Clean energy stocks are encountering hurdles, with a notable drop this year. The iShares Global Clean Energy fund, which tracks sectors like renewable energy, semiconductors, and solar energy, has fallen 27% and trails behind the 15% increase of the MSCI World Index. This marks the third consecutive year of annual losses for the fund.
Prominent clean energy stocks such as Plug Power, Enphase Energy, SolarEdge Technologies, and NextEra Energy have experienced significant drops of 63%, 60%, 71%, and 29%, respectively. However, the Inflation Reduction Act signed by the Biden administration has allocated 750 billion USD for health and climate programs. Since its enactment last year, more than 270 new projects for clean energy have been announced, attracting 132 billion USD in private investments.
While these government funding programs offer hope for a revival in the sector, clean energy stocks still need recovery. The primary challenge is the persisting high-interest rates, which have remained at their highest level since 22 years, following the Federal Reserve's aggressive interest rate hike in March. This move has driven up the credit costs for growth companies looking to expand their capital. Adding to the woes, supply chain disruptions intensify the issue.
Fund managers report that while some clients express interest in sustainable investments, balancing the challenges and optimizing portfolio returns prove difficult. The expectation that high-interest rates will last until early 2024 might curtail their earnings. Companies in clean energy tend to act based on their future profit potential, given their position in a rapidly growing industry. Despite this year's substantial share price falls, there are concerns about their current balance sheets' overvaluation.
Todd Jones, Chief Investment Officer at Gratus Capital, noted that some overly optimistic assumptions are embedded within the clean energy company share prices. Jean Rosenbaum, the Leading Portfolio Manager at GYL Financial Synergies, disclosed that her firm has reduced clean energy investments in recent months due to concerns that rising interest rates might affect company profit margins. Clean energy investments account for less than 5% of the firm's total assets.
Critics comment that the slow, global shift towards clean energy has dampened overall enthusiasm. It's been eight years since the Paris Agreement was adopted, aiming to decelerate global warming to significantly less than 2 degrees Celsius, or preferably 1.5 degrees. Despite the agreement signed by more than 190 countries, little progress has been made towards these goals partly due to the lack of concrete measures in the initial plan.
Higher costs impact consumers aiming to switch to clean energy. Andrew Poreda, Vice President at Sage Advisory, pointed out that installing solar panels at private homes could require a huge credit, which remains financially unfeasible because of high credit costs.
Regardless, sustainable investing persists as an option for investors. Peter Krull, Director of Sustainable Investing at Earth Equity Advisors, manages a portfolio focusing on sectors that range from alternative energy sources to battery technology; all the way to environmentally-friendly transportation. Krull's portfolio has outperformed the MSCI World All Cap Index since its inception in 2012, although it experienced some setbacks in recent years. Krull views the ongoing share price drops in clean energy stocks as an opportunity for investors.
Clean energy stocks are not the exclusive option for sustainable investors. The tech giant Nvidia, known for its strong stance in Artificial Intelligence (AI), has seen its share prices skyrocket by 220% this year. AI is poised to play a significant role in accelerating climate solutions, from pollution reduction to plant cultivation.
Krull commented that the perception of sustainable investing often revolves around purchasing solar or wind energy stocks. However, he believes that system improvements, such as developing more efficient batteries and transportation solutions, are equally important. Efforts in these domains can impact sustainability progress more substantially as compared to direct investments in alternative energy sources.
