The S&P Global Clean Energy Index has shown a 28% fall since mid-July among the share prices of 100 leading renewable energy companies, in contrast to rises in the wider energy sector. We consider the impact of these outflows.
Share prices at renewable energy firms are falling while outflows from renewables funds are increasing. Our warm October may have reminded us why it is so important to tackle climate change, but retail investors are proving less keen to invest into the sector.
The fall has been sharpest over the last three months. According to the S&P Global Clean Energy Index of 100 companies, renewable energy stocks were down 22.6% in the year to Tuesday 10th October; and down 36% between their 12-month high in January 2023 to their 12-month low in October 2023. But the steepest fall has been between mid-July and mid-October, with prices falling 28% in this period alone.
This index features 100 top renewables firms, including utilities Con Edison, EDP, Iberdrola and Ørsted; and other businesses such as Enphase Energy, First Solar and SolarEdge Technologies. It includes companies from established and emerging markets, with 30 from China, 25 from North America, and 20 from Europe. This is important because it shows there is a good geographical spread and, despite that, the listed renewables sector is on track for its worst year since 2013.
Partly this is because the renewables industry is a victim of its own success.
Governments have been throwing their support behind renewables in the last three years, especially following the Covid pandemic as they sought to ‘build back better’. This led to legislation such as the US Inflation Reduction Act, which has been good in stimulating development but is also increasing pressure on supply chains to meet extra demand for wind turbines, solar panels, and other products and services.
This is leading to inflation in the renewable energy sector, which is exacerbated by the inflation we are seeing in the wider economy. The impacts of disruption caused by the pandemic have been long-lasting, with demand for raw materials growing as the world economy unlocked, and worsened by Russia’s ongoing war in Ukraine.
This inflation is also showing up the problem of the industry’s so-called ‘race to the bottom’, where technological improvements led developers to make too-optimistic assumptions about how cheaply they could produce power at new projects. They are now realising they bid at prices where profit margins were slim or non-existent, with the result that many are delaying or cancelling projects. And it means that any delays in securing permits for development projects are costly as well.
Seen in this context, the declining interest by retail investors to invest in companies that are focused on the renewables sector makes total sense. These companies are now finding their core activities less profitable; are experiencing stronger headwinds in developing new projects or securing orders, which leads to questions over future growth; and are facing tougher scrutiny from other firms in the sector. For instance, Barclays last month warned that Ørsted has no plan B as renewables suffer.
Declining investor confidence in renewables stands in stark contrast to the strong performance of companies in both the wider energy and technology sectors.
For example, the S&P 500 Energy Index, which is dominated by companies in the fossil fuels sector, has risen by on average 10% in the last year. These companies received a fillip as energy prices rose globally in the last year following the upheaval after the Ukraine war, which enabled some firms to make record profits. Meanwhile, the Nasdaq 100 index of technology companies has reported a strong 12 months.
It is not simply renewables stocks that have suffered either. LSEG Lipper has warned that investor reticence about renewable energy has spread to the fund management sector, with net outflows from renewables funds globally reaching a quarterly record of $1.4bn between July and September. This is a sharp turnaround from the $3.36bn inflows it reported into these funds in the first half of 2023.
But does this decline of interest in renewables stocks and funds matter? Yes and no.
Yes, it is concerning that retail investors are less confident in renewables. This may mean that firms trying to carry out initial public offerings in the coming months will struggle to command the prices they once would. That restricts their ability to raise funds and can only have knock-on effects on their investment activities. It would be very concerning for the renewables industry if this fall is replicated through 2024.
And yet, we must also see this in context of the strong increases in investor demand for the renewables sector in recent years. A retreat by some investors now might simply reflect a return to normality following a few years of over-exuberance. There is little indication that institutional investors are questioning either the importance of the long-term role of renewables in addressing the climate crisis; or that a shortage of finance will present a major stumbling block for developers with the best projects.
Declines now may also provide interested investors with the opportunity to get into the renewables sector at prices they find attractive. There is every chance that the sector will receive a boost again at the COP28 climate change conference in Dubai next month, when the need to grow wind and other sources will be on the agenda.
There are certainly headwinds for renewables investors as we head into the closing weeks of 2023: inflation, supply chain disruption, bureaucracy, and the start of major election campaigns where renewables will likely be a ‘culture war’ issue. But we see plenty of tailwinds for the sector that should give investors plenty of hope too.
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