There will be wide-ranging implications for asset classes, sectors and regions as a result of government policy to accelerate the energy transition, according to managers at JP Morgan Asset Management (JPMAM).
Here they analyse the impact of the Inflation Reduction Act in the US, Green Deal Industrial Plan in Europe and Power Up Britain strategy in the UK on investments.
Implications are wide ranging across asset classes, regions and sectors
Hugh Gimber, global market strategist at JP Morgan Asset Management
A series of major breakthroughs in energy policy have taken place around the world over the last year. The US administration kickstarted the momentum in August with the Inflation Reduction Act (IRA), the largest clean energy package in US history. The European Union responded with its own Green Deal Industrial Plan (EU GDIP) in February this year. More recently, the UK government’s Powering Up Britain strategy aims to ensure that the UK is not left behind as countries race to secure their place in the energy supply chains of the future.
Regulatory “sticks” that punish unfriendly climate behaviour are no longer viewed as sufficient. Today’s energy policy is all about the “carrot”: subsidies and tax credits that look to pull forward future demand and buy time for new technologies to build the scale required to become self-sufficient.
The implications are wide ranging across asset classes, regions and sectors, as our investors explain.
The beneficiaries of the UK government’s Powering up Britain strategy
Callum Abbot, portfolio manager, JPM UK Sustainable Equity Fund
The UK government’s Powering up Britain strategy announced a wide-ranging plan to increase green power in the UK, help affordability of bills for UK households and to work towards achieving the UK’s net-zero target.
The strategy focuses on carbon capture and storage (CCUS) with the goal of capturing 20 to 30MtCO2 per annum by 2030. There are two potential clear beneficiaries: companies with North Sea oil and gas assets and biomass power generators that will use CCUS to create green energy.
The increased offshore wind generation target for up to 50GW of generation by 2030 will provide plenty of opportunities for offshore wind energy developers. There has been concerns that returns for these types of projects would compress over time, as more capital entered the space and made the bidding process ever more competitive.
However, in combination with the US IRA and EU GDIP, the scale of opportunities for renewable companies is so significant the risk of returns being competed away has diminished.
The strategy puts significant emphasis on energy efficiency in building. This presents opportunities for materials and heat pump manufacturers, as well as those that will do installation work.
In the future, we need to see more specific policy and announcements on funding and subsidies. The Autumn Statement is the next key focus point.
Will the US Treasury venture into green bonds?
Ed Fitzpatrick, portfolio manager, JPMorgan Funds – Green Social Sustainable Bond Fund and ETF
Since the Biden administration took office, there has been an effort within the US Treasury to develop a sustainable financing programme. With the passage of the IRA, the US Treasury will be able to specifically link green projects to funding needs and issue green bonds if it chooses.
While there has been no indication of intent to issue green bonds so far, the US Treasury’s foray into this space would be a tremendous benefit to the development of the market, adding further diversification within the US dollar universe.
Additionally, it would allow the green bond market to more closely resemble traditional high-quality diversified fixed income universes that are more familiar to the industry and investors.
Increased incentives for electric vehicles
Danielle Hines, portfolio manager, JP Morgan Funds – US Sustainable Equity Fund
There are investment opportunities not only in the companies that are directly exposed to the provisions in the IRA, but also the companies that are indirectly exposed through leverage to the broader value chain.
For example, increased incentives for electric vehicles will not only benefit the vehicle manufacturers themselves – grid infrastructure will be required to handle increased load, semiconductors are necessary to enable the innovation, and renewable generation is required to service demand. The same indirect benefits will likely play out across other areas, such as hydrogen.
The IRA will help all the impacted sectors to become much more dynamic in the years to come.
We see particular potential within the utilities sector given how the IRA will drive longer duration of growth for companies in this space.
In practical terms, the bill gives greater visibility on more than two decades of renewable tax credits. The IRA’s new opportunity set now also includes upgrades of existing renewable plants and collocating standalone energy storage projects on the current footprint of energy sites.
Eyeing opportunities in carbon capture and hydrogen
Francesco Conte, portfolio manager, JPM Climate Change Solutions Fund
The IRA will lead to opportunities across a broad range of climate change solutions. We’re focused on three key areas.
First, the IRA aims to accelerate the transition to clean energy while also re-shoring renewable technologies. This directly benefits clean energy providers, and we have investments in companies providing solutions such as heat pumps and batteries.
Second, producers of electrification equipment will benefit not only directly via incentives, but also indirectly from the additional need for electrification infrastructure given the push towards renewables and energy efficiency.
The third focus is new technology. According to data published by the International Energy Agency in October 2022, producing green hydrogen using renewable energy costs between $3 and $8 per kg, compared with only $0.5–$1.7 per kg when using natural gas. Through the IRA, clean hydrogen plants can receive a tax credit of up to $3 per kg, encouraging more investment, which can hopefully reduce future costs.
Our investments in new technologies are currently modest but could become more meaningful if subsidies for areas such as carbon capture and hydrogen materialise.
Climate solutions that promote onshoring of manufacturing will benefit
Tanya Barnes, portfolio manager, Private Capital Group
Climate solutions that promote onshoring of manufacturing – especially in the energy, battery and automotive sectors – or provide related enabling technologies will likely be immediate beneficiaries from the IRA and EU GDIP. The IRA also earmarks over $135bn in funding for sectors that demand the greatest share of global GHG emissions, namely transportation, industrials & manufacturing, food and agriculture, and real estate.
This funding will stimulate investments in sustainable fuel and vehicles, resource-efficient manufacturing, climate-smart agriculture, and building electrification.
Governments are now translating their ambitions into action
Hugh Gimber
In conclusion, the energy transition will be one of the key secular themes driving financial markets over the coming decades. Incorporating the impact of climate-focused subsidies that lie five to 10 years ahead into today’s earnings estimates is an inherently uncertain task, particularly when the finer details of new fiscal packages are still being thrashed out.
This provides fertile ground for hunting out companies where the tailwinds ahead are not yet reflected in market pricing, but avoiding companies that are inadequately prepared for the energy overhaul will be just as important as identifying the beneficiaries.
Yet with governments now translating their ambitions into action, the powerful combination of an accommodative regulatory backdrop and sizeable fiscal support is opening up new opportunities across many parts of the investment landscape.
