.

“The one thing we know is we need a lot of solar, wind, batteries, electric vehicles, heat pumps, carbon capture and so on.

“This policy is focused on massively ramping up investment in manufacturing in those areas.”

One significant difference between developing new sources of renewal energy and carbon-intensive energy is the capital expenditure time frame.

Generally, renewable energy sources require very large upfront capital expenditure, but low ongoing spending.

Capital expenditure on fossil fuel developments tend to be large upfront, and then constant over the life of a project.

The Inflation Reduction Act – which is in place until the US reduces emissions by 20 per cent or at least 2032 – gives renewable energy projects an immediate tax credit, offsetting that large upfront cost.

While it is estimated to cost $US400 billion, investment bank Credit Suisse forecasts the impact to be $US1.7 trillion over the next decade.

Value chains are changing

“The Act is already changing value chains globally,” says Le Floch.

“Companies are adapting their investment plans,” he says, citing Tesla’s recent decision to cancel the expansion of a German battery plant, and replace it with one in the US.

Alongside the Act is the Covid-inspired trend to re-shore (or “near-shore”) supply facilities, which is leading to greater industrial activity.

“That trend is accelerating … across industries from renewable energy through to semi-conductors,” Le Floch says.

“The bottom line is that many supply chain companies that feed into renewables, such as solar panel manufacturing, will relocate to the US.

“When you get value chains moving like that, you get a multiplier effect across the economy,” he says.

Regnan has invested in Canadian industrial automation company ATS, for example, which has picked up business from companies wanting to improve manufacturing lines in recent months.

“We are going to keep talking about this for many years – the reconfiguring of value chains and the ramifications across many different areas is enormous.”

About Maxime Le Floch

Maxime is an analyst with Regnan’s impact investment team. He focuses on Regnan Global Equity Impact Solutions Fund. Maxime has more than 10 years of experience in sustainable investment. Before joining Regnan he was an investment analyst with Hermes where he helped launch and manage the Hermes Impact Opportunities Equity Fund.