The sell-off that’s gripped green equities looks set to continue into 2024, marking a fourth consecutive year of losses.
The negative sentiment appears to be engulfing a wider range of green asset classes, with Tesla Inc. at risk of losing its place among the top 10 stocks in the S&P 500. Nearly two-thirds of the 620 MLIV Pulse respondents said they plan to stay away from the electric vehicle sector, and 57% expect the iShares Global Clean Energy exchange traded fund – which is down about 30% this year – to extend its slide in 2024.
The gloomy outlook comes as green investors deal with the shock of a post-pandemic world of much higher interest rates. There’s also the ongoing political backlash in many US states and an evolving regulatory backdrop that has the potential to expose greenwashing and further damage valuations.
Chat Reynders, who’s been a sustainable investor for three decades, calls the downturn in green assets a “watershed moment” for the industry. The hype that had surrounded going green to tackle climate change had led some investors to take their eye off traditional financial metrics such as supply, demand and balance sheets, he said.
“We will look back and say this was an era of extraordinary speculation,” said Reynders, who helps oversee about $3.5 billion as co-founder of Reynders, McVeigh Capital Management in Boston. “Whether it was a meme stock or a green stock, everybody was marketing and selling extremely hard.”
Although MLIV Pulse respondents are largely united in their gloomy view of green stocks in the short term, the picture is different when the time horizon is extended. Most respondents believe they’ll need to protect their portfolios from climate risk in the coming years.
Garvin Jabusch of Green Alpha Advisors in Louisville, Colorado, said the current sell-off represents “a temporary pivot of capital away from renewable energy”. Brent Newcomb, president of Ecofin, which manages about $2 billion in London and Kansas City, said he sees the market downturn as a buying opportunity and he’s adding to his positions in utility stocks.
And Bill Green of Climate Adaptive Infrastructure in Mill Valley, California, said it’s a “red herring” to look at the value of publicly traded solar or wind stocks and conclude that the energy transition has stalled.
“Public markets are notoriously fickle and have, in our view, overreacted to rising interest rates and supply chain challenges,” he said.
But timing the upturn is proving difficult. Investors with environmental, social and governance (ESG) objectives had hoped this year would see a rally thanks to historic levels of support in the form of packages such as the US Inflation Reduction Act. Instead, the highest inflation in decades and rising interest rates have hit many traditional ESG stocks, with wind and solar among the biggest losers.
Many clean energy companies are capital intensive, which makes them more vulnerable to higher borrowing costs than oil and gas companies with well-established rigs and platforms. To make matters worse, wind and solar producers have been hit by project delays, exacerbated by supply chain bottlenecks, derailed plans and rising costs.
The next green asset class expected to fall is electric vehicles, as battery-powered cars remain too expensive for many households struggling with the long-term effects of inflation. Tesla shares rose almost 140% this year to a high in July, but have since fallen around 20%.
Two years ago, Tesla was valued at $1.2 trillion, briefly making it the fifth largest company in the S&P 500. Its market value has since fallen below $800 billion, making it the eighth largest company in the benchmark. Nearly 50% of MLIV Pulse respondents expect it to fall out of the top 10 next year. Tesla investors are also trying to figure out how to respond to a chief executive who regularly shocks the markets with highly controversial social media outbursts.
But the pace of climate change is forcing an inevitable pivot to greener technologies, which will require more investment.
“Next year is an important year for the implementation and renewal of decarbonisation targets, as decarbonisation efforts under the Paris Agreement require additional front-loaded net investment,” said Barclays Plc analysts led by Maggie O’Neal. “With 2023 likely to be the hottest year on record and 2024 potentially similarly hot, adaptation and decarbonisation will remain in focus.”
Against this backdrop, two-thirds of MLIV Pulse respondents expect climate change to impact portfolio values over the next three years. This is in line with previous similar surveys: a Bloomberg Intelligence poll published earlier this month found that 89% of investors acknowledge that ESG metrics are here to stay. And a survey of mostly US-based Bloomberg terminal users published in August found that around two-thirds said ESG was too important to ignore, even if they did not like the label.
Barclays’ O’Neal also notes that the political backdrop remains key.
“Half of the world’s population will vote in elections in 2024,” she said. “As public policy drives many of the factors that make ESG material to investors today, the outcomes of these elections matter.” Respondents include portfolio managers, traders and individual investors. This week’s poll asks what’s the best place to invest your extra cash. Share your views here.
