Impax, renewables, subsidies and inflation

Regardless of what you might hear from lobby groups, the widespread adoption of green technologies requires significant subsidy, be that direct or indirect.

In its latest half-year release, Impax Environmental Markets (IEM) set out some of the upcoming support measures from the European Union and the Biden White House. It seems that €500bn (£426bn) of the €1.8tn spending package agreed in Brussels last month has been earmarked for climate action.

But even that level of subsidy pales when set against the Biden administration’s upcoming splurge, assuming it gains assent in Congress. Impax notes that the latest $1.2tn infrastructure bill contains sizeable allocations for public transportation and strengthening the power grid, presumably along sustainable lines. What follows could cheer climate campaigners and depress monetarists in equal measure: a proposed $6tn bill where action on climate change will be a core focus.

Politicians in Europe and the US have long since abandoned responsible monetary policy in favour of deficit financing, although you imagine that stimulus measures on this scale would not have been remotely palatable to taxpayers save for the impact of Covid-19. But it may be that this could even fall short of the 'build back better' wish list. The United Nations (UN) estimates that developing countries face an annual investment gap of $2.5tn relating to sustainable development goals. The burden of the green transition will fall primarily on taxpayers, but industry and consumers will also be expected to pick up the tab via increased energy tariffs.

Impax notes that the renewable energy sector continued to perform admirably despite the impact of the lockdowns, helped along by inflows into passive clean energy exchange-traded funds, with assets from the two leading  ETFs in the renewable energy sector surging from $760m to $10.6bn between January 2020 and March 2021.

Investors will increasingly need to tailor their capital allocations to take account of which industries stand to benefit from green stimulus measures. And it is obvious that the private sector is being corralled (coerced?) into action on this front. Over two-thirds of the OECD Development Assistance Committee engage in blended finance. Blending activities by donor governments generated a total of $152bn from commercial sources between 2012 and 2017.

None of this would have been lost on managers at Impax. The trust has outstripped the benchmark MSCI All Country World index in the first half of 2021, while registering a total return of 13.5 per cent in net asset value (NAV) through the period. A premium to NAV of 5.2 per cent doesn’t seem extravagant given growth prospects.

Though the trust certainly wasn’t immune to the initial economic disruption brought about by the pandemic, it is overweight in positions linked to food, agriculture and water infrastructure, all areas that are positively exposed to the reopening of the global economy.

However, managers are certainly aware of the challenges posed by a prolonged inflationary period, a distinct possibility if existing governmental spending pledges come to fruition. That often translates into a rising interest rate environment, something of a novelty nowadays. If the doom-mongers on inflation are proved correct, Impax reckons its “focus on companies with pricing power should position the portfolio well”, but we think its long-term prospects are indirectly dependent on continued central government support.