Play the Green Transition with Environmental Impact 100 – Part 1

The political and legislative developments powering the green energy transition

The growth of renewables has been an investment theme for well over a decade as the cost of renewables has declined and our focus on the global green transition has intensified. However, recent political and regulatory developments in both the US and Europe have proven especially catalytic in giving impetus to the climate agenda. In the US, for example, we have seen the new infrastructure law, the CHIPS and Science Act and the Inflation Reduction Act (“IRA”) – all passed in the last two years. In Europe, we have seen REPowerEU and the European Commission’s Green Deal Industrial Plan (“GDIP”), designed to secure the EU’s cleantech leadership. These developments indicate a shift in how our developed economies are managed, as governments become more actively involved in shaping our future (green) industries, in particular those deemed strategically critical. This we believe is creating new opportunities for impact investors with an environmental focus.

In this piece, we examine how the $USD 369 billion US IRA and the $USD 272 billion EU GDIP are likely to have a catalysing impact on companies operating in the most impactful environmental subsectors.

Framework

In 2021, we put together our Environmental Impact 100 theme with the objective of offering investors a framework for investing in the top 100 most impactful companies of the green transition. The theme and related fund (Rize Environmental Impact 100 UCITS ETF) was built in partnership with Sustainable Market Strategies in Montreal, Canada – a team of climate academics and sustainably research experts – on the back of a purpose-built sustainable thematic classification and impact-focused scoring methodology for publicly listed companies.

Today, the classification captures companies across all key environmental subsectors including, but not limited to, Renewable Energy Generation, Energy Efficiency Solutions, Climate Resilience Solutions, Clean Water and Nature Based Solutions. Each company is also tied back to its contribution to the relevant environmental objective of the EU Taxonomy for Sustainable Activities (“EU Taxonomy”) as illustrated below.

What is the Inflation Reduction Act

Signed by President Biden into law on August 16, 2022, the IRA earmarks $USD 369 billion for climate spending and energy security in the form of tax credits, grants and loan guarantees.

What is the Green Deal Industrial Plan?

On February 01, 2023, The EU unveiled its own $USD 272 billion GDIP, a direct response to the IRA and committing to significantly fast-track the development of the Net Zero industry in Europe through a simplified regulatory environment, faster access to funding, investment in skills and an open trade policy.

What are their objectives?

Both the IRA and the GDIP will power the green energy transition in the US and Europe respectively. Whilst the effects will be felt more directly by the energy, industrials and utilities sectors, and clean energy subsidies will drive innovation in areas such as hydrogen, carbon capture and sequestration, residual effects will be distributed across a range of other sectors and supporting technologies which is why investors stand to benefit from a broad exposure to the green transition.

How the IRA is expected to support subsectors in Environmental Impact 100

Several environmental subsectors are likely to benefit from relevant clauses or commitments present in the IRA. Here are some examples (this is a non-exhaustive list. Further details can be found on the on the White House website):

• $USD 369 billion of clean energy tax credits. Examples include credits relating to components for wind, solar and battery technologies, carbon capture, utilization, sequestration, clean hydrogen production and clean fuel production. This should benefit the following five subsectors: (1) renewable energy generation, (2) renewable energy equipment, (3) hydrogen and alternative fuels, (4) energy efficiency solutions, and (5) electric vehicles and green transport.
• Direct consumer incentives could subsidize energy upgrades and include $USD 9 billion for consumer home energy rebate programmes for both purchasing and retrofitting new electric appliances. The subsector that should benefit from this is energy efficiency solutions.
• Consumers can claim a $USD 4,000 tax credit for purchasing a used EV and this jumps to $USD 7,500 for purchasing a new vehicle. This is set to help the electric vehicles and green transport sector grow.
• Advanced Industrial Facilities Deployment Program includes $USD 5.8 billion for projects aimed at reducing GHG emissions through advanced industrial technologies in emission-intensive sectors such as the iron, steel, aluminium, cement, glass, paper, and chemicals sectors. This should positively impact the following subsectors: (1) pollution control and (2) energy efficiency.
• Advanced Energy Project Credit supports projects involving low-carbon heat systems, carbon capture systems, energy efficiency measures, and other pollution reduction technologies and practices. This should be beneficial for two subsectors: (1) pollution control and (2) energy efficiency.

How the GDIP is expected to support subsectors in Environmental Impact 100

Several environmental subsectors are likely to benefit from relevant clauses or commitments present in the GDIP. Here are some examples (this is a non-exhaustive list. Further details can be found on the European Commission website):

• A simplified regulatory framework will increase the production capacity of Net Zero products such as batteries, windmills, heat pumps, solar, carbon capture and storage. This should benefit the following five subsectors: (1) renewable energy generation, (2) renewable energy equipment, (3) hydrogen and alternative fuels, (4) energy efficiency solutions, and (5) electric vehicles and green transport.
• The Critical Raw Materials Act will introduce measures designed to secure the supply, from an extraction, refining and recycling perspective, of the raw materials that form the building blocks of the energy transition. This should impact the full spectrum of all of the environmental subsectors.
• A relaxation of State Aid Rules and acceleration of existing financing schemes (such as the EUR 250 billion RePowerEU, Invest EU and the Innovation Fund) will provide loans and grants for the net zero industry. This should also impact the full spectrum of all of the environmental subsectors.
• The establishment of Net Zero industry academies to roll out upskilling programmes as well as increasing the EU’s network of trade agreements will ensure everything is in place for the green transition. This should also impact the full spectrum of all of the environmental subsectors.

Conclusion

In addition to the direct benefits of the IRA and GDIP discussed, the energy transition will produce significant amounts of data that must be harnessed to drive the integration of clean energy alternatives through energy exploration, power generation and of course distribution and usage. For example, AI and machine learning analytics can drive predictive maintenance to resolve equipment issues before they occur, or predictive demand-matching operations can optimise energy supply in smart grids. Companies developing innovative technology and big data solutions will therefore play a pivotal role in the supporting infrastructure of the green transition. This will have a broad, residual effect on companies within the entire universe.

Related ETF

LIFE: Rize Environmental Impact 100 UCITS ETF

LUSA: Rize USA Environmental Impact UCITS ETF