Rize ETF’s Rahul Bhushan explains how drives across the world to green up the economy are creating investment opportunities.
The green agenda has been gaining traction as an investment theme for well over a decade, as the urgency of the need for effective, sustainable ways to combat climate change has been repeatedly highlighted. 
So, the investment case for action to find environmental solutions is well established. And indeed, huge strides forward have been made as renewable energy has moved into the mainstream. However, the pace of change gains real impetus when the world’s superpowers take meaningful action.
In August 2022, president Biden passed the Inflation Reduction Act (IRA), earmarking a meaty $369bn for a wide range of climate spending and energy security projects.
The IRA marks a significant milestone for the green transition. It will support the ambitious US domestic target to reduce greenhouse gases by 40% from 2005 levels by 2030, bridging current funding gaps and accelerating the development of low-carbon technologies. The consensus among experts is that it will go a long way in achieving that goal.
The IRA follows several substantive initiatives introduced earlier by Biden, including the 2020 Energy Act and the 2021 infrastructure programme based on his Build Back Better election campaign.
But the IRA’s clout is a whole different order of magnitude. It benefits the whole spectrum of clean energy, both extending existing wind, solar, EV and carbon capture programs and getting new ones off the ground – and is already having a pretty major impact.
Interestingly, the funding fallout has extended far beyond North America, triggering something of a green standoff between the US and Europe as companies that were planning to invest in the EU started to reconsider their choices in the light of the IRA’s alluring subsidies.
The EU realised swift and meaningful action was required to keep the international playing field level. At the start of February 2023 it unveiled a similar $272bn plan to fast-track development of the Net Zero industry there, promising a simplified regulatory environment, faster funding and an open trade policy.
While it seems strange to see such a ‘green trade battle’ going on, a lot of businesses and the environment in general are benefiting from it.
Certainly, many of the companies leading the charge on environmental impact are seeing very meaningful upside as a consequence of the US and EU subsidies and grants.
In the battery recycling space, Li-Cycle is a great example. The Canadian business aims to maximise the reuse of valuable metals including lithium and cobalt from used lithium batteries, recycling them back into new battery production.
The IRA has provided loans to help it build a new facility that will support it as it expands globally, with recent deals including exclusive recycling for a Vietnamese electric vehicle battery manufacturer and recycled cobalt for commodity multinational Glencore.
It’s an excellent example of a company that needs government support in the nascent stages of growth, given the extensive cost of advanced recycling programmes to compete without subsidy when the alternative for battery manufacturers is simply to source new materials from scratch.
The direction of travel is one-way – recycling these materials is bound to become increasingly important as EVs gain market share. Moreover, the alternative is likely to involve mining in the Democratic Republic of the Congo, where working conditions are far from ideal and the environment is degraded. Clearly, then, there are multiple advantages to Li-Cycle’s operations if they can be made economically viable.
Another key challenge for the renewable energy drive is energy storage. That’s the focus of German-American company Fluence, which draws on the advanced technological expertise of its parent companies, Siemens in Germany and AES in the US, to produce a range of energy storage solutions.
We need businesses like this because grid stability and the management of peaks and troughs in demand is a big issue, but very difficult at scale. Again, IRA backing is helping to support the construction of a large-scale facility in Utah.
In Europe, meanwhile, Swiss solar equipment maker Meyer Burger is tapping into the EU’s Green Deal support for capital projects. They are one of the few manufacturers not linked to the Chinese solar sector supply chain and it’s important to move away from reliance on China and improve the diversity of supply chains when it comes to polycrystalline solar panels, for example.
It’s not all about energy generation and storage either. From pollution control in Canada to the circular economy in Germany, these initiatives are helping to shift the dial across a broad gamut of crucial environmental areas – and contributing to the significant outperformance of environmental stocks and ETFs tracking the same.
Rahul Bhushan is co-founder of Rize ETF. The views expressed above should not be taken as investment advice.
