Green energy shares have fallen to five-year lows, as investors increasingly worry about political support for the worldwide shift away from fossil fuels, as reported by the Financial Times.
The S&P Global Clean Energy Transition Index, an important clean energy company benchmark, is down 16% over the last year. The drop is more than the challenges of increasing interest rates and cost of projects but also political choices that have unsettled investor confidence.
Political setbacks discourage hopes of recovery
Optimism among investors that green energy stocks would rebound as interest rates stabilized and power prices increased has been eroded by policy flip-flops. US President Donald Trump's move to put on hold Inflation Reduction Act money for green projects and leave the Paris climate pact has hit sentiment hard, the Financial Times has reported. Back in Europe, backing for policies to cut the use of fossil fuels has also softened in some markets.
Deirdre Cooper, senior sustainable equity at investment manager Ninety One, labelled the prevailing negativity as "exceptional" and out of line with company performance. "Firms that we own within the decarbonisation space have had good growth and stable returns, but have lagged on a share price basis," Cooper said. "I have never witnessed such bearishness in terms of valuations for firms with structural growth."
S&P Dow Jones Indices analysts also concurred with this, adding that although inflation and interest rate pressures have helped drive up project costs and uncertainty, they have disproportionately burdened clean energy stocks.
Clean energy lags behind oil and defence sectors
The plight of the clean energy sector is a contrast to others. The S&P Global BMI Energy (Sector) index, which is controlled by oil and gas, fell just 5% in the same timeframe thanks to Trump's encouragement of fossil fuel exploration. The S&P Aerospace and Defense Select Industry Index, on the other hand, grew by 14% as investors banked on increased defence spending within the EU.
The gap also highlights the effect of lending rates on clean energy schemes. Following their peak in early 2021, the clean energy index started a consistent fall as lending rates went up. Increased interest rates have also made initial investments in clean energy facilities progressively onerous.
Yet performance in the industry has been mixed. Danish wind turbine manufacturer Vestas had its shares decline more than 44% in the last year, while Spanish renewable energy company Iberdrola's shares increased by nearly 30% in the same timeframe.
Some cheer amidst the doom
In spite of the weakness in the market, some analysts opine that the situation is not all doom and gloom. James Smith, Premier Miton fund manager, had contended that investor anxieties
regarding interest rates could be exaggerated, adding that most clean energy schemes have index-linked returns.
"There's backing from a number of Republican congressmen for green energy tax credits," said Smith, speculating that bipartisan support might allay some policy uncertainty.
In addition, investment in clean energy technology is still robust. S&P Global Commodity Insights, as cited by the Financial Times, forecasts that clean energy expenditure will for the first time top upstream oil and gas investment in 2025, led by solar and battery storage schemes.
Erwan Kerouredan, an RBC Capital Markets analyst, also pointed out that hydrogen firms targeting markets outside the US and EU, including the Middle East, are more favourable. "The financing environment is altogether different," Kerouredan said. "There's a difference in terms of firepower." Though immediate uncertainty hangs, long-term trends for investing indicate clean energy may still regain steam in the coming years.
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