The winds of change are blowing through the stock market, particularly for companies involved in green energy and sustainability. Recent shifts in interest rates and politics have upended sectors that once attracted significant capital investments.
In the United States, President Donald Trump has been vocal in his criticism of the IRA package, which included billions in support for transitional industries. Similarly, in Europe, there has been a shift away from climate-focused initiatives towards defense and energy priorities.
Patric Lindqvist, a fund manager at Handelsbanken overseeing the Handelsbanken Sustainable Energy fund, attributes this shift to the broader trends of deglobalization and political uncertainty that have created a climate of instability. He also notes that the slow implementation of regulations designed to facilitate climate solutions has hindered progress in the sector.
A few years ago, the surge in investments in ESG (Environmental, Social, and Governance) companies reflected a belief that these companies held the key to solving sustainability challenges. Money poured into ESG-labeled funds, and the limited supply of sustainable companies on the stock market became highly sought after. However, the recent rise in interest rates has dampened this enthusiasm.
Lindqvist explains, “This is a capital-intensive sector, and overall, interest rates have been rising during the period we are examining. This naturally affects the returns on investments.”
The S&P Global Clean Energy Transition Index, which tracks green energy companies, experienced a significant surge during the COVID-19 pandemic. However, the index has since lost all of its gains from the past five years, reflecting a broader trend of decline in the sector.
This global index comprises 97 companies from both developed and emerging markets, with a heavy focus on the energy and industrial sectors. The top-weighted companies in the index include Iberdrola SA, Scottish & Southern Energy, Vestas Wind Systems AS, and Danish company Ørsted. Nearly half of the index is weighted towards the United States, China, and Brazil.
Despite recent challenges, a report from DNB paints a hopeful picture for sustainable companies. The potential repeal of the IRA by Trump and the continued push for sustainability under the EU’s Green Deal are expected to create new investment opportunities in the sector. DNB predicts three factors that will drive the resurgence of returns in sustainability:
1. Regulations and subsidies, such as the IRA and Green Deal.
2. Renewed investor confidence as the concept of sustainability becomes more mature and sophisticated.
3. Continued credibility and progress in companies’ sustainability efforts, driven by regulations like the CSRD.
While Lindqvist’s fund has faced difficulties, with a decline of 11% over one year and 37% over three years, it has still seen significant growth of over 60% in five years. Lindqvist sees compelling investment opportunities in the sector, noting that despite weak stock prices, both topline revenues and profits have increased.
“The maturity of technologies to address the climate crisis is significantly greater now than five years ago, reducing technology risks,” Lindqvist adds. He highlights electrification as a particularly exciting area, emphasizing the importance of not only generating electricity but also distributing it effectively in a world where energy generation is becoming more decentralized.