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Even before the recent UN climate report sounded the alarm on 'unequivocal' human-caused global warming, policymakers and financial advisors have been calling for greater decarbonization efforts as part of the U.S. energy transition.
“Rising demand to decarbonize offers one of the most powerful secular themes in the market, in our view,” Morgan Stanley analysts wrote in a recent note. “We continue to believe potentially more supportive policy for decarbonization, coupled with pressure from broader stakeholders, will create value for companies that can enable the transition.”
The Morgan Stanley note stated that the world needs to invest an estimated $50 trillion in key areas to achieve the goals set out in the Paris Agreement while the companies that can help facilitate the transition — those who can supply solar panels, electric vehicles, improved plastic recycling, and more — could reap the rewards of that spending.
“The relationship between decarbonization and P/E premium/(discount) will, in our view, grow in importance over time, both because faster decarbonization is highly correlated with faster EPS growth, and because ESG interest continues to revolve around 'rate of change' rather than absolute carbon emissions,” Morgan Stanley Analyst Stephen Byrd wrote.
The note cited clean energy provisions in the $1 trillion bipartisan infrastructure bill, which the Senate passed on Tuesday and is headed for the House.
Although President Biden's full climate agenda was scaled back, the bill includes $73 billion to modernize the electric grid (which includes $300 million to develop carbon capture and clean hydrogen technologies), $7.5 billion for EV charging stations, and an additional $7.5 billion for electric and low carbon buses and ferries.
Morgan Stanley analysts wrote that the infrastructure bill could “set the stage” for more robust decarbonization efforts passed through reconciliation, which would be “the Biden administration's first opportunity for meaningful climate legislation.”
The initial bipartisan framework is “a very good down payment on climate,” Dan Carol, public finance program director at the Milken Institute, told Yahoo Finance (video above). “But it's good that the Biden administration is taking the two-track approach because there [are] lots of things that are needed in there.”
The $3.5 trillion budget blueprint that Senate Democrats passed on Wednesday includes ways to cut greenhouse gases and embark on climate-related research and resiliency projects. The plan also lays out incentives in the form of tax credits for consumers and manufacturers who purchase and produce electric vehicles. Additionally, The Clean Electricity Payment Program, a rebranded alternative to the Clean Electricity Standard that Democrats sought, would pay utilities to forgo fossil fuels in favor of renewable electricity sources. Also included is a carbon import fee that taxes goods from high-polluting nations.
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In the private sector, corporations have been considering how climate change could affect their bottom lines and many have made inroads for cutting emissions by pledging net-zero targets.
“Whether it's wildfires in places like Turkey or the American West, extreme flooding in China and Europe, I think we all understand that climate change is a serious issue that requires some very urgent resolve,” Rob Fauber, Moody's CEO, told Yahoo Finance.
“We have a very broad customer base, including financial institutions and corporations and governments,” Fauber added. “They're all seeking to better understand and measure and manage the financial impacts of climate change. ... So, we see this as a place where there'll be long-term customer demand to support our ongoing growth.”
In its "decarbonization playbook," Morgan Stanley highlighted stocks in seven sectors — clean tech, autos & shared mobility, utilities, multi-industry, chemicals, energy, and transportation — that could benefit from exposure to the decarbonization theme.
The tailwinds for these sectors stem from factors including falling costs of renewable energy, deploying renewables at scale, consumer awareness, and policy support.
“We see a growing demand outlook for not only renewable energy solutions, such as wind and solar, but some of the potentially more transformative decarbonization technologies, such as carbon capture & storage,” the note stated.
Grace is an assistant editor for Yahoo Finance and a UX writer for Yahoo products.