A year after the Inflation Reduction Act (IRA) was signed into law it’s a good reminder that there’s opportunity in infrastructure investments in the U.S., particularly green technology or those that profit from the transition from fossil fuels to renewable-energy sources.
“This is a really good time to be investing in the sector,” says Michael McGown, head of North American infrastructure private markets at Mercer Alternatives. “There is a real need to transition away from carbon, and the fact that the U.S. government has gotten behind this makes it a win.”
Yes, there is some political pushback against the law—and there are still those who want to rely on fossil fuels and other traditional forms of energy production. But many experts point to the IRA’s transformative potential, and its impact on energy-transition spending in particular, as a good opportunity for savvy investors.
“I don’t think in my career I’ve ever seen a law have a greater impact on economic development in this country,” Gregory Wetstone, chief executive officer of the American Council on Renewable Energy, a clean energy lobbying group, said in July.
Wall Street agrees. Calling themselves “positive” on greentech opportunities, analysts at UBS wrote in July that they forecast US$40 trillion to US$50 trillion of global energy-transition investments in the years 2021–30, in support of net-zero efforts.
“We also expect to see technological developments and a broad-based move to global electrified vehicles (i.e., battery-electric vehicles and plug-in hybrid electric vehicles),” the UBS team wrote in a note. “Such sales may account for a 30% share of the global market by 2025 and a 60%–70% share by 2030, in our view.”
Within the category of energy transition, there are some infrastructure themes that may appeal more than others, either because of their promise of innovation or potential monetary returns.
Mercer’s McGowan points to investments in carbon reduction and abatement, those dedicated to decommissioning old power plants to replace them with renewable or hybrid technologies, and investing in ammonia, which is often used to transport clean hydrogen.
More cutting-edge technologies are likely to offer investors better total returns, says Steven Novakovic, director of curriculum for the Chartered Alternative Investment Analyst Association. In contrast, the more mature, stable, user-fee oriented investments are less return-oriented, but better bets for income investors.
“Generating, moving, or storing energy tends to be income-oriented,” Novakovic says.
Importantly, even though energy infrastructure may be capital-intensive, higher and rising interest rates aren’t likely to be a negative for the sector.
“High barriers to entry and the monopolistic positioning of many infrastructure assets tend to make them less sensitive to the economic cycle,” the UBS analysts said. “In addition, they can help stabilise income generation in a multi-asset class portfolio, particularly when accounting for long-term inflation. Since 2003, infrastructure has typically performed best when global inflation has been high (based on Cambridge Associates Infrastructure Index data).”
With interest rates higher across the board, some investors may simply choose to stick with safer fixed-income assets, Novakovic says. But, he says, “Ultimately infrastructure still has a diversifying effect for portfolios.”
Where to Invest
What are the best ways for investors to access the sector? Qualified investors, or those with at least a few million to spend, can put money directly into private-market plays, such as private-equity funds or even venture-capital funds, which are likely to pay the most in total returns.
There are, of course, typical concerns with private-market strategies, the UBS team said: “illiquidity, longer lockup periods, leverage, concentration risks, and limited control and transparency of underlying holdings. While risks can’t be fully eliminated, it is possible to mitigate them through strong due diligence and strict manager selection.”
They add a shout-out for global industrial stocks, writing that the “sector’s composition has become increasingly diversified and no longer behaves like a traditional cyclical play, in our view.”
In a July note to clients, J.P. Morgan Private Bank analysts wrote about the opportunities in the semiconductor industry driven by the IRA in addition to last year’s CHIPS and Science Act. Semiconductors, for instance, can be used in the process of decarbonisation, particularly for powering “smart” electric grids and other forms of infrastructure
“The semiconductor industry is poised for growth as chips penetrate the clean energy value chain: in photovoltaic solar cells, wind turbines, EVs, batteries, charging stations, and power grids,” the note said.
CHIPS alone allocates more than US$50 billion to subsidise domestic manufacturing of advanced semiconductors. “These government incentives, combined with the wide variety of uses for semiconductors, have pushed companies to ramp up supply,” J.P. Morgan said.
For investors who want to access a basket of energy-transition stocks, several exchange-traded funds may fit the bill. The Global X Lithium & Battery Tech ETF (ticker: LIT) “invests in the full lithium cycle, from mining and refining the metal, through battery production,” according to fund documents, while the Sprott Energy Transition Materials ETF (SETM) says it, “provides pure-play access to a range of critical minerals necessary for the global clean-energy transition.”
And for those who prefer bonds, or just want a more tax-efficient strategy, many municipalities are also issuing debt to fund cleaner energy. In June, the California Community Choice Financing Authority sold nearly US$1 billion in bonds to finance the acquisition of clean energy—including geothermal and solar-plus-storage—by the Clean Power Alliance of Southern California. The projects could affect as many as 3 million residents.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Couples find that lab-grown diamonds make it cheaper to get engaged or upgrade to a bigger ring. But there are rocky moments.
