From an investing perspective, the structural themes of electrification, green buildings, transition metals, and waste and water infrastructure growth will continue despite political changes, as they have broad-based societal and economic drivers. These themes are occurring globally, in the UK, the EU, the USA, Japan, and emerging markets.
We believe that renewables demand will continue to grow due to its cost advantages and scalability, even without direct government support. Baseload electricity demand is now increasing in both developed and emerging markets, driven by the energy transition, data centres, and growing air conditioning use. This growth in electricity demand will drive increasing renewables and storage deployment, which is the fastest pathway to add electricity supply. Hyperscalers buying power for data centres are capable of paying higher prices to compensate for lower government support.
We believe that the underperformance of environmentally focused stocks over the last three years will end in 2025. A global universe of 850 companies with environmental revenues is forecast to have higher earnings growth than MSCI ACWI in 2024-2026, with lower valuation multiples. This was not true in 2021-2024 as investors were paying a sustainability premium that has now receded, while the revenue growth has continued.
In high-emitting industries such as shipping, steel, mining, cement, airlines, and chemicals, we are focused on companies and projects that can decarbonise based on company-specific advantages. We believe policies such as the EU Carbon Border Adjustment Mechanism (CBAM), and USA tariffs will place emphasis on supporting local manufacturing, with accompanying increases in prices for these products. Regulated carbon markets in both the EU and USA are expected to tighten beyond 2026 due to lower free allocations, incorporating more industrial and transportation activities, and rising electricity demand requiring gas peak load generation.
We believe that dispersion will remain significant across the high-emitting and environmental sectors, and companies with advantaged products, output growth, and emissions reductions should outperform their sector peers over time.
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(1) Multiple groups have forecast the IRA’s fiscal costs over its 10-year life. In November 2022, Credit Suisse forecast that the IRA’s fiscal cost to the federal budget would amount to more than $800 billion over 10 years. In March of 2023, researchers at the Brookings Institution estimated the IRA fiscal cost to be $780 billion through 2031. That same month, Goldman Sachs forecast the IRA fiscal cost at $1.2 trillion. And in April, University of Pennsylvania researchers expected the IRA fiscal cost to be just over $1 trillion from 2023 to 2032. In addition, CBO recently increased its projected fiscal costs of energy related tax provisions, making their forecast roughly in line with these outside projections.
