Montana Climate Case, Hawaiian Electric Lawsuit, and More ESG News This Week

Chart of the week: Thematic sectors underperform in the year since IRA passage

A year on from Biden's landmark Inflation Reduction Act, analysts and press are weighing its impact against initial expectations. At least $224B in clean tech and semiconductor projects have been announced since passage of the IRA and Chips Act, with more than 80% of this destined for red states. Touting the IRA this week, Biden says it has created 170K jobs in clean energy and will create 1.5M over the next decade. About half of the $132B funding generated for clean tech has or will go towards EVs and batteries. 270 clean energy projects have been announced since August 2022, with notable activity in Arizona, Georgia, and Ohio. Despite the bill's impact, hurdles remain, such as the slow pace of construction, a shortage of contractors and engineers, and grid connection delays. The act also faces the possibility of a Republican president in 2024, who would likely to strip back much of the bill's key spending and could rework tax credit eligibility guidance.

Since the surprise announcement on July 27 last year, thematic ETFs representing EV, solar, wind, energy storage, and hydrogen shares have sharply underperformed the S&P 500 by 11% - 32% (Figure 1). An initial rally last summer soon dissipated along with rising costs for capital. Recently, shares have underperformed amidst a higher Treasury yield backdrop while earnings have disappointed in the solar space.

Some notable trends have emerged, shown in Figure 2. The Americas EV segment has outperformed on a relative basis in part due to domestically friendly IRA tax credits, while Asia manufacturers have lagged amidst oversupply and price competition. Energy storage has fared relatively well and, in particular, Australian lithium producers are close to unchanged. Global solar companies have underperformed while the US Department of Commerce anticircumvention case continues. On the other hand, US firms have led the way down in hydrogen and mixed renewables segments with EV charging similarly weak.

Companies that have bucked the downturn and posted share price gains include: First Solar (US manufacturing momentum), Fluence Energy (energy storage), Archer Aviation (eVOTL progress), Li Auto (strong EV offerings), Pilbara Minerals (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 26^th, 2022

Source: FactSet. *Thematic segment returns are equal weighted change in price for companies StreetAccount defines within each segment and region; stocks that move more than 50% are excluded; returns for regional themes with less than three companies are not shown.

Thematic performance for the week

Thematic sectors lower on the week with US names leading losses. Global EV shares are down amid ongoing price pressures, as well as concerns over cash burn and demand. Tesla continued its push to increase volume (aided by IRA incentives) with further price cuts in China and the launch of cheaper, lower range models in the US. Among earnings reports, Xos and Lightning eMotors results missed while Canoo beat, though all three names traded lower. Lucid was downgraded for cash burn and likelihood of future equity raises. Elsewhere, Vietnamese EV maker VinFast surged on its Nasdaq debut, closing with a higher market cap than Ford or GM. Nikola shares fell after it recalled all its electric trucks following a fire investigation.

US solar among the struggling segments with analysts downbeat on demand following Q2 earnings. SolarEdge and FTC Solar both received downgrades. Sunworks (lower backlog) and Maxeon (guidance cut on weak US demand) both missed. First Solar newly underperforming this week; analysts have speculated that DoC AntiCirc findings may be more supportive for Asian names. US wind names also lower with TPI Composites leading declines on bankruptcy of customer Proterra; follows negative sentiment surrounding blade quality concerns across the sector.

Environment

A Montana judge has ruled in favor of the state's youth, overturning two laws that barred state agencies from considering climate change when reviewing fossil fuel projects. Judge Kathy Seeley found Montanans have a "fundamental constitutional right to a clean and healthful environment" and that GHG emissions were proven to be "a substantial factor" in causing harm to Montana's climate. The 16 plaintiffs argued the permitting of coal and natural gas projects contradicted a 1972 amendment to the state's constitution requiring it to protect and improve the environment. In addition to targeting provisions in the Montana Environmental Policy Act (MEPA), which banned the consideration of climate change and GHG emissions for new energy projects, the judge also blocked a 2023 policy which made it harder for groups to sue government agencies over MEPA permitting decisions. Montana, which has vowed to appeal the decision in its state Supreme Court, had argued that its GHG emissions were too small to make a meaningful contribution to the climate crisis. Montana has the nation's largest recoverable coal reserves, ~30% of the US total, and is the nation's fourth largest coal producer. Coal-fired power plants also provided the largest share of the state's electricity generation at 42%. The decision marks the first victory in a US youth-led climate case, which experts believe could influence similar lawsuits elsewhere; the constitutions of New York and Pennsylvania also establish the right to a healthy environment.

Elsewhere, the UN IPCC head warned world leaders to reduce fossil fuel dependence amid climate emergency. COP28 host UAE failed to report methane emissions to UN. Brazil finalized plans to cap GHG emissions for large polluting companies as part of 2050 net zero pledge; is studying large scale hydrogen projects. The US has set two wind areas off the Oregon coast with 2.6GW capacity while Hawaii governor pointed to drought, invasive plants, strong hurricane as contributors to wildfire disaster. Canada's new clean grid regulations would allow some fossil fuel usage though Alberta Premier vows non-compliance. The EU adopted rules requiring product emissions reporting for new carbon import tax. GHG emissions fell 2.9% in 1Q23 while UK government's working carbon price that is three times higher than current levels may be exaggerating the cost savings of renewables. Meanwhile, China's emissions hit record levels due to coal usage though some expecting an earlier peak. Australia is considering a green tariff on imports of steel and cement form China, India, and Vietnam.

Social & Governance

Hawaiian Electric (HE) shares have sold off by more than 50% this week following deadly wildfires in Maui. Company is facing a lawsuit alleging negligence in not shutting down power amid high winds. Plaintiffs lawyers stated that videos and witness accounts point to the utility's equipment as a cause, with reports that downed power wires triggered fires. Analysts have noted that such shutdowns are not the company's policy due to electricity needs for hospitals and water supply; company may deny gross negligence. The firm is reportedly in talks with restructuring advisors; earlier in the week, S&P downgraded the utility's credit rating.

In other governance news, the US Supreme Court halted Purdue's $6B bankruptcy settlement while UBS will pay $1.4 surrounding mis-selling of mortgage bonds in run up to 2008 crisis. An NYC pension fund is facing a lawsuit centered on fiduciary responsibility and its recent sale of fossil fuel stocks. A financial trade group is challenging Missouri's efforts to curb ESG investing.

Labor negotiations in focus as Hollywood studios offered an expanded deal including pay increase, data sharing, AI assurances; writers union reportedly responded with no significant concessions on its side. The UAW pushed for strikes at Detroit Three automakers if no new contract deal in 30 days. Southwest Airlines reached a tentative agreement with transport workers union. Human rights controversies included First Solar disclosure of forced labor practices at a Malaysia factory that it uncovered in an audit, H&M looking into alleged labor abuses in Myanmar, Canada investigation of Ralph Lauren in possible forced labor usage.

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