Earlier this month, the Biden administration took an important step in combating the climate crisis with the passage of the Inflation Reduction Act, which includes roughly $370 billion in energy and climate incentives — mostly in the form of tax credits, according to Goldman Sachs.
But with potential ripple effects on global supply chains as the local economy shifts to a more energy-efficient era, strategic ETF investors can take advantage of the progress.
“It’s very clear that the administration is using the carrot,” Tim Johnston, a partner at Blue Horizon Capital and co-founder of Li-Cycle, told Leslie Picker in an interview Monday on CNBC’s “ETF Edge.” “Trying to incentivize people to domesticate or at least work with fair trade countries to help the supply chain.”
Johnston said incentives are critical to building infrastructure for sustainable energy production and how we use that energy all the way through.
“That capital flowing through the administration doesn’t just come in the form of loans and grants,” he said. “It also comes in the form of tax incentives, so all we expect to see is a structural benefit that goes to some of these companies that really help with this overall transition.”
And with the recent push toward sustainable ETFs, the move could double as a catalyst to spur further inflows into those clean energy companies and industries that stand to benefit.
“It’s not as if clean energy is new to the ETF space,” said Tom Lydon, vice president of VettaFi, in the same interview. “There are some great ETFs that have been around for over a decade.”
Two of the biggest, Lydon said, are the iShares Global Clean Energy ETF ( ICLN ) and the Invesco Solar ETF ( TAN ). The two funds have a total of $9 billion in assets and are currently operating.
“Most of these ETFs that we have today tend to be cap-weighted, so there’s more investing in fewer companies,” he said, which leaves less allocation to support up-and-coming companies in the clean energy space.
Beyond the dominant clean energy ETFs, Lydon said strategic investors should look to other areas such as smaller and overseas companies and lithium cobalt producers — not just batteries or solar companies.
“We’re going to need these minerals as we continue to move this clean energy process forward,” Lydon said.
Among the funds driving the new energy transition is the Blue Horizon New Energy Economy ETF (BNE), which acts as a single index solution to gain global exposure to clean energy themes.
Johnston said Blue Horizon sees the transition as divided into five broad segments: power generation, distribution and storage, as well as e-mobility and efficiency materials – commodities such as lithium, nickel, cobalt, copper and rare earth elements.
“This transition is really broad, it’s not just here in North America,” he said. “And what we’re trying to do is identify what we think are leaders.”
That includes core companies like Tesla, which most ETF investors have, Johnston said, while also including areas like new types of battery technology and solar energy subgroups.
“We see them as an important part of that transition as we go forward,” he said.
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