Evening Brief – 04.30.24
Clean energy stocks have underperformed the broader markets over the past four months. The iShares Global Clean Energy ETF, for example, has fallen roughly 10% this year, while fossil fuel stocks have risen sharply, owing primarily to a more than 25% rise in WTI crude oil prices since late December 2023.
Clean energy securities have been underperforming as the industry faces cyclical headwinds, including elevated interest rates, input cost inflation, and increased project difficulties.
US-based sustainable funds lost a net $13 billion last year due to poor investment performance and increased political scrutiny, according to Morningstar Inc. The research firm stated that 2023 was the first calendar year of outflows for U.S. sustainable funds since it began tracking the sector 10 years ago.
However, when comparing global investment in fossil fuels and sustainable energy, Man Group reports that annual investment in clean energy has greatly exceeded capital expenditures in fossil fuels in recent years.
“Much of this from tax breaks and government subsidies that are accretive to the bottom line, added Man Group. “This is significant and suggests cyclical trends and the supply/demand dynamics of fossil fuel companies should not distract from the long-term potential of renewables.”
The most significant source is the Inflation Reduction Act, which includes $370 billion in energy and climate incentives, continued Man Group, spending more on environmental issues than any other area.
“We believe the most important allocations are the investment tax credit of 30% for renewable projects, the production tax credit of 1.5c/kWh for firms producing renewable power and the extension of existing subsidies and credit for either 10 years or until emissions targets are met.”
While the future of these projects after the U.S. elections is unknown, Man Group pointed to recent Bloomberg research that showed Republican states stand to benefit far more than Democratic states. Red states are expected to obtain $337 billion in renewable energy investments by the end of the decade, compared to approximately $183 billion for Democratic states.
Investors may not want to dismiss renewables despite their recent underperformance. The long-term rationale for the sector should strengthen as governments work to mitigate climate-related risks and achieve their net zero targets.