The green transformation in energy has led to strong performance for some share prices. Last year was a particular standout for cleaner and greener businesses.
However, the tables have taken a turn. Recent data shows that these new energy businesses are performing poorly compared to oil and gas companies. What’s going on, and why have things flipped upside down?
[top_pitch]
What is the green transformation?
This term refers to the changing of the guard in the energy industry. Globally, we are moving away from fossil fuels and towards more renewable sources of energy.
All this change has driven lots of investment and money into the energy sector. The influx of capital has allowed businesses in this area to grow. In turn, this has kept energy sector share prices in an almost constant state of expansion.
But things haven’t been peachy for all energy businesses. The obvious losers have been the more traditional energy companies. These companies have been around a long time and had proven to be a profitable choice for investors for years. But they’re not down and out just yet.
Why has the green transformation been so popular?
More and more, investors want to know that their money is going to worthy companies. This has led to a big uptick in things like ESG investing. There has also been a high demand for companies hoping to transform energy as we know it.
Peter Garnry, Head of Equity Strategy at Saxo Markets explains the changing demands of investors: “In 2020, the pandemic hit, and a tsunami of retail investors joined the equity market all engaging mostly in technology and ESG (with an emphasis on the E) investments.
“This combined with the huge uptake in green bonds in Europe, rising carbon emission prices, more aggressive targets on carbon emission reductions from China and the Biden victory in the US election fueled a stunning speculative fever.”
Why have green energy companies taken a dive?
New data from Saxo Markets shows a collapse in the prices of green shares compared to traditional energy companies for just the second time in 18 years.
Peter Garnry describes what is causing this dip: “Fears of rising inflation and interest rates are causing investors to re-evaluate their green transformation exposure.
“For one thing, higher commodity prices mean that it is more expensive to manufacture wind turbines and other types of green technologies, lowering the competitive advantage in the short-term.
“These companies also heavily depend on access to capital and cheap financing because their investments require a lot of debt financing. A higher interest rate would increase the cost of debt and the discount rate on future cash flows.
“Sentiment has for now changed so much that global clean companies are down 45% relative to oil and gas majors.”
[middle_pitch]
What is next for the green transformation?
Although giddy excitement seems to have waned, there is still a lot of interest in green energy. Traditional energy companies may have won the most recent battle, but the war continues.
Peter Garnry explains: “Our view is that the green transformation is still in its infancy, something like where the computer industry was in 1995 with the launch of Windows 95 and the humble beginning of the Internet, and that the next three decades will see blistering growth rates for this industry.
“Investors should, in our view, be exposed to this theme, but investors must diversify across many names as it is too early to predict the big winners.”
How can I invest in the green transformation?
There is no doubt that the energy industry is going to go through massive changes over the coming years.
This current pause in the relentless climb of green companies may be just a bump in the road. Or it could be something more significant. Perhaps a shaking out of all the overvalued stock, leaving just the very best companies standing.
If you want to get involved, you can research some different companies or funds and use a share dealing account to invest. Just be aware that investments always carry risk and that past performance is not an indicator of future results. As this new information shows, progress doesn’t happen in a straight line.
