Outlook for Sustainable Supply Chain Investment Soars

By Veronica Zhang, Deputy Portfolio Manager, Environmental Sustainability

9 Years of Sound Policy > 10 Years of Slapdash

Since the passing of the Inflation Reduction Act (IRA) over half a year ago, we have witnessed a swell of interest. Players across the globe, up and down the value chain of energy transition, have preferred the U.S. to build out supply chains given the attractive and direct impact on project economics and cost savings. In the last eight months, $150 billion of domestic manufacturing projects across storage, solar, and wind have been announced with expected online timeframes within the next three years.¹ For context, this amount surpasses the total investment in these areas between 2017-2021.

 

 

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^† Monthly returns are not annualized.

Expenses: Class A: Gross 5.79%; Net 1.25%. Expenses are capped contractually until 05/01/24 at 1.25% for Class A. Caps exclude acquired fund fees and expenses, interest, trading, dividends, and interest payments of securities sold short, taxes and extraordinary expenses.

August 2022 – March 2023: 46 Manufacturing Facilities Announced; $150bn in Capital Investments

Source: Cleanpower.org. Data as of March 2023.

However, we suspect the investment pie is significantly bigger. We have heard increasingly from corporates and their customers a reticence to rush into project buildout – largely as we are still awaiting further clarification on specific details of the bill from the Treasury. Further down the value chain on grid-connected projects, we have heard from numerous sources that the demand far exceeds the regulatory capacity to green-light proposed projects, with queues in some jurisdictions surpassing three years. Specialized labor has been another pinch point, as there are insufficient engineers and technicians to staff new manufacturing facilities for inverters, batteries, and other technologies requiring specific expertise, and training takes time. General supply chain issues that plagued the industry in 2022 seem to be moderating, as are logistics bottlenecks – but industry participants are cautious to stir up those issues to add to the longer-dated, more structural issues related to the domestic supply chain build-out currently unfolding.

What Does This All Mean?

An operator at one of our holdings summed up his sentiments nicely: “I’d rather have 9 years of a well-thought-out policy than 10 years of modifications down the line.” The Treasury has been releasing details addressing different parts of the extensive bill throughout the year, with industry experts expecting some of the most anticipated ones toward greenfield manufacturing to be released later this year. We have already witnessed a preliminary rush of buildout announcements on the upstream side and expect this to help supply the slew of projects that will undoubtedly come online once they pass the regulatory hurdles. Reassuringly, details around what has been released so far seem to reflect that regulators are cognizant of the limitations to growth, particularly regarding critical mineral supply chains and the timing and capital investment necessary to build them to scale in the U.S.

Quarter in Review

The VanEck Environmental Sustainability Fund (Class A Shares) returned 6.53% during the first quarter of 2023. Portfolio performance was supported by investments around the electric vehicle (EV) supply chain, on the back of incremental Treasury announcements around the IRA that were more supportive of fluid geopolitical supply chains and less stringent requirements around qualification for the EV tax credit in the US.

There were several changes to portfolio positioning during the quarter. The table below highlights several of the notable additions and exits.

 

 

An expanded PDF version of this commentary can be downloaded here.

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Originally published 05 April 2023.