Written by Rahul Bhushan, co-founder of Rize ETF
The green transition is now a well-established investment theme.
Now, our future on this planet depends on our ability to transition to climate neutrality. As long as we are in the phase of transition, the growth prospects for supportive stocks should in theory remain strong.
But while there’s no “bad” time for investors to gain exposure, “time spent in the market” should remain a key consideration.
The need to address near-term climate change is also becoming increasingly urgent. Especially with awareness growing and deadlines looming for green commitments drawing ever closer.
We’re now seeing a greater number of geopolitically inspired, legislative commitments and regulatory unwinds to help facilitate an easier transition. And while this is obviously supportive for the environment, it’s also often supportive for green companies themselves.
Such companies can quickly find themselves enjoying sustained growth as their route to market is simplified almost overnight.
Right now, two initiatives with the potential to supercharge the green transition are beginning to manifest in the market.
Tidal wave of support
The first, potentially game-changing, directive is the US Inflation Reduction Act, or the “IRA”, signed into law by President Biden in August last year. Alongside investments in many other sectors, the IRA directs some US$400bn of federal funding towards sectors that can help to lower US carbon emissions significantly by 2030.
The second directive is the US$272bn Green Deal Industrial Plan (GDIP), unveiled by the EU last month as a direct response to the IRA. It supports the green energy transition by providing a more supportive environment for scaling up Europe’s manufacturing capacity for net zero technologies and products.
Where these two directives differ from some of their predecessors is their unprecedented breadth.
For example, the IRA earmarks US$369bn of clean energy tax credits, grants and loan guarantees related to areas like wind, solar, storage and carbon capture, utilisation and sequestration. But it also includes:
– a US$9bn allocation to consumer home energy rebate programmes;
– a US$4,000 consumer tax credits for electric vehicle purchases; and,
– a US$5.8 billion allocation to projects aimed at reducing GHG emission;
Similarly, GDIP introduces a simplified regulatory framework that seeks to increase the production capacity of products like batteries, windmills, heat pumps and carbon capture/storage. But it also introduces:
– measures to secure supply of raw materials relating to the energy transition
– accelerated financing for the entire net zero industry
– net zero industry academies to upskill workers so they are ready for a net world
– an enhanced network of transition-friendly trade agreements
The most direct beneficiaries in both cases will be companies in areas like renewable energy generation, renewable energy equipment, hydrogen & alternative fuels, energy efficiency and electric vehicles/green transport.
But the sheer scale of these catalytic programmes means that enduring benefits will also be enjoyed by green stocks with a less direct focus on energy, industrials and utilities. This includes those supporting climate resilience, improving access to clean water, controlling pollution and protecting global biodiversity.
Diversified, long-term exposure
Given the IRA and the GDIP’s scale both in terms of the areas they impact and how potentially large that impact may be, the time to invest in the Green Transition is now, before the tidal wave of new support reaches terminal velocity. Exposure should also be diversified to leverage the variety of opportunities across environmental subsectors and reducing idiosyncratic risk in any one market.
The green transition isn’t going anywhere yet and investors who stand to benefit will be those who recognise the importance of moving quick, staying for long and diversifying.