Green stock selloff deepens as Tesla sentiment sours

BLOOMBERG

The selloff that’s ripped through green stocks looks set to continue into 2024, bringing a fourth consecutive year of losses, according to Bloomberg’s latest Markets Live Pulse survey.
The negative sentiment appears poised to engulf a wider array of green asset classes, with Tesla Inc seen at risk of losing its place among the 10 biggest stocks in the S&P 500. Almost two-thirds of the 620 MLIV Pulse respondents said they plan to stay away from the electric-vehicle sector, and 57% expect the iShares Global Clean Energy exchange-traded fund — which is down about 30% this year — to extend its slide in 2024.
The gloomy outlook comes as green investors navigate the shock of a post-pandemic world shaped by much higher interest rates. And, there’s also the persistent political backlash in many US states, as well as an evolving regulatory backdrop that has the potential to expose greenwashing and further hurt valuations.
Chat Reynders, who’s been a sustainable investor for three decades, calls the downturn in green assets a “watershed moment” for the industry. The hype that had surrounded going green to help address climate change has led some investors to take their eye off traditional financial metrics such as supply, demand and balance sheets, he said.
“We’ll look back and say this was an era of extraordinary speculation,” said Reynders, who helps oversee about $3.5 billion as co-founder of Reynders, McVeigh Capital Management in Boston. “Whether there was a meme stock or a green stock, everyone was marketing and selling extremely hard.”
Though MLIV Pulse respondents are broadly united in their bleak view of green stocks in the near term, the picture is different when the time horizon is extended. Most respondents expect they’ll need to shield portfolios from climate risk in the coming years. Garvin Jabusch of Green Alpha Advisors in Louisville, Colorado, said the current selloff represents “a temporary pivot of capital away from renewables.” Brent Newcomb, president of Ecofin, which manages about $2 billion out of London and Kansas City, said he sees the market downturn as a buying opportunity and he’s adding to his positions in utility stocks. And Bill Green of Climate Adaptive Infrastructure from Mill Valley, California, said it’s “a red herring” to look at the value of publicly traded solar or wind stocks and conclude that the energy transition has stalled.
“Public markets are notoriously fickle and have, in our view, overreacted to rising interest rates and supply chain challenges,” he said. In the MLIV Pulse survey, 38% of respondents said miners of critical minerals ranked as the best investment option among climate-related offerings. But timing the upturn is proving hard.
Investors targeting environmental, social and governance goals had hoped this year would produce a rally thanks to historic levels of support in the form of packages such as the US Inflation Reduction Act. Instead, decades-high inflation and soaring interest rates ended up hammering a lot of traditional ESG stocks, with wind and solar standing out as some of the biggest losers.
A lot of clean energy companies are capital intensive, which makes them more vulnerable to higher borrowing costs than oil and gas companies with well-established rigs and platforms. To make matters worse, wind and solar producers have been hit by project delays exacerbated by supply-chain bottlenecks, derailing plans and increasing costs.
The next green asset class expected to see a decline is EVs, as battery-powered cars remain too costly for many households struggling with the long-term fallout of inflation. Tesla shares soared almost 140% this year through a July peak, but have since dropped about 20%.
Two years ago, Tesla was valued at $1.2 trillion, briefly making it the fifth-largest company on the S&P 500. Its market value has since fallen below $800 billion, ranking it the eighth largest in the benchmark index. Almost 50% of MLIV Pulse respondents expect it to drop out of the top 10 next year. Tesla investors are also figuring out how to respond to a chief executive who regularly shocks markets with highly controversial social media outbursts.
Yet the pace of climate change is forcing an inevitable pivot toward greener technologies, necessitating more investment.
“Next year is an important one for the implementation and renewal of decarbonisation targets, as Paris Accord decarbonisation efforts require additional, front-loaded, net investments,” according to Barclays Plc analysts led by Maggie O’Neal. “With 2023 appearing likely to be the warmest year on record, and 2024 potentially being similarly hot, adaptation and decarbonization will remain in focus.”
Against that backdrop, two-thirds of MLIV Pulse respondents expect climate change to affect portfolio values over the next three years. That echoes previous, similar surveys, with a Bloomberg Intelligence poll published earlier this month finding that 89% of investors acknowledge that ESG metrics are here to stay. And a poll of mostly US-based Bloomberg terminal users released in August found that about two-thirds said ESG is too important to ignore, even though they dislike the label.
O’Neal at Barclays also notes that the political backdrop remains key. “Half of the world’s population will vote in elections in 2024,” she said. “As public policy drives many of the factors making ESG material to investors today, the outcomes of these elections matter.”