Clean energy stocks hit hurdles, but remain resilient in the face of challenges

Clean energy stocks have fallen out of favor due to higher interest rates and a lack of progress in addressing climate change. These challenges are not expected to disappear in the near future.

For instance, the iShares Global Clean Energy exchange-traded fund, which monitors the performance of various sectors including renewable electricity, semiconductors, and solar energy, has declined by 27% this year. This underperforms the MSCI All-Country World index, which has gained 15%. The fund is on track to experience its third consecutive yearly loss.

This year, Plug Power shares have decreased by 63%, Enphase Energy shares by 60%, SolarEdge Technologies shares by 71%, and NextEra Energy shares by 29%.

The Inflation Reduction Act by the Biden administration has pledged $750 billion for health and climate projects. Since its approval last year, over 270 new clean energy projects have been unveiled, with $132 billion in private investments, as per a Bank of America report from August.

Despite expectations for a boost from increased government spending on climate solutions, clean energy stocks have yet to see a recovery.

The main cause for the poor performance of these stocks is the high interest rates, which have reached a 22-year peak following the Federal Reserve's aggressive rate hikes in March. This has led to heightened borrowing costs for companies seeking capital. In addition, supply chain disruptions have added to the challenges faced by the sector.

Money managers acknowledge that while there is client interest in investing in sustainability-driven companies, they face challenges in maximizing portfolio returns. The anticipation of sustained high interest rates through early 2024 may impact the earnings of these firms. Clean energy companies often trade based on their anticipated future earnings, as they are part of an emerging sector. However, there are concerns about the high valuation of these stocks compared to their current financial positions, despite facing significant declines this year.

Todd Jones, Gratus Capital's chief investment officer, pointed out that clean energy companies' share prices are based on overly optimistic assumptions. Meanwhile, Jean Rosenbaum, senior portfolio manager at GYL Financial Synergies, revealed that her firm has decreased its clean energy investments due to fears of declining corporate earnings caused by high interest rates. Clean energy assets now make up less than 5% of her firm's portfolio.

Investors are expressing disappointment with the slow global shift towards clean energy, citing the lack of specific action and progress towards the goals set out in the Paris Agreement eight years ago. This agreement aimed to slow Earth's warming to well below 2 degrees Celsius, ideally to 1.5 degrees, but progress from the 190+ participating countries has been limited.

Andrew Poreda, vice president at Sage Advisory, noted that the increased rates have also impacted consumers looking to make the switch to clean energy. For instance, transitioning to a residential solar system can be costly, necessitating the use of a loan, which may now be unaffordable due to high borrowing costs. However, he emphasized that this does not mean investors are completely abandoning sustainability investing.

Peter Krull, the Sustainable Investments Director at Earth Equity Advisors, oversees a portfolio that specifically targets stocks in industries such as alternative energy, battery technology, and green transportation.

Since its inception in 2012, the portfolio has consistently outperformed the MSCI World All Cap Index, despite experiencing a decrease in recent years. Krull views the current downturn in clean energy stocks as a favorable chance for investors to make purchases.

Investors are not only investing in clean energy stocks, but also in companies with a sustainability mindset, such as Nvidia, the artificial intelligence powerhouse that has seen a 220% increase in its shares this year and is part of Krull's firms portfolio. AI has been driving significant gains in mega-tech companies' shares, and experts believe it will play a vital role in accelerating climate change solutions, from reducing pollution to reforestation.