COP28: where do greener investors go from here?

In a packed conference hall in Dubai last week, hundreds of exhausted officials from every part of the world rose to their feet to cheer the result of the UN’s COP28 climate summit.

The text agreed in Dubai was the strongest agreement yet on global action to tackle climate change. It contained a pledge to “transition away from fossil fuels” — something that might seem obviously necessary, but had been left out of all previous COP agreements and had been resisted at this conference by Saudi Arabia and other oil producers.

It included a vow to triple renewable energy capacity by 2030 — meaning the installation in the next seven years of more than 7,000GW, enough to power the UK 70 times over. And there were pledges to scale up investment in many other areas, from nuclear power to road transport.

But for investors betting on the green transition this has been a painful year. Clean energy stocks have slumped, lagging badly behind both the wider market and the oil and gas sector, which has been buoyed by higher fossil fuel prices since Russia’s invasion of Ukraine.

So are green companies still worth the attention of stock market investors? If so, what are the most promising opportunities? Investors have plenty of options to align their portfolios with the world’s push for cleaner energy — and position themselves to profit from one of the biggest economic transformations in history.

The renewables outlook

When the chief executive of one of the world’s biggest renewable energy developers met the FT at COP28, he expressed amazement at what had happened to his share price this year.

Business was booming, with his project developers operating at full pelt and a bulging pipeline of new work. Yet investors had dumped the stock, wiping billions of dollars off the company’s valuation. “It’s a market failure,” he complained.

His situation is far from unique. According to the International Energy Agency (IEA), more than 500 gigawatts of global renewable energy capacity have probably been added this year — smashing the previous record — with more than $1bn a day being spent on solar deployment alone.

Yet renewable energy stocks have taken a beating. BlackRock’s iShares Global Clean Energy exchange-traded fund — the largest ETF of its sort, with a heavy focus on renewable energy — is down 24 per cent so far this year, compared with a 20 per cent rise for the MSCI World index.

A big part of the reason for this fall is higher interest rates, to which renewable energy developers are vulnerable. Unlike their fossil fuel-based counterparts, solar and wind power producers don’t have to make ongoing purchases of coal or gas to burn.

This means that the bulk of the lifetime cost for a renewable energy plant is paid up front, typically funded by credit. When interest rates rise sharply, the effect on the economics of this industry is severe.

Adding to this pain has been inflation, a particular problem for wind farm developers, which have faced surging prices for metals like steel, copper and molybdenum. A stark case study this year has been Ørsted, once the Danish state oil champion, which has reinvented itself as a leading international wind farm developer.

Ørsted last month announced a $4bn writedown as it said it had “no choice” but to stop work on two wind farms off the coast of New Jersey. Shares in the company have fallen 44 per cent this year.

Renewables developers such as Ørsted typically agree to long-term contracts with fixed prices for the energy they sell, before they begin building their plants. That model has limited their room for manoeuvre amid worsening business conditions. Yet a rebound may be looming.

Analysts at JPMorgan reckon that renewable energy stocks should enjoy positive momentum next year. A string of interest rate rises in large economies appears to have ended, with investors now betting on cuts in 2024. The wholesale power market is adjusting to developers’ higher costs, JPMorgan says, with purchasers set to agree to more generous contract prices for renewable energy.

Government policy moves could provide further boosts. The US Inflation Reduction Act promised massive financial support for renewables development, but many companies have deferred investment decisions pending final rules for tax credit benefits, which are expected in the next few months.

Other issues for renewable power developers include arduous bureaucracy around project permits and weaknesses in power grid infrastructure that make it harder to get plants connected. But these problems can be solved — and by committing to triple the world’s renewable energy capacity in just seven years, governments have put pressure on themselves to create that enabling environment.

Another factor supporting an accelerated renewables rollout is the extraordinary growth of solar panel production in China, which has run ahead of demand, creating a supply glut. That has dragged down the share prices of Chinese panel producers like Trina Solar. However, alongside technological advances that have driven price declines over the past decade, it looks helpful for renewable plant developers. After the brutal sell-off in the shares of these power providers, this could be a good moment to buy.

Line chart of Price indices rebased ($) showing Clean energy stocks underperformed the oil & gas sector and the wider market

An EV price war

The logic for big bets on clean energy appears to have convinced Warren Buffett. The 93-year-old does not have a reputation as an especially green-hearted investor, and his company Berkshire Hathaway remains one of the biggest coal plant owners in the US.

But its energy business is now conspicuously overweight on renewable energy, with wind and solar accounting for more than 40 per cent of its generation capacity — roughly double the proportion in the US electricity sector as a whole.

However, Buffett has also been gradually winding down one of his earliest and most successful clean energy bets. In 2008, Berkshire paid $230mn for a 10 per cent stake in China’s BYD — whose market valuation has since risen 2,300 per cent, as it grew to become the world’s biggest producer of electric and hybrid cars.

Berkshire has been reducing its stake in BYD over the past two years — because, Buffett said in May, he doesn’t want to compete with Elon Musk’s Tesla.

Buffett’s remark highlights a tough question for anyone investing in the automotive industry. At COP28, countries agreed to pursue the “rapid deployment of zero- and low-emission vehicles”. They also committed to double the global average rate of energy efficiency improvements by 2030, a pledge that will require a big increase in battery-powered vehicles.

Investors wanting to ride the electric vehicle wave have three obvious options. They can invest in Tesla, the clear market leader in North America and Europe. They can buy shares in long-established automotive companies, which are moving towards battery-powered models, cannibalising their own hard-won businesses in combustion engine cars. Or they can bet on Chinese producers which have a home base in what is by far the biggest national EV market, and are now turning their sights on Europe.

Growth in EV sales, which had been on a tear in recent years, has stuttered in 2023. Governments in Europe and elsewhere have cut subsidies, and higher interest rates have crimped consumer demand for electric cars, which still tend to be more expensive than petrol-powered ones.

Analysts at Bernstein reckon EV sales growth will remain weak for a while longer, with interest rate cuts taking time to feed through into increased demand. That