How to join the green arms race

Another year, another war. This time, mercifully, the belligerents’ aims are more laudable, and the battleground involves climate politics and tax breaks. But the stakes are no less high.

This month, half a year after the US passed legislation that guarantees around $370bn (£300bn) in subsidies for American-made green technology, things came to a head at Davos. The European Union, until recently more accustomed to pleading with Washington to step up on climate change, was suddenly very angry.

Many in the bloc argue the US plan discriminates against European companies and amounts to thinly veiled protectionism. There is evidence for this. Some US states, armed with tax break promises, are already trying to lure European clean energy firms across the Atlantic.

While European Commission president Ursula von der Leyen struck a conciliatory tone in her response at the World Economic Forum, her remarks left little doubt that a green arms race is under way. “Those who develop and manufacture the technology that will be the foundation of tomorrow’s economy will have the greatest competitive edge,” she said.

Stuck in the middle – outside the EU tent, unable to convert its ‘special relationship’ with the US into economic substance and lacking a coherent trade or industrial strategy – is little old Blighty. This week, the director-general of the Confederation of British Industry (CBI) warned that the country is on its own losing side and bemoaned the lack of a British response at “exactly the time that the Americans and the Europeans are going bigger and faster”.

How then, might the humble UK retail investor mount their own ‘dig for victory’ response?

One option is to see past the geopolitical spat and take the view that climate-change-combatting technology is worth investing in wherever it is based. If the aim is global decarbonisation, economic competition shouldn’t matter. The real battle is stateless.

Still, hard-headed investors gravitate toward the best risk-adjusted returns. To that end, one might conclude that the US – with its business-friendly laws and culture and nous for global industry – looks like an attractive place to make a bet. Not only does the country have lots of emissions to cut, but its track record of winning technological races is unmatched.

Shortly after the US passed its green plan, we highlighted the case for solar power investor US Solar Fund (USFP). Five months on, the trust’s discount has widened further, despite robust (Liberum thinks growing) appetite for assets more or less in the shop window.

But do secondary market share purchases constitute much of a war effort? An underappreciated truth of environmental, social and governance (ESG) investing is that buying green stocks does little to combat climate change. At the margin, bidding up the value of green securities might help lower a company’s capital costs, but it is better to think of a share in Greencoat UK Wind (UKW) as simply a claim on its future cash flows.

Before capital markets got jittery in 2022, both UKW and other renewables-focused funds had a good run of equity fundraising. Hopefully, once things settle down, investors in this corner of the listed market will again have regular opportunities to pool their capital into funds directed at new green projects.

Until then, investors wanting to directly fund green innovation may have to add risk. One such route is via venture capital trusts (VCTs), and tax-efficient vehicles that take stakes in early-stage growth companies. The Octopus Future Generations VCT (OFG), which raised £40mn at launch a year ago, is in the process of selling another £30mn slug of shares, which it will use to fund companies focused on the energy transition, among other themes. Click here for more on the VCTs raising money this year.

As with any war effort, altruism is also required. For those who feel investing in the future of the planet needn’t promise returns, there are options. One is to donate to a non-profit like the Clean Air Task Force, whose climate solutions advocacy work has been cited for its cost-effectiveness. Failing this, tree-planting schemes – now abundant and in some instances at huge scale – are a proven, low-cost technology to get behind.