The Inflation Reduction Act, which will amount to an estimated $369 billion investment in climate initiatives, is the largest and most impactful piece of climate policy the United States has enacted to date.
The breadth of programs included in this legislation is vast. Rather than single out specific technologies for targeted support, the Inflation Reduction Act includes programs for virtually all clean technologies. As such, it truly embodies an "all of the above" approach to minimizing greenhouse gas emissions in the US economy. The legislation creates or extends programs that incentivize renewable power generation, carbon capture and sequestration, electrification of heating, electric vehicles and charging infrastructure, and certain energy improvements in households, to name a few.
Decarbonizing the US economy is a monumental undertaking - one so large that it has needed policy support to truly set the wheels in motion. Until now, policy support has come along in fits and starts without an unequivocal and longstanding commitment in place. That has now changed, with the Inflation Reduction Act giving the decarbonization effort much needed momentum and plenty of track to run, assuming that President Biden signs the final bill into law in the coming days.
This is undeniable progress, but what does it really mean for companies navigating the transition to sustainable business models? We spoke to industry experts across our team in the US to get their perspectives on the implications of this landmark US climate legislation for the energy and resources, financial services and consumer goods and retail sectors.
"Clear supply and demand side incentives will enable the United States to build clean energy technology at a blistering pace while also investing in the necessary domestic manufacturing capability – a measure key to enhancing energy security.” John Baron – Expert in Energy and Resources
“Through numerous policy mechanisms, this piece of legislation will have far reaching market impacts that will shape the direction of the energy industry over the next decade. Tax credits will be available for clean energy technologies including solar, wind, batteries, and nuclear projects. What’s more, there will be incentives for manufacturers who invest in facilities to produce vital components for renewable energy projects including manufactured goods like solar panels and wind turbines. This amounts to clear supply and demand side incentives that will enable the United States to build clean energy technology at a blistering pace while also investing in the necessary domestic manufacturing capability – a measure key to enhancing energy security.
There are rafts of other pieces of this legislation, including provisions that will charge a fee for methane emissions at oil and gas facilities, and incentives for clean hydrogen, carbon capture and electrification of transportation. This will have a profound impact on the energy sector and reshape how we generate electricity in this country, unlocking vast opportunities for capital deployment into a myriad of clean technologies in the energy sector over the next ten to fifteen years, facilitating an influx of domestic and foreign capital into the US power markets. As trusted advisors in this space, we look forward to working with our clients to provide expert due diligence for these opportunities.”
“In Financial Services, the Inflation Reduction Act creates a massive opportunity to expand and further sustainable investment and drive financing to lead the change to a carbon-free economy” Melissa Klimek, Expert in Financial Services
“The market for sustainable finance products has boomed in recent years, with the North American GSS (Green, Social, Sustainable) bond market growing at an average of 76% a year according to a report from Climate Bonds. With that, the US sustainable debt from municipal bonds has also increased, reaching over $27.6bn in 2020 according to S&P Global Ratings. These trends will only accelerate with the addition of investment in climate initiatives as a result of the Inflation Reduction Act.
What does this mean for financial institutions? Firstly, it has impacts for the lending and financing lines of a business. These functions will need to ensure that the guidelines for Inflation Reduction Act projects and initiatives are incorporated and aligned to sustainable finance origination and screening processes. Due diligence and review processes will also need to be updated to ensure projects and investments are in fact sustainable. Post transaction monitoring and review processes should also be evaluated to ensure adherence to Inflation Reduction Act guidelines and internal criteria for your sustainable investments. Secondly, with the expectation that the Inflation Reduction Act will increase demand for sustainable investment products, it’s more important than ever that your front-office and supporting functions are well-versed on your sustainable finance taxonomy, business priorities and goals for green investing. Finally, the Inflation Reduction Act represents a huge opportunity for financial services firms to develop new sustainably focused products, enabling them to play a key role in accelerating the transition to a carbon-free economy. As a global leader on the energy transition, we are helping clients in the financial services space to navigate these challenges to drive positive impact.”
“The increased supply of affordable renewable energy fast-tracked by the Inflation Reduction Act will allow consumer goods manufacturers and retailers to quickly mitigate emissions in their owned operations and become laser-focused on investing in and enabling supplier sustainability and influencing sustainable consumer behaviour.” Maureen Bossi, Expert in Consumer Goods and Retail
“Consumer goods manufacturers and retailers can anticipate impacts to owned operations as well as upstream and downstream in the value chain. The supply and demand incentives leveraged by the energy and resources sector and financed by the financial services sector will increase the supply of affordable renewable power, bolstering the business case for consumer companies to transition away from fossil fuel-generated electricity used to power manufacturing, on-site operations, and the movement of goods. And as partners and suppliers transition to renewable energy alternatives as well, those emissions reductions will have a knock-on effect in the emissions intensity of consumer companies’ supply chains.
Consumer incentives for electric vehicles and home energy improvements will increase demand in those sectors and can foster a more mature consumer base that dials up the pressure on consumer companies to address sustainability issues most material to their business models – purchased goods and services, waste generated in operations and consumer use, materials including plastics, and more. Those elements of a consumer company’s upstream and downstream value chains are where nearly 90% of their emissions profile lies and undeniably where efforts and investments will – and should – be focused. The first step is to establish an accurate baseline of current emissions, waste, and material use and use that to prioritize sustainability levers. Our team of industry and supply chain experts is working with clients to do this, and continue moving the sustainability agenda forward.”
The Inflation Reduction Act is a landmark moment that will speed the US’s course to a low carbon economy. With far-reaching impacts across sectors, organizations need to act fast to capitalize on the new opportunities created by this legislation – be that to build clean energy technology, to finance the transition or to decarbonise your supply chain.
As a global leader in sustainability, Baringa can help. To understand how your business should be reacting to the Inflation Reduction Act in a way that drives real impact, please contact our team: John Baron for Energy and Resources, Melissa Klimek for Financial Services or Maureen Bossi for Consumer Goods and Retail.
Four steps to building a firmer risk framework
What steps does an organisation need to take to evolve its risk framework? We share four key areas to focus on to build a firmer risk management framework.Read more
The critical role of frameworks in unlocking transition finance without unleashing greenwashing
Financial institutions need to focus on enablers, developing their own transition finance frameworks. How can they do this as effectively to mobilise capital to the transition whilst avoiding greenwashing?Read more
The case for investing in energy efficiency for real estate
The drive for greater energy efficiency in real estate is rapidly gathering momentum. It is a pivotal moment for financial institutions to profit from the energy transition while building a stronger society and economy.Read more
Reflections on the Future of Payments Review
Baringa is pleased to have contributed to the ‘Future of Payments Review.’ In this video, we share our reflections on the report and what this means for the UK payments market.Read more