MUM I MISSED THE IRA!

November 9, 2022

The Inflation Reduction Act (IRA) is the name of the new legislation that reinforces the US commitment to a sustainable and economically viable energy transition. In the long term, it will have a very favourable effect on companies that are committed to the climate transition or provide products that enable it.

The prevailing volatility in the financial markets, soaring inflation and the risks of recession pushed the passage of the IRA into the background when it was passed last August. Hardly anyone talked about it. Yet this new law marks a turning point in US climate policy. It is not entirely dedicated to the climate transition, but the bulk of the investments in the law are

The IRA in a nutshell

On the climate front, the Act has two distinct objectives. Firstly, in a more than tense geopolitical context, to ensure the long-term energy independence of the United States. Secondly, to accelerate the country's progress in the climate transition while generating jobs and avoiding a "yellow waistcoats" effect. The law is intended to be an incentive rather than a punishment. In other words, it focuses on the carrot and not the stick.

In concrete terms, the US government will invest $340 billion in the form of tax breaks to combat global warming: $260 billion for the IRA and $80 billion for the infrastructure bill passed at the end of 2021. The graph below details the investments planned by the government. It is aimed at companies but also at individuals who wish, for example, to improve the energy efficiency of their properties or acquire electric vehicles.

Source : BloombergNEF

Expected impact on the economy

Through the energy transition, the US government hopes to create 900,000 new jobs per year until 2030. In the short term, there are doubts about the ability of the Inflation Reduction Act to combat inflation through expansionary fiscal policy. In the long term, it is possible, since the acceleration of technological innovations should make renewable energy prices even more competitive and, above all, less volatile than those of fossil fuels. As the graph above shows, the main beneficiaries of this law are the members of the renewable energy value chain (solar, wind and batteries) as well as the actors involved in the field of soft mobility (electric vehicles, bio-fuels, etc.).

How can investors take advantage of it?

Two types of strategies allow investors to gain exposure to the climate transition:
1. An impact strategy that invests in companies whose products, goods and services reduce CO2 emissions either directly (batteries, heat pumps, insulation materials, etc.) or indirectly (micro-processors, turbine and lithium producers, software for optimising electrical circuits, etc.)
2. A transition strategy that invests in positive impact companies and in companies that emit a large amount of CO2 (cement, steel, chemicals) but are committed to reducing these emissions. By reducing their dependence on fossil fuels, these companies will see their valuation improve significantly over the long term.

In recent months, rising oil and commodity prices have benefited companies with high CO2 emissions. In 2022, the fossil fuel sector is doing much better than renewable companies. Impact companies have seen a sharp downward revision in their valuations.

In order not to miss the train, not the plane, it is therefore time to take advantage of the opportunity to gain long-term exposure to the climate revolution. It promises to be just as fruitful as the technological revolution of the last 30 years.

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