The US’s vast climate change legislation programme is a year old. The team managing the BlackRock Sustainable American Income Trust says the Act is driving innovation in new transition technologies.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
The Inflation Reduction Act celebrates its one-year anniversary in early August. The Biden administration’s flagship climate legislation directed $369 billion in clean energy tax credits and funding for climate and energy programs,money that is already working through the system to deliver the government’s decarbonisation ambitions.
We expect the Act to drive further innovation in new transition technologies, such as carbon capture, utilisation and storage (CCUS), next-generation nuclear and clean hydrogen. We also anticipate the Act may help reduce the US’s reliance on China for minerals and metals needed for renewable energy.
The legislation’s effects are now coming into clearer focus and many of these predictions are becoming a reality. The recent IEA report on the state of the energy market in 2023 found that the Inflation Reduction Act has prompted a wave of investor interest in hydrogen and CCUS.2 There are now a growing number of large-scale, well-capitalised projects, which should move the technology on over the next few years.
A recent report from Rhodium Group3 found that new wind and solar facilities have been increasingly competitive with new natural gas generation facilities. It also showed that on current measures, the legislation will also influence the speed with which electric vehicles replace gas-powered cars, suggesting that by 2035, electric vehicles will comprise between one-third and two-thirds of all passenger car sales.
Managing climate risk
Given the Trust’s ambition to deliver a lower carbon emissions intensity relative to its reference index, these changes are important. Our aim is that the companies in which we invest are ahead of their peers on energy usage and emissions, and on the front foot in adopting emerging energy solutions to remain competitive. With ‘green’ energy costs falling, companies that rely on legacy energy solutions may become more vulnerable.
This has been an important part of our recent engagement programme. We have been engaging with a large car manufacturer for example, to help it communicate better on its strategic pivot to electric vehicles and how it is being factored into future compensation decisions. We have also sought to engage with an energy company to understand their views on climate risk management and how it relates to specific projects.
These changes still require significant investment on the part of the industrial sector, and broader adoption will depend on whether the industrial sector can see easy pathways to transition. With that in mind, we hold a number of companies that are helping businesses make these changes, modernise their technology and reimagine their processes.
Climate risks are investment risks
Companies cannot afford to ignore risks and climate risks in particular. In the long-term, they are likely to prove serious investment risks, as investors react to the impact of climate policy changes. In our view c is likely to reallocate to those companies that are managing these risks successfully. Companies must be prepared to adapt, innovate and pivot their strategies towards a low carbon economy.
Having said this, we hold a select few fossil fuel providers in the portfolio. We do not believe this is incompatible with the objective. In fact, it is often with these fossil fuel providers that the greatest gains on carbon emissions reduction can be made. Engaging with them to improve performance can help shift the dial on carbon emissions more than simply investing in companies that have already made the change.
The Inflation Reduction Act has helped galvanise the green energy sector and deliver on the US government’s decarbonisation ambitions. As investors, it is vital that we are on the right side of this change. This helps guide our sustainability strategy over the long-term.
Sources:
1 Grist - One year in, the Inflation Reduction Act - 20/07/2023
2 IEA - World energy investment report 2023 - 24/09/2023
3 Taking Stock 2023 report, Rhodium Group - 23/09/2023
Risk Warnings
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
There is no guarantee that any forecasts made will come to pass.
Trust-specific risks
Counterparty Risk The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Currency Risk The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Emerging Markets Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.
Gearing Risk Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
