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ESG developments: Montana climate case, Hawaiian electric lawsuit, and post-IRA market trends

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2023-08-18

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ESG developments have taken center stage this week, with significant events shaping the landscape of climate action, corporate responsibility, and market performance.

Chart of the Week: Thematic Sectors Reflect a Year of IRA Passage

A year has passed since the Inflation Reduction Act (IRA) was signed into law by President Biden, igniting discussions about its impact and outcomes. A staggering $224 billion has been allocated to clean technology and semiconductor projects in the wake of the IRA and Chips Act. Impressively, more than 80% of these investments are destined for states leaning red. President Biden lauded the IRA, asserting that it has not only generated 170,000 jobs in the clean energy sector but also projects the creation of 1.5 million more within the next decade. Nearly half of the $132 billion allocated to clean tech has been or will be directed towards electric vehicles (EVs) and batteries. Over 270 clean energy initiatives have been announced since August 2022, with key activities in Arizona, Georgia, and Ohio. Despite its transformative impact, obstacles remain, including sluggish construction progress, shortages of contractors and engineers, and delays in grid connections. Moreover, the future of the act could be influenced by the 2024 presidential race, potentially altering its key expenditures and tax credit criteria.

Notably, thematic exchange-traded funds (ETFs) centered around EVs, solar, wind, energy storage, and hydrogen have faced challenges in the year following the IRA announcement. These sectors have underperformed the S&P 500 by a margin ranging from 11% to 32%, as depicted in Figure 1. Initially, there was a surge in these ETFs' value, but it waned due to capital cost escalation. Recent underperformance can be attributed to higher Treasury yields and lackluster earnings, particularly in the solar sector.

Key trends have emerged in the thematic sectors, outlined in Figure 2. The Americas' EV segment has outperformed, buoyed by friendly IRA tax credits. Conversely, Asian manufacturers grapple with oversupply and price competition. Energy storage has demonstrated resilience, with Australian lithium producers holding steady. In the solar domain, global companies have faltered, partly due to the ongoing US Department of Commerce anticircumvention case. Hydrogen and mixed renewables, along with EV charging, have faced challenges in the US market.

Companies that have defied the downtrend and achieved share price gains include First Solar (driven by US manufacturing momentum), Fluence Energy (focusing on energy storage), Archer Aviation (making progress in electric vertical takeoff and landing vehicles), Li Auto (strong EV offerings), and Pilbara Minerals (meeting lithium demand).

Figure 1: Select thematic ETF indexed price changes since IRA announcement



Source: Investing.com

Figure 2: Average % price returns for thematic segments since market close July 26th, 2022



Source: FactSet

Thematic Performance Snapshot

This week saw thematic sectors facing downward pressure, with US entities leading the downturn. Global EV shares dipped due to ongoing pricing challenges, cash burn concerns, and demand uncertainties. Tesla continued expanding its volume (boosted by IRA incentives) by introducing lower-priced models and reducing prices in China and the US. In terms of earnings, Xos and Lightning eMotors reported misses, while Canoo outperformed. Despite the latter, all three stocks experienced declines. Lucid faced a downgrade due to cash burn and potential future equity raises. Vietnamese EV manufacturer VinFast made a notable splash on the Nasdaq, achieving a market cap surpassing that of Ford or GM. Conversely, Nikola witnessed a drop as it recalled all electric trucks following a fire investigation.

US solar companies struggled amid downbeat demand sentiment stemming from Q2 earnings. SolarEdge and FTC Solar both received downgrades. Sunworks (due to a lower backlog) and Maxeon (guidance cut based on weak US demand) both fell short. First Solar's performance also declined this week; analysts suggest that the US Department of Commerce's AntiCirc findings could be more supportive for Asian players. US wind companies faced a similar fate, with TPI Composites taking the lead in declines due to the bankruptcy of its customer, Proterra. This follows a broader sense of concern regarding blade quality across the sector.

Environmental Insights: Montana's Landmark Climate Case

In Montana, a significant legal victory unfolded as a judge ruled in favor of the state's youth, overturning two laws that previously prohibited state agencies from considering climate change when evaluating fossil fuel projects. Judge Kathy Seeley affirmed that Montanans possess a "fundamental constitutional right to a clean and healthful environment," highlighting the substantial role of greenhouse gas emissions in harming Montana's climate. The plaintiffs, consisting of 16 individuals, contended that coal and natural gas projects' permitting contradicted a 1972 state constitutional amendment mandating environmental protection and enhancement. The court not only targeted provisions of the Montana Environmental Policy Act but also blocked a 2023 policy that impeded groups from suing government agencies over permit decisions. Although Montana plans to appeal the decision, it marks a significant triumph in a youth-led climate case, potentially influencing similar lawsuits in other states with comparable environmental rights enshrined in their constitutions.

Global Climate and Governance Developments

The head of the UN's Intergovernmental Panel on Climate Change (IPCC) issued a dire warning, urging world leaders to reduce reliance on fossil fuels due to the ongoing climate emergency. In the realm of corporate responsibility, the United Arab Emirates (UAE), slated to host COP28, failed to report methane emissions to the UN. Brazil finalized emission capping plans for major polluting firms as part of its 2050 net-zero commitment. Canada explored large-scale hydrogen projects while enforcing clean grid regulations, although Alberta's Premier signaled non-compliance. The European Union adopted rules mandating emissions reporting for products, a precursor to a new carbon import tax. Greenhouse gas emissions decreased by 2.9% in 1Q23, yet the UK government's carbon pricing strategy might be overstating renewable cost savings. Meanwhile, China's emissions reached unprecedented levels due to coal consumption, despite expectations of an earlier peak. Australia contemplated implementing a green tariff on steel and cement imports from China, India, and Vietnam.

Social and Governance Updates: Hawaiian Electric's Turmoil

Hawaiian Electric (HE) witnessed a sharp decline of over 50% this week following deadly wildfires in Maui. The company faces a lawsuit alleging negligence for failing to shut down power amid high winds. Plaintiff attorneys pointed to videos and witness accounts implicating the utility's equipment, suggesting that downed power lines ignited the fires. Observers noted that power shutdowns clash with the company's policy, driven by the need for electricity in hospitals and water supply systems. The utility may refute allegations of gross negligence. HE reportedly engaged restructuring advisors, and earlier in the week, S&P downgraded its credit rating.

In other governance-related developments, the US Supreme Court halted Purdue's $6 billion bankruptcy settlement, and UBS agreed to a $1.4 billion settlement linked to the mis-selling of mortgage bonds prior to the 2008 financial crisis. A New York City pension fund is confronting a lawsuit centered on fiduciary responsibility after divesting from fossil fuel stocks. Additionally, a financial trade group is challenging Missouri's attempts to restrict ESG investing.

Labour and Industry Insights

Labour negotiations commanded attention this week, with Hollywood studios offering an expanded deal featuring pay increases, data sharing, and assurances related to artificial intelligence (AI). In response, the writers' union reportedly remained firm, making no significant concessions. The United Auto Workers (UAW) pushed for potential strikes at Detroit's "Big Three" automakers if a new contract deal isn't reached within 30 days. Meanwhile, Southwest Airlines reached a tentative agreement with a transport workers union.

Human rights concerns emerged as First Solar revealed forced labour practices in a Malaysian factory during an audit. H&M launched an investigation into alleged labour abuses in Myanmar, while Canada probed Ralph Lauren for potential forced labour usage.

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