The beginning of the decade brought widespread optimism that clean energy and ESG investing were set to become the strategy of choice for hedge funds. But with sustainability stocks trailing their fossil fuel counterparts in the years that followed, has the furor for renewable energy fallen away?
Just last year, Penta reported that UBS analysts had forecast between $40 trillion and $50 trillion of global energy-transition investments were on the way between 2021 and 2030 as a means of achieving net-zero emissions.
The team claimed that technical developments and the transition towards electric vehicles (EVs) would help EVs claim a 30% global market share by 2025 and a 60%-70% share by 2030.
Today, however, more hedge funds appear to be shorting clean energy in favor of fossil fuels at a greater scale.
Between Q1 2021 and Q3 2024, the S&P Global Clean Energy Index fell more than 55%, while the S&P Global Oil Index has grown almost 50% over the same period.
But what’s causing hedge funds to turn their backs on green stocks? And is this trend likely to reverse in the future?
The Rise and Fall of ESG
The past three years have seen clean energy stocks underperform their oil and gas counterparts, but what’s driving this downturn? And why do hedge funds seem so ambivalent towards the potential of sustainable energy investments?
There are many reasons for the suspicion of hedge funds regarding ESG investment opportunities.
One key factor is that the ESG landscape has become a victim of its own success off the back of an impressive post-pandemic recovery.
Between January 1 2020 and the end of Q3 2024, the S&P Global Clean Energy Index posted growth of 23.64%, and following the Covid-19 Wall Street crash embarked on a rally of 275%.
This caused more firms to wake up to both institutional and retail investor appetite for ESG stocks with more companies seeking to create dubious Environmental, Social, and Governance credentials to attract more interest.
Soren Aandahl, chief investment officer of Blue Orca Capital recently claimed that many ESG assets are focused on chasing capital, with many industry firms lacking the good ideas needed to inspire investors.
Aandahl even suggests that falling sentiment towards ESG stocks could bring a positive impact for clean energy, with the end of the gold rush helping to weed out the weaker business propositions leaving the strongest players to prosper.
However, with Canadian battery recycling firm Li-Cycle recently pausing a project in New York due to cost estimates spiraling to $1 billion from its original $560 million budget in a move that’s threatening the long-term viability of the company, it’s clear that the macroeconomic impact of inflation and the implementation phase of bright new ideas is another hindrance.
Danish wind company Ørsted also canceled two wind power projects near New Jersey while blaming the macroeconomic climate and supply chain difficulties.
The heady days of the post-pandemic ESG rally have given way to an economic pinch and new challenges to turn bright ideas into a reality. Rather than prejudice, it appears that hedge funds have simply grown wary of the fiscal sustainability of sustainable energy.
Energy Becomes Political
With the iShares Global Clean Energy EFT (ICLN) moving tightly alongside the shifting odds of the tightly contested 2024 US Presidential election campaign trail, it’s clear that sustainability has become a hot political topic.
Upon Trump’s 2016 election win, the exchange-traded fund fell 5% as other stocks rallied, and climbed more than 6.5% between market close on election day 2020 and the following Monday after Democratic candidate Joe Biden won the subsequent race for the White House.
Donald Trump’s skeptical view on climate change caused the iShares fund to rise and fall many times throughout the campaign trail and the election’s impact on energy is unignorable for hedge funds keen to bank on market sentiment.
Likewise, the iShares Global Clean Energy ETF and The Invesco Solar ETF (TAN) rallied more than 3% and 6% respectively following Wall Street’s declaration that Democratic candidate Kamala Harris won the final presidential debate before the election, underlining how sustainability had become a key polemic between the prospective governments.
This means that hedge fund strategies in 2024 have shifted from assessing ESG stocks on a case-by-case basis and instead building a focus on the election fallout between clean energy and fossil fuels.
Clean Energy is Still Alive and Kicking
Although Wall Street’s interest in clean energy has been waning since its post-pandemic peak, global investment in innovative carbon-neutral technology and infrastructure has been accelerating.
Total energy investment is forecast to surpass $3 trillion in 2024, with global clean energy investments taking two-thirds of the share amounting to $2 trillion. The remaining $1 trillion is set to be invested in fossil fuels like oil, gas, and coal, according to the International Energy Agency.
The $2 trillion in renewable investments covers sustainable technologies like EVs, nuclear power, storage, and grids.
This highlights that sustainability is still set for a bright future on the world stage, and we’re likely to see more hedge funds use prime solutions for more intelligent global market access to international ESG stocks focused on energy.
To illustrate this further, Ember data shows that in 2023, electricity in Europe generated by wind power surpassed fossil gas for the first time ever. With wind and solar producing a record 27% of the European Union bloc’s energy, the world’s shift to carbon neutrality appears to be occurring at different paces.
Will Green Energy Make a Comeback?
The notion of hedge funds shunning clean energy in recent years has been down to a number of factors, and it’s important to remember that the S&P Global Clean Energy Index would still be trending upwards were it not for its rapid post-pandemic rally.
With this in mind, green energy markets don’t need to make a comeback. Instead, hedge funds will be waiting in the wings for the right geopolitical and economic conditions to reemerge to buy back into renewable investment opportunities.
For institutions that retain a more global focus on energy, those renewable investment opportunities are likely to emerge sooner rather than later.