Climate bill would fuel sustainable investing

The Senate’s climate bill is being heralded as the biggest government investment in clean energy ever — and it provides something the sustainable investing world has long sought: certainty.

The Inflation Reduction Act, which the House is expected to pass this week, includes about $370 billion in investments for energy security and climate change, according to estimates from Senate Democrats. Putting that into law means the environmental goals won’t evaporate with a change that ushers in a new administration that's less friendly on climate policy.

Supporters project that the investments could help the U.S. reduce its greenhouse gas emissions by 40% by 2030 compared with 2005 levels — a figure significantly lower than the 50% goal proposed last year by President Joe Biden.

“It’s fantastic to have a bill, to have some clarity and to know what the U.S. energy policy going to be for at least the next decade, rather than having to guess every few years,” said Elizabeth Levy, head of ESG strategy and portfolio manager at Trillium Asset Management.

That certainty is important for companies in the clean energy business, as well as investors, who will be able to better model and prepare their assessments in the future, Levy noted.

WHAT'S INCLUDED

The package promises to lower overall energy costs for consumers through rebates and tax credits. That includes a $9 billion clean energy rebate program primarily for low-income households and 10 years of tax credits for energy-efficient home improvements, such as adding heat pumps, solar panels and electric water heaters. It also would provide lower- and middle-income households with a $4,000 tax credit for purchasing used electric cars or $7,500 for new vehicles.

For energy production, the legislation adds $60 billion in incentives for solar, wind, batteries, heat pumps, new U.S.-based manufacturing facilities and revamped ones to produce electric vehicles and clean energy research. Some of the grants and tax credits include $6 billion for green improvements to high-emitting manufacturing facilities, such as chemicals, steel and cement, according to Senate Democrats.

Natural gas companies would also be awarded for reducing methane emissions and penalized for excessive levels.

The bill has substantial provisions for environmental justice, with $60 billion in allocations for investments in disadvantaged communities, bill supporters said.

Further, it includes $20 billion to support more climate-friendly agriculture, $5 billion to conserve forests and plant trees in urban areas, and $2.6 billion for protecting coastal habitats. However, the climate bill provides big concessions to the fossil-fuel industry — conditions that were viewed as all but necessary to secure support from Sen. Joe Manchin, D-W.Va.

“Under this legislation, the fossil fuel industry will receive billions of dollars in new tax breaks and subsidies over the next 10 years — on top of the $15 billion in tax breaks and corporate welfare that they already receive every year,” Sen. Bernie Sanders, D-Vt., said in prepared remarks days before Sunday’s vote.

“Under this legislation, up to 60 million acres of public waters must be offered up for sale each and every year to the oil and gas industry before the federal government could approve any new offshore wind development. To put this in perspective, 60 million acres is the size of Michigan,” Sanders said.

OIL AND GAS

Despite the environmental justice spending, the compromises with big oil will have an adverse effect on poor areas that have experienced disproportionately high consequences of pollution and global warming, Levy said.

“In order to win support, [the bill] had to include a lot of provisions to expand fossil fuel development and infrastructure,” she said. “A lot of frontline communities that have felt the brunt of fossil fuels will continue to.”

But the bigger picture for the fossil fuel business is that it will be prodded to expand into clean energy. “The bill provides the framework for electric vehicles taking over fossil-fuel vehicles,” Levy said. “Fossil fuel use in this country is not going to keep growing forever. It is going to peak and then, hopefully, fall.”

SUSTAINABLE INVESTING

The reaction at one firm, Domini Impact Investments, to the Senate bill’s passage was optimism.

“The buy-in of the country to meeting the climate objectives we have, behind a clear path, is really fundamental,” said Mary Beth Gallagher, director of engagement at Domini. “Investment opportunities will increase because of that.”

The incentives in the bill “may just enable the whole economy to make this transition to [the Paris Agreement limit of] 1.5 degrees C,” Gallagher said.

Another group, US SIF, The Forum for Sustainable and Responsible Investment, praised the legislation.

“We’ve always advocated that government is the most important step to make significant progress on climate issues,” said Bryan McGannon, director of policy and programs at US SIF. “Sustainable investing has its role to play, but you need that foundational action by the government.”

The measures will clearly benefit businesses that are part of a transition to clean energy, McGannon said.

“This is an important first step to accelerate the transition to a clean energy economy, but more can be done that will drive companies that are reluctant to make this transition. This is a very thorough indicator of where the future of our economy is going,” he said. “If companies are not preparing for that transition, shareholders will certainly have a lot to say to them to ensure they are getting prepared.”

Something left of the climate bill, however, was a punitive component for carbon emissions, a factor that could have helped persuade dirtier businesses to clean up, he noted.

HEALTH CARE

Although it is a smaller piece of the legislation, the climate bill includes prescription drug reforms, allowing Medicare to negotiate prices and setting out-of-pocket cost limits at $2,000 for those in the program. The legislation also lower premiums for those covered by the Affordable Care Act.

See also: Sector special: Healthcare poses challenges for ESG investors

One of Domini’s engagement priorities with its portfolio companies is the cost of insulin, and it has asked Sanofi and Novo Nordisk to work on lowering prices, particularly for lower-income people who have diabetes, according to the asset manager.

That drug costs are a component of the legislation “gives us cause for hope,” Gallagher said. “Being able to bring the price of drugs down is really important.”

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This story was originally published on ESG Clarity.