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Green energy stocks have fallen back to levels last seen five years ago ahead of an environmental, social and governance frenzy that pushed them to record highs, as uncertainty over political support for the clean energy transition away from fossil fuels depresses the market.
The S&P Global Clean Energy Transition Index, an important barometer that tracks the performance of big clean energy companies, has dropped 16 per cent over the past 12 months.
Some investors believed shares would start to recover late last year as interest rates levelled off or fell and electricity prices climbed.
But US President Donald Trump’s decision to freeze Inflation Reduction Act funding for green projects and withdraw the country from the Paris climate agreement have contributed to negative sentiment. Support for measures to cut fossil fuels is also under pressure in some European markets.
Deirdre Cooper, head of sustainable equity at global investment manager Ninety One, said pessimism hanging over the decarbonisation sector was “exceptional” and mismatched with underlying company performance.
“Companies that we hold in the decarbonisation sector have seen strong growth and stable returns, but they have underperformed in terms of share price,” she said.
“I have never seen such bearishness in terms of the valuation for companies with structural growth . . . The market is assuming no growth for decarbonisation [ie the sector].”
“In general, underperformance was in part driven by ongoing challenges such as the interest rate and inflationary environment, meaning higher project costs and policy uncertainty impacting the clean energy sector,” added analysts at S&P Dow Jones Indices.
The decline outweighs a 5 per cent fall over the same period in the more oil and gas-weighted S&P Global BMI Energy (Sector) index, with several oil and gas stocks benefiting from Trump’s mantra of “drill, baby, drill”.
It also contrasts with a 14 per cent increase in the S&P Aerospace and Defense Select Industry Index, as weapons-makers rise on the prospect of higher defence spending in the EU.
After peaking in early 2021, the S&P Global Clean Energy Index started to fall steadily as interest rates rose, with clean energy projects particularly vulnerable to higher borrowing costs due to high upfront costs.
S&P Dow Jones Indices analysts noted the overall performance of the index masked significant variation in company performance.
For example, Danish wind turbine maker Vestas’s shares are down more than 44 per cent over the past 12 months, while Spanish renewable energy and grid developer Iberdrola has climbed almost 30 per cent over the same period.
James Smith, fund manager at Premier Miton, said in some cases investors were overly fixated on pressure from interest rates, given many clean energy developers have index-linked returns.
The underlying picture was not all “doom and gloom” he noted, highlighting, for example, support from several Republican congressman for tax credits for green energy.
The weakness in listed company valuations comes despite overall strong investment in clean energy technology.
S&P Global Commodity Insights predicts it will overtake upstream oil and gas spending in 2025, for the first time, driven by solar and battery storage.
Erwan Kerouredan, analyst at RBC Capital Markets, added that hydrogen companies exposed to markets outside of the EU and the US, such as the Middle East, were better positioned.
“The funding environment is completely different,” he said. “There’s a difference in terms of firepower.”
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