Portfolios unchanged despite Inflation Reduction Act enthusiasm

Fund managers remain cautious amid headwinds

Eight months ago US president Joe Biden signed into law the biggest government investment in clean energy, giving sustainable investors much-longed for certainty. The Inflation Reduction Act (IRA) is tipped to spark nearly $3trn of investment in renewable energy technology, yet that vote of confidence has not had the expected ripple effect.

The WilderHill Clean Energy Index, which tracks US-listed companies that stand to benefit substantially from a societal transition toward the use of clean energy, is down around a third from a year ago.

Vineta Salale (pictured), portfolio strategist at Boston-based asset management firm GMO, said: “There does seem to be a significant disconnect between what feels like this very positive policy tailwind and how some of these clean energy companies are currently being priced. 

“Clean energy can be a relatively volatile space, it can be very sentiment driven. There’s often this impression that it’s highly interest-rate sensitive, expensive and speculative and so, even if there is this big secular tailwind (long-term economic trend that helps feed market growth), that can put some investors off this space.”

BlackRock’s Investment Institute is keeping a close eye on what materializes from the IRA. Earlier this year, it said that the effects of an accelerating transition to a lower-carbon economy are not fully priced in. The world’s largest asset manager thinks that assets that stand to benefit from transition opportunities are “likely to add returns over time as the transition accelerates and becomes more fully priced.” 

These include where the Act gives investors long-term certainty, such as the 10-year investment and production tax credits for wind and solar, and fixed incentives for solar polysilicon manufacturing. Changes to existing rules are anticipated to allow new investors to crowd in, co-invest or transfer tax credits more easily, including government entities, non-profits and foreign investors without a US tax base.

There is now greater clarity on the programs under development and the government incentives on offer, since the IRA was passed eight months ago, promising $370bn in investments. Last year, a record $108bn was spent on new US factories, partially because of the IRA’s clean energy incentives, with BMW and Norway’s Freyr Battery committing billions to building new factories. The Brookings Institute estimates that the IRA puts the US on track to reduce greenhouse gas emissions by up to 42% by 2030 vs 2005 levels, in a paper published a couple of weeks ago.

Caution remains

Yet fund managers remain cautious until they see more concrete developments, according to Jonathan Roe, investment manager at Cardano, which helps pension schemes decide on their long-term goals, investment strategies and risk management.

Roe said: “A couple of managers we recently engaged with saw the introduction of the IRA as a tailwind to their existing positions but have not changed the portfolios, as the finer details of the plan still need to be ironed out. 

“Similarly, another manager reflected that they wouldn’t make changes to portfolio positioning as a direct consequence of the IRA as that would be more a top-down approach – and they are bottom-up stockpickers. However, they did say they might incorporate this supportive legislation into their modelling assumptions for companies.”

BlackRock also appears cautious. Back in January, the global asset manager’s Investment Institute cautioned: “It is possible that assets set to benefit from the transition could become overvalued. We would then consider tilting portfolios away from them as we would any other asset whose expected returns we assess – even if we still see the potential for strong earnings growth in the long term.”