BNP AM

The sustainable investor for a changing world

Chile solar energy panels

A surprise proposed deal in the US Senate on billions of dollars of climate-related spending looks set to change the perception of the US’ role in the fight against climate change and could provide a significant boost to environmental solutions equities, write Edward Lees and Ulrik Fugmann of the Environmental Strategies Group. [1]  

Markets had not expected the news of a USD 369 billion climate and tax package. We had been hoping for one between USD 200-300 billion. The climate and energy proposals were seen as the ‘most ambitious climate action ever taken by the US’ (New York Times) and includes tax incentives to ramp up wind, solar, geothermal, battery and other clean energy industries over the next decade.

The raft of measures will be funded by USD 451 billion in new tax revenue over the next 10 years, while cutting federal spending on prescription drugs by USD 288 billion. The plan would raise most of its new tax revenue, an estimated USD 313 billion, by imposing a minimum tax on the so-called book income [2] of large corporations.

A number of legislative and procedural hurdles to the deal between Senator Joe Manchin and Democratic majority leader Chuck Schumer remain. It must adhere to strict budgetary rules since Democrats plan to advance it under the budget process known as ‘reconciliation’, which allows certain fiscal measures to pass with only a simple majority.

The bill is called the ‘Inflation Reduction Act of 2022’, to distinguish it from the ambitious multitrillion-dollar domestic policy plan that President Joe Biden had initially proposed and that Democrats in Congress spent most of last year toiling to pass. The name underscores the deflationary effect that clean energy technology is expected to have in the medium to longer term.

Our view confirmed

We have long held the contrarian view that after the death of the Build Back Better plan in December 2021 we would see a significant US climate bill voted through during the summer.

Our view was based on our assessment that clean energy investments are ultimately deflationary. They also help address the hot topic of energy security in the face of the war in Ukraine.

We believe that US power infrastructure is in a dire condition [3] and needs cheap, greener and reliable power.

While the final details of the bill could change, we understand that it currently includes: 

  • USD 30 billion in tax credits for solar panels, wind turbines, batteries and critical minerals processing
  • USD 10 billion in tax credits to build clean technology manufacturing facilities
  • USD 500 million for heat pumps and critical minerals processing
  • Tax credits to make new and used electric vehicles more affordable 
  • USD 20 billion to cut emissions in the agriculture sector 

We anticipate a major positive impact for shares in residential solar, hydrogen, wind, energy storage and electric vehicle (EV) manufacturers.

References

[1] Also see Environmental thematic strategies – BNPP AM Luxembourg professional investor (bnpparibas-am.lu)  

[2] Determined in accordance with generally accepted accounting principles (GAAP), this is the amount a corporation reports on its financial statements for its investors or shareholders, as well as for financial regulators. Source: https://www.investopedia.com/book-income-5207852  

[3] Progress on clean energy could be derailed without an overhaul of the electricity infrastructure – a task some industry experts say requires more than USD 2 trillion. The network is decaying with age and underinvestment, a condition highlighted by failures during increasingly frequent and severe weather events. Source: https://www.reuters.com/investigates/special-report/usa-renewables-electric-grid/

Disclaimer

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Related insights

To reach net zero, overhaul the built environment
US climate spending – How does it reduce inflation?
BNPPAM

In the U.S., this material is for Institutional use only – not for public distribution. This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any investor.

These documents and video clips may also include information obtained from affiliated investment management companies within BNP Paribas Asset Management, the brand name of the BNP Paribas group’s asset management services. The documents and video clips are produced for informational purposes only and do not constitute: 1. an offer to buy nor a solicitation to sell, nor shall they form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. investment advice. Any opinions included in these documents and video clips constitute the judgment of the author/ presenter at the time specified and may be subject to change without notice.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, and estimates of yields or returns. No representation is made that any performance presented will be achieved by any funds, or that every assumption made in achieving, calculating or presenting either the forward-looking information or any historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BNP PARIBAS ASSET MANAGEMENT USA, Inc. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

FOR INSTITUTIONAL AND FINANCIAL PROFESSIONAL INVESTOR USE ONLY. THIS MATERIAL IS NOT TO BE REPRODUCED OR DISTRIBUTED TO PERSONS OTHER THAN THE RECIPIENT.

BNP PARIBAS ASSET MANAGEMENT USA, Inc. is registered with the U.S. Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. BNP PARIBAS ASSET MANAGEMENT USA, Inc. is a registered trademark of BNP Paribas or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. © 2022 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.

BNP PARIBAS ASSET MANAGEMENT is the global brand name of the BNP Paribas group’s asset management services. © 2022 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.