Budget reconciliation: The key to investors’ net zero commitments

The finance community can help catalyze climate progress by publicly supporting the climate provisions of the budget reconciliation package and pushing portfolio companies and corporate clients to do the same.

For the 128 asset managers and 61 banks that have committed to align trillions of dollars with the Paris Agreement, this moment presents a once-in-a-generation opportunity to achieve their climate goals – not through investments but through public policy advocacy.

The Build Back Better Act includes incentives and investments that are critical to combat climate change. Without this legislation, the U.S. will almost certainly fail to reach both its 2025 and 2030 emissions reduction benchmarks.

The finance community can help catalyze climate progress by publicly supporting the climate provisions of the budget reconciliation package and pushing portfolio companies and corporate clients to do the same. These engagement efforts will enable Wall Street to mitigate the systemic risks climate change poses to the financial system, satisfy growing client demand for ESG, and meet decarbonization pledges. Advocating for climate policy is in investors’ best interest.    

Three provisions, in particular, are critical for emissions reduction: tax incentives for clean electricity and clean transportation; policy to decarbonize the power sector, and a methane fee. By endorsing these specific measures, asset management firms, banks, and the companies they influence can help drive the climate action needed to safeguard their bottom lines.

Tax Incentives for Clean Electricity and Clean Transportation

With tax incentives for clean electricity and clean transportation, Wall Street can bolster decarbonization while making climate tech investing more financially viable.

The solar investment tax credit (ITC), for example, has undergirded solar financing for over 15 years. Since the ITC’s enactment in 2006, the U.S. solar industry has grown by more than 10,000%, offering investors steady returns thanks to supportive public policy.

Finance firms can continue to capitalize on renewable energy deployment by calling for a ten year extension of the ITC and the production tax credit. Supporting similar credits for transmission and storage – two essential elements of clean energy development – would prime renewable investors for even greater success.  

Tax incentives cannot end, however, with the power sector. Transportation accounts for the largest percentage of CO2 emissions in the U.S. and exacerbates public health inequities in communities exposed to air pollution along highways, ports, and rail yards.

Gabe Malek,
Project Manager, Investor Influence

By backing a new tax credit for zero-emission commercial vehicles, asset managers and banks can accelerate the electrification of medium- and heavy-duty trucks. This incentive could help lower the total cost of ownership for clean trucks, providing Wall Street with new financing opportunities. Additionally, tax credits for used electric vehicles, charging infrastructure, and domestic electric vehicle manufacturing can push the broader road transport sector towards decarbonization.

Tax incentives for clean electricity and clean transportation benefit the finance community – they promote decarbonization and foster private sector investment in the energy transition.

Policy to Decarbonize the Power Sector

Meeting the goals of the Paris Agreement will require electric utilities to cut emissions by 80% by 2030. Investors aligned with net zero thus have good reason to support legislation intended to decarbonize the power sector.

In addition to supporting the robust suite of clean energy tax credits currently in the Build Back Better bill, investors should endorse grants, loans, and incentives outside of the tax code that can drive deployment of clean power generation and provide much needed business certainty.

Investors could also advocate for a corporate carbon fee that puts a price on the externality of carbon pollution. Carbon pricing could supercharge power sector decarbonization. A price on carbon would push financial markets to incorporate the cost of emissions into asset valuations. As a result, clean energy would become more financially viable for investors looking to direct capital to climate solutions.  

Supporting provisions to decarbonize the power sector can help investors facilitate near term emissions reduction key to reaching net zero by 2050. The likely proliferation of renewable energy projects stemming from these measures would also present Wall Street with reliable investment opportunities.

Methane Fee

Finally, by calling for a fee on methane pollution from the oil and gas sector, asset managers and banks can protect their balance sheets from climate risk en route to net zero by 2050.   

Methane is 84 times more potent than CO2 in the first 20 years after its release, accounting for at least 25% of current warming. Minimizing the immediate impacts of climate change depends on aggressively slashing methane emissions. In fact, ambitious methane mitigation in the oil and gas sector could slow warming by 30%.

Including a methane fee in the budget reconciliation package could thus generate substantial climate progress. The proposed fee would cover oil and gas production, processing, and transmission, penalizing companies whose pollution exceeds industry thresholds. For banks heavily exposed to the oil and gas sector, this measure could play a pivotal role in reducing financed emissions.

The Build Back Better Act is the best tool available to fight climate change. Whether investors speak out or remain silent will reveal their true commitment to net zero.