Wedding planner Sterling Boulet has some advice for brides-to-be regarding lab-grown diamonds, which cost a fraction of the natural ones.
“If you’re trying to get your man to propose, they’ll propose faster if you offer this as an option,” says Boulet, of Raleigh, N.C. Recently, she adds, a friend’s fiancé “thanked me the next three times I saw him” for telling him about the cheaper lab-made option.
Man-made diamonds are catching on, despite some lingering stigma. This year was the first time that sales of lab-made and natural mined loose diamonds, primarily used as center stones in engagement rings, were split evenly, according to data from Tenoris, a jewellery and diamond trend-analytics company.
The rise of lab-made stones, however, is bringing up quirks alongside the perks. Now that blingier engagement rings—above two or three carats—are more affordable, more people are dealing with the peculiarities of wearing rather large rocks.
Esther Hare, a 5-foot-11-inch former triathlete, sought out a 4.5-carat lab-made oval-shaped diamond to fit her larger hands as a part of her vow renewal in Hawaii last year. It was a far cry from the half-carat ring her husband proposed with more than 25 years ago and the 1.5-carat upgrade they purchased 10 years ago. Hare, 50, who lives in San Jose, Calif., and works in high tech, chose a $40,000 lab-made diamond because “it’s nuts” to have to spend $100,000 on a natural stone. “It had to be big—that was my vision,” she says.
But the size of the ring has made it less practical at times. She doesn’t wear it for athletic training and swaps in her wedding band instead. And she is careful to leave it at home when traveling. “A lot of times I won’t take it on vacation because it’s just a monster,” she says.
The average retail price for a one-carat lab-made loose diamond decreased to $1,426 this year from $3,039 in 2020, according to the Tenoris data. Similar-sized loose natural diamonds cost $5,426 this year, compared with $4,943 in 2020.
Lab-made diamonds have essentially the same chemical makeup as natural ones, and look the same, unless viewed through sophisticated equipment that gauges the characteristics of emitted light.
At Ritani, an online jewellery retailer, lab-made diamond sales make up about 70% of the diamonds sold, up from roughly 30% two years ago, says Juliet Gomes, head of customer service at the company, based in White Plains, N.Y.
Ritani sometimes records videos of the lab-diamonds pinging when exposed to a “diamond tester,” a tool that judges authenticity, to show customers that the man-made rocks behave the same as natural ones. “We definitely have some deep conversations with them,” Gomes says.
Not all gem dealers are rolling with these stones.
Philadelphia jeweller Steven Singer only stocks the natural stuff in his store and is planning a February campaign to give about 1,000 one-carat lab-made diamonds away free to prove they are “worthless.” Anyone can sign up online and get one in the mail; even shipping is free. “I’m not selling Frankensteins that were built in a lab,” Singer says.
Some brides are turned off by the larger bling now allowed by the lower prices.When her now-husband proposed with a two-carat lab-grown engagement ring, Tiffany Buchert, 40, was excited about the prospect of marriage—but not about the size of the diamond, which she says struck her as “costume jewellery-ish.”
“I said yes in the moment, of course, I didn’t want it to be weird,” says the physician assistant from West Chester, Pa.
But within weeks, she says, she fessed up, telling her fiancé: “I think I hate this ring.”
The couple returned it and then bought a one-carat natural diamond for more than double the price.
When Boulet, the wedding planner in Raleigh, got engaged herself, she was over the moon when her fiancé proposed with a 2.3 carat lab-made diamond ring. “It’s very shiny, we were almost worried it was too shiny and was going to look fake,” she says.
It doesn’t, which presents another issue—looking like someone who really shelled out for jewellery. Boulet will occasionally volunteer that her diamond ring came from a lab.
“I don’t want people to think I’m putting on airs, or trying to be flashier than I am,” she says.
For Daniel Teoh, a 36-year-old software engineer outside of Detroit, buying a cheaper lab-made diamond for his fiancée meant extra room in his $30,000 ring budget.
Instead of a bigger ring, he got her something they could both enjoy. During a walk while on an annual ski trip to South Lake Tahoe, Calif., Teoh popped the question and handed his now-wife a handmade wooden box that included a 2.5-carat lab-made diamond ring—and a car key.
She put on the ring, celebrated with both of their sisters and a friend, who was the unofficial photographer of the happy event, and then they drove back to the house. There, she saw a 1965 Mustang GT coupe in Wimbledon white with red stripes and a bow on top.
Looking back, Teoh says, it was still the diamond that made the big first impression.
“It wasn’t until like 15 minutes later she was like ‘so, what’s with this key?’” he adds.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’