A $400 Billion Catalyst

By Bruce Kahn, Ph.D.

Clean Energy Gets an Historic Boost From the Inflation Reduction Act

We’ve been thinking lately about the Federal-Aid Highway Act. Signed into law by President Eisenhower in 1956, the legislation authorized construction of a 41,000-mile national system of freeways over 13 years, funded by a federal outlay of $37 billion. Today, what we casually call the Interstate is considered to be the greatest public works project in history.

But it’s not so much the permanent, society-changing benefits produced by the “Ike’s Grand Plan” that has our attention: it’s the capital commitment. Adjusted for inflation, the mid-twentieth century infrastructure project would represent around $400 billion in today’s dollars. Here’s what’s really interesting: last year’s Inflation Reduction Act directs virtually the same level of investment toward climate and energy projects.

In other words, the Inflation Reduction Act of 2022 includes the largest-ever stimulus package for sustainable investment in U.S. history.

FUNDING FOR CHANGE

True enough, sandwiched between hundreds of billions in grants, loans, federal procurements, and tax credits, the Act directs a whopping $394 billion to clean energy. With an overriding goal of lowering the nation’s carbon emissions by the end of this decade, funds for clean electricity and clean transportation projects will be delivered through a mix of tax incentives, grants, and loan guarantees.

Here’s what we really like: the bill includes strong incentives for private investment, mostly coming in the form of tax credits to companies in the clean energy, transport, and manufacturing arenas. Many of the tax incentives in the bill are direct pay, meaning that an entity can claim the full amount even if its tax liability is less than the credit.

Once capital deployment is in motion, we would expect momentum to grow for industrial transformation and green projects across a long list of sectors, including renewables, electricity, water, energy efficiency, agriculture, medical, manufacturing, and construction.

A RETURN TO FUNDAMENTALS

Despite its name, it doesn’t appear the Inflation Reduction Act will have much effect on inflation one way or the other. What this mostly pragmatic bill could do, however, is boost U.S. manufacturing, provide some support where job sectors are shifting, and, most importantly, build out the infrastructure needed to shift to cleaner, modern energy systems. For investors and portfolio managers, all of this is coming at an opportune time. 

As it’s happened, the past couple of years have been challenging for investments in the sustainable market. Rising interest rates changed the relative short-term appeal of certain assets, and markets, rightly or wrongly, reallocated capital towards assets with shorter payback periods. In this environment, stock prices in the sustainable space essentially became detached from their respective company’s financials. Green investors mostly underperformed this year and last.

The good news is the fundamental drivers of a transition to a more sustainable economy remain firmly intact. As a result, we believe the spending provisions in Inflation Reduction Act, as they breathe new life into clean energy and new infrastructure projects, will kick-start a return to more appropriate market valuations for companies operating in the sustainable economy. Investors who’ve maintained a long-term outlook are likely to be rewarded.

A FUNDAMENTAL CHANGE

When Dwight Eisenhower pitched the interstate system to Congress almost seven decades ago, he was surely thinking about the long-term value the massive investment would create for the U.S. economy. He would’ve loved to have known that the Grand Plan has ultimately returned more than six dollars economic productivity for each one dollar it cost.*

There’s every reason to think the Inflation Reduction Act’s sprawling allocation to a sustainable economy could have the same kind of multiplier effect. Given the urgency of addressing global challenges, the shift towards an economic model where growth is delivered with a focus on environmental and social outcomes can only accelerate. And for years to come.

We’ll suggest here that the Inflation Reduction Act’s nearly $400 billion in climate change investment – the largest of its kind in American history – will propel the sector forward for several decades. Public investing will transform our economy once again. Ike would be impressed.

Bruce Kahn, Ph.D. is the Lead Portfolio Manager of the Shelton Sustainable Equity Fund.

Important Information

*Source: The Best Investment A Nation Ever Made: A Tribute to The Dwight D. Eisenhower System of Interstate and Defense Highways, By Wendell Cox & Jean Love.

Investors should consider a fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about the fund. To obtain a prospectus, visit www.sheltonfunds.com or call (800) 955-9988. A prospectus should be read carefully before investing.

INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.