Sustainable

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Perspective 1

Inflation Reduction Act of 2022: Investment opportunities

On 16 August 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA ‘22) into law. With USD 369bn dedicated to energy security and climate change, and an additional USD 4bn for drought resiliency, the bill contains a wide variety of spending plans that should provide a tailwind for select companies. We see our Energy efficiency, Smart mobility and Clean air and carbon reduction themes as particularly well positioned. Below we discuss three key components of the policy and the investment implications.

What’s in the bill?

Energy efficiency: a variety of incentives to improve energy efficiency are embedded throughout the policy. Ten years of consumer tax credits and USD 9bn in consumer rebate programs were slated for home efficiency projects, including heat pumps, electric HVAC, and rooftop solar. USD 1bn was set aside to improve energy efficiency in affordable housing.

Transport: a consumer tax credit of USD 4,000 and USD 7,500 is included for used and new "green" vehicles respectively (subject to income restrictions), and the tax credit for building EV charging stations was increased and extended. Further, USD 1bn was laid out for "green" heavy-duty vehicles like garbage trucks, and USD 3bn for the US Postal Service to purchase zero emission vehicles. Beyond EV, the Act creates a new tax credit for sustainable aviation fuel.

Energy security: the bill increases the investment tax credit (ITC) for solar and wind, includes a nuclear credit for existing facilities, and attempts to make green hydrogen more economical through a new production tax credit for clean hydrogen.

Where we see opportunity

We see a number of opportunities across sectors, but encourage investors to be selective. Index-level valuations for US companies are beginning to look rich (Fig. 1 and 2), as companies face supply constraints, tariff threats, potential of an economic slowdown and higher interest rates which are a headwind to expansion for growth companies. Currently, we are focused on relatively larger cap companies with diversified revenue streams, solid earnings, and robust balance sheets.

With the above considerations in mind, we see short term and longer-term opportunities across multiple sectors. We recommend diversification across energy efficiency tools, the electric vehicle supply chain, energy transition including transmission, offshore wind, solar, battery storage, industrial gases necessary for the hydrogen supply chain, emissions trading markets, and companies providing environmental consulting services that can aid in adaptation projects.

Within the energy transition, we prefer utility scale alternative energy providers that tend to enjoy relatively stable earnings compared to pureplay alternative energy stocks. Similarly, within electric vehicles we take a selective approach, limiting manufacturers to those with a competitive advantage or vertically integrated supply chains, and high voltage components makers that serve several end markets. Pureplay US charging companies could see a boost from the bill, but without knowing which companies will receive the funding allocations, we see these as higher risk ways to position.

Investor takeaways

  • The Inflation Reduction Act of 22 is one of the largest climate spending plans ever passed in the United States.
  • For investors interested in tapping into these trends on a tactical basis, please see our Greentech goes global theme for more information. We recommend being selective, and prefer larger cap companies with diversified revenue sources, solid earnings and robust balance sheets.
  • For investors with a longer-term time horizon, we see opportunity in broad exposure to the Energy efficiency, Smart mobility, Clean air and carbon reduction themes.

Fig. 1: NASDAQ Clean Edge Smart Grid Infra Index P/E relative to S&P 500

NASDAQ Clean Edge Smart Grid Infra Index P/E relative to S&P 500 chart

Fig. 2: S&P Global Clean Energy Index P/E Relative to S&P 500

S&P Global Clean Energy Index P/E Relative to S&P 500 chart

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