ESG manager with US$46bil eyes new options on US climate bill

Attractive numbers: A technician in a hybrid power park with solar panels and wind turbines in Sabugal, Portugal. Impax estimates that clean electricity is to get a US$120bil (RM509bil) boost from the Inflation Reduction Act in the form of tax incentives. — Reuters

LONDON: Impax Asset Management Group Plc, one of the world’s largest environmental, social and governance (ESG) fund managers, is exploring stocks and sectors it once avoided as the US Inflation Reduction Act (IRA) redraws the green investing map.

The IRA, which promised to inject at least US$369bil (RM1.6 trillion) into clean energy, is a game changer for the future of ESG investing, said David Winborne, a senior portfolio manager at Impax in London.

Until now, the returns on renewable assets had tended to look unappealing because of the fragmented nature of the industry, but “we have a sense that’s starting to turn because it’s now a more consolidated industry with potentially more pricing discipline emerging,” he said in an interview.

Half a year after it was signed into law by President Joe Biden, markets are still analysing the IRA’s impact on green assets and the supply chains that feed them. Its political fallout is also still playing out.

The European Union (EU), which has long accused the United States of lagging behind in green initiatives, is attempting to devise a coordinated response to what it calls protectionism.

Speaking to workers in Virginia, Biden suggested last Thursday that the IRA’s green incentives will help other countries and predicted that democratic nations will ultimately “benefit from what we’re doing.”

But he also said he intends to make sure that supply chains “end with us”.

Green investors, meanwhile, are looking for the best way to get maximum exposure to companies at the receiving end of subsidies.

Impax, which oversees about US$46bil (RM195.2bil) in client funds, is now reviewing its energy portfolio as sectors previously hobbled by uncertainty become attractive. The firm estimates that clean electricity alone is set to get a US$120bil (RM509bil) IRA boost in the form of tax incentives, which Winborne said makes wind power more appealing.

“It provides an additional tailwind and accelerates a lot of trends in clean energy,” he said, declining to identify individual stocks.

Another big IRA beneficiary is the electric vehicle (EV) industry, which Impax estimates will make up 15% of global vehicle production by the end of the year, helped by the law. But Impax is more interested in supply chains than the finished product.

“We don’t know which car company will dominate,” Winborne said. “But demand for EV components will go up regardless.”

Impax also has started to take an interest in companies that work with clean hydrogen or on technologies that cut emissions for heavy-duty trucks and shipping, which are more appealing after the IRA, Winborne said.

“Such areas could be quite interesting,” he said. “But some of the earlier-stage stuff like sustainable aviation fuel isn’t an area of investment for us now.”

Though the law was signed back in August, investors are still calculating its scope and reach.

Goldman Sachs Group Inc analysts said late last year that it will take a while for the market to grasp the full impact of the IRA, especially its potential to change investment dynamics up and down the supply chain.

The law offers about US$260bil (RM1.1 trillion) in tax credits, as well as grants, loans and supporting policies for mature sectors such as solar, wind and nuclear power.

New technologies such as hydrogen and carbon capture also stand to get a boost.

For now, investors may be assuming that the IRA favours US companies.

That calculus might shift as the European Commission explores the potential relaxation of limits on national subsidies to help the bloc compete with the IRA.

Additionally, the US and EU are in talks to look at giving European companies access to parts of the IRA.

The coming months will show whether Europe’s green agenda can co-exist with the IRA or “be a direct rival to it,” analysts at Barclays Plc said in a client note.

The response from India and China will also be key, especially when it comes to incentives around solar, they said.

“At first glance, the IRA is clearly favourable to American companies or international companies running business locally in the US,” said Hua Cheng, a money manager at Mirova SA, the US$29bil (RM123bil) sustainable investing unit of Natixis SA.

“However, it may also depend on the reactions of other countries over the long term, and the consequences may become less clear partially due to fierce competition.”

Fund managers have different views on which part of the green economy will benefit most.

Clean energy technologies also tend to be long-term assets, making it hard to assess risk-return dynamics.

The sector is heavily dependent on commodities, such as the lithium used in EV batteries, whose values can be volatile.

Winborne said an area often neglected by green investors is buildings and energy efficiency.

IRA offers US$9bil (RM38.2bil) in rebates for retrofitting homes with energy-efficient measures like heat pump installation and insulation, which adds to the appeal of US equipment rental companies that supply tools, scaffolding, lighting and generators for infrastructure projects, he said.

“With the IRA, companies are moving fast to respond,” Winborne said. “We think it’s an interesting secular growth opportunity.” — Bloomberg

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Impax , ESG , green , climate , bill , inflation , IRA , rebates , EV


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