Investing in the New-Energy Economy

The transition from fossil fuels to renewable energy—a core theme in values-based portfolios for almost two decades—has been catapulted from a niche investment theme to the mainstream thanks to the passage of the most significant climate action legislation on record.

The Inflation Reduction Act (IRA), passed in August, is a profound inflection point in the evolution of climate policy that puts U.S. muscle behind the global push toward carbon-reduction goals. The bill, which dedicates $369 billion to climate provisions, is likely to elevate investor confidence in the clean-energy theme and open the door to new investment opportunities.

“The IRA will provide a huge boost to companies and projects, both proven and emerging, that enable decarbonisation at scale,” says Justina Lai, chief impact officer at Wetherby Asset Management in San Francisco. “It provides much more policy certainty to companies and funds already investing in the energy transition and incentivises laggards to catch up.”

The new legislation requires all emissions-producing sectors, such as transportation, agriculture, construction, and utilities, to reduce greenhouse gases, and provides a host of tax incentives to companies and individuals to make environmentally friendly choices, such as buying an electric vehicle and installing solar panels.

Lai expects more innovation in renewable energy, energy efficiency, electric vehicles, and batteries, along with nascent technologies in areas such as green hydrogen, direct air capture, carbon capture and storage, energy storage, and sustainable fuels.

A goal to have net-zero carbon emissions by 2050—an agreed-upon target by many nations and the global scientific community—isn’t just a technology investment story. The carbon-reduction theme is intersecting with agriculture, construction, transportation, finance, and other industries.

In Kent, England, InspiraFarms creates modular cold rooms and packing-houses for agricultural use to reduce reliance on diesel generators and reduce food waste. Berlin-based Betteries upcycles electric-vehicle batteries and incorporates them in clean-power systems. In Lexington, Ky., Rubicon has developed software to help waste-management companies, businesses, and municipalities reduce carbon emissions.

“This is about investing across the entire value chain of this transition,” says Ian Schaeffer, global market strategist at J.P. Morgan Private Bank.

While a major area of innovation is in slowing climate change, another is in addressing the needs of communities already struggling with the impact of rising global temperatures.

Source Global, a Scottsdale, Ariz., start-up, creates new solar-powered technology that extracts water vapour out of the air to make drinking water, eliminating the need for fossil-fuel-dependent methods for delivering drinking water to communities whose water supply is drying up due to climate changes.

“The beauty of the Inflation Reduction Act is that it opens the door to climate adaptation in underserved communities. That creates massive opportunity,” says Cody Friesen, Source’s founder and CEO.

J.P. Morgan’s Schaeffer says investors should be looking toward the primary enablers of the transition to clean energy, and points to two important themes: green buildings and semiconductors.

“Buildings account for a staggering amount of carbon emissions,” he says. “We think there’s opportunity in sustainable construction materials, efficient air systems, incorporating smart systems, and digital infrastructure.”

Semiconductors are essential to modern technology and will play a big role in the transition of the automotive industry from internal combustion engines to electric vehicles, Schaeffer says. “This will require more powerful and efficient semiconductors. The demand for these will skyrocket in coming years.”

Opportunities are global in scope, and suited for long-term investors, he says. “This transition will be a long and bumpy but ultimately inevitable process likely to take us through the middle half of this century.”

As the war against Hamas dragged into 2024, there were worries here that investment would dry up in Israel’s globally important technology sector, as much of the world became angry against the casualties in Gaza and recoiled at the unstable security situation.

In fact, a new survey found investment into Israeli technology startups grew 28% last year to $10.6 billion. The influx buoyed Israel’s economy and helped it maintain a war footing on several battlefronts.

The increase marks a turnaround for Israeli startups, which had experienced a decline in investments in 2023 to $8.3 billion, a drop blamed in part on an effort to overhaul the country’s judicial system and the initial shock of the Hamas-led Oct. 7, 2023 attack.

Tech investment in Israel remains depressed from years past. It is still just a third of the almost $30 billion in private investments raised in 2021, a peak after which Israel followed the U.S. into a funding market downturn.

Any increase in Israeli technology investment defied expectations though. The sector is responsible for 20% of Israel’s gross domestic product and about 10% of employment. It contributed directly to 2.2% of GDP growth in the first three quarters of the year, according to Startup Nation Central—without which Israel would have been on a negative growth trend, it said.

“If you asked me a year before if I expected those numbers, I wouldn’t have,” said Avi Hasson, head of Startup Nation Central, the Tel Aviv-based nonprofit that tracks tech investments and released the investment survey.

Israel’s tech sector is among the world’s largest technology hubs, especially for startups. It has remained one of the most stable parts of the Israeli economy during the 15-month long war, which has taxed the economy and slashed expectations for growth to a mere 0.5% in 2024.

Industry investors and analysts say the war stifled what could have been even stronger growth. The survey didn’t break out how much of 2024’s investment came from foreign sources and local funders.

“We have an extremely innovative and dynamic high tech sector which is still holding on,” said Karnit Flug, a former governor of the Bank of Israel and now a senior fellow at the Jerusalem-based Israel Democracy Institute, a think tank. “It has recovered somewhat since the start of the war, but not as much as one would hope.”

At the war’s outset, tens of thousands of Israel’s nearly 400,000 tech employees were called into reserve service and companies scrambled to realign operations as rockets from Gaza and Lebanon pounded the country. Even as operations normalized, foreign airlines overwhelmingly cut service to Israel, spooking investors and making it harder for Israelis to reach their customers abroad.

An explosion in negative global sentiment toward Israel introduced a new form of risk in doing business with Israeli companies. Global ratings firms lowered Israel’s credit rating over uncertainty caused by the war.

Israel’s government flooded money into the economy to stabilize it shortly after war broke out in October 2023. That expansionary fiscal policy, economists say, stemmed what was an initial economic contraction in the war’s first quarter and helped Israel regain its footing, but is now resulting in expected tax increases to foot the bill.

The 2024 boost was led by investments into Israeli cybersecurity companies, which captured about 40% of all private capital raised, despite representing only 7% of Israeli tech companies. Many of Israel’s tech workers have served in advanced military-technology units, where they can gain experience building products. Israeli tech products are sometimes tested on the battlefield. These factors have led to its cybersecurity companies being dominant in the global market, industry experts said.

The number of Israeli defense-tech companies active throughout 2024 doubled, although they contributed to a much smaller percentage of the overall growth in investments. This included some startups which pivoted to the area amid a surge in global demand spurred by the war in Ukraine and at home in Israel. Funding raised by Israeli defense-tech companies grew to $165 million in 2024, from $19 million the previous year.

“The fact that things are literally battlefield proven, and both the understanding of the customer as well as the ability to put it into use and to accelerate the progress of those technologies, is something that is unique to Israel,” said Hasson.

Investing in the New-Energy Economy

The 28% increase buoyed the country as it battled on several fronts but investment remains down from 2021