Investors Pulled Over $280 Billion From “Green Stocks” Globally Since Their August 2022 Peak — Bloomberg
Investors pulled over $280 billion from “green stocks” globally since their August 2022 peak — Bloomberg
Vaccine stocks fell, and green stocks fell. The pandemic and climate threats and profits failed. What’s left? War.
After $280 Billion Wipeout, Green Stocks Confront Soaring Debt Costs
– Higher rates are a problem for the capital-heavy industry
– Clean energy funds have seen outflows as sentiment has soured
There appears to be no end in sight for the multi-billion dollar rout in renewable energy stocks, as a surge in borrowing costs threatens to squeeze returns in the sector for years to come.
The industry received a fresh blow on Friday, after a sales warning from equipment provider SolarEdge Technologies Inc. sent shares in solar stocks across the US and Europe tumbling as much as 25%.
Until recently expected to displace oil-and-gas companies from mainstream investment portfolios, clean energy stocks have instead become a no-go zone for many. Investors have been pulling money out, wiping over $280 billion from the market capitalization of green stocks globally since their August 2022 peak — not quite boom-to-bust but a dramatic unraveling nonetheless for a market that was all the rage at the turn of the decade.
Now, with the yield on the 10-year US Treasury bond creeping toward 5%, their fortunes could be about to take another hit. Higher yields make it costlier to fund the huge investment that clean energy requires, giving investors reason to fret about returns.
On top of that, the pace of decarbonization is in question and oil’s march back toward $100 a barrel is renewing interest in fossil fuels. Add all that up and it’s got investors asking if it’s worth waiting around for green energy stocks to pay off.
“If companies are rolling out capacity and raising debt, but power prices and profitability are falling, that’s not a combination markets like,” said Sharon Bentley-Hamlyn, a fund manager at Aubrey Capital Management. “Our exposure to the renewables sector is considerably lower than at this time last year.”
SolarEdge Technologies sank as much as 25% in US premarket trading on Friday after it warned its third-quarter revenue will come in below its previous guidance range. Other firms in the sector, including Enphase Energy Inc., Sunrun Inc., SMA Solar Technology AG and Meyer Burger Technology AG also tumbled.
The MSCI Global Alternative Energy Index – which counts Orsted A/S, Vestas Wind Systems A/S, First Solar Inc., and Enphase Energy among its top constituents – has slumped about 39% this year. In value terms, it’s down almost $152 billion in 2023 alone.
Retail investors have also fled, with global clean energy equity ETFs seeing outflows amounting to over $1.1 billion in total since December 2022. They had attracted more than $15 billion in the previous three years.
True, there have been some pockets of speculative frenzy in green shares this year, with stocks linked to lithium — critical for electric-vehicle batteries — skyrocketing in Australia and India. Retail traders also piled into Korean battery materials suppliers such as Ecopro BM Co. Among bigger investors, though, the mood is one of disillusionment.
“When I speak to colleagues and other investment managers, they say ‘let’s get out’,” said Marcus Poppe, co-head of European equities at DWS Group.
Renewable Energy ETFs Suffer Investor Exodus
Global clean energy ETFs see over $1.1 billion outflows since December
The picture is a stark contrast with the immediate post-Covid period when US and European governments doubled down on net-zero agendas.
So far, companies and governments are still committing cash to renewables — the $358 billion of new investment seen in the first half of 2023 is a record for any six-month period, according to BloombergNEF’s Renewable Energy Investment Tracker. But progress, including on US President Joe Biden’s $2 trillion Inflation Reduction Act, may still be falling short.
BNEF estimates that keeping net zero on track requires at least $4 to be spent on low-carbon energy supply globally for every $1 that goes to fossil fuels from 2021 to 2030. Investment hasn’t reached that ratio yet.
“Globally, the energy transition is moving in the right direction, albeit slowly,” BNEF said in a report this month.
There are setbacks aplenty. Britain, for instance, is watering down its green policies, citing the cost-of-living crisis. And Biden’s plan to dramatically boost US offshore wind power by 2030, is now being dubbed impossible.
Industry insiders point to huge cost increases, including from raw material prices — and that’s before the latest lurch higher in interest rates.
Renewable energy stocks are four times more sensitive to interest rates than traditional oil and gas companies, due to bigger debt levels and their long-duration nature, according to Evgenia Molotova, a senior investment manager at Pictet Asset Management.
Constituents of the MSCI alternative energy index have a leverage ratio of 3.8, based on debt-to-12-month earnings, compared with just 1.1 for the five biggest energy producers by market capitalization, according to data from the index operator and figures compiled by Bloomberg.
In response to a request for comment on refinancing costs, Orsted referred Bloomberg News to Chief Financial Officer Daniel Lerup’s comments at an investor presentation in June, where he said the company’s debt portfolio had an average maturity of around 10 years, “which gives us a lot of comfort in the rate exposure that we are sitting with.”
NextEra Energy Partners, a wind and solar business, is among those cutting growth targets, citing high interest rates and the “burden of financing.” Vestas, the world’s leading turbine maker, said in August it expects increased costs from a backlog of wind turbine orders to drag down full-year earnings.
Vestas declined to comment, citing a silent period before its quarterly earnings report. NextEra didn’t respond to a request for comment.
Asian renewables firms, especially Chinese names, dominate global supply chains for solar power and EVs. While they have been relatively insulated from higher rates, companies must contend instead with plunging prices caused by a post-Covid production surge.
Prices of critical minerals such as lithium and nickel have also fallen as EV demand has slowed, said Nannan Kou, head of China research at BNEF.
Those issues have sent shares in Contemporary Amperex Technology Co., the world’s largest EV battery maker, nearly 17% lower this year, knocking its price to less than half its 2021 peak. Longi Green Energy Technology Co., the world’s largest producer of solar modules, is down about 40%. The CSI New Energy Index has fallen almost 33%.
Finally, renewables are again facing competition from fossil fuels. With oil approaching $100 a barrel, the MSCI World Integrated Oil & Gas Index has gained nearly 8% this year. And relative valuations remain attractive, given generous dividends, buybacks and free cashflow yields, according to strategists at Sanford C. Bernstein.
Ultimately, while investors understand the ethical arguments for getting behind the green transition, there’s still the question of making money for clients. And as the pace of the shift appears to wobble, or even gets delayed, so too does the balance in investment decisions.
“It’s a fantastic industry to be a shareholder in, but as a shareholder you have to be sure you get returns,” said Dan Kemp, chief research and investment officer at Morningstar Inc. “It can’t be just a holding you have because it’s a good market but whether those companies can deliver returns.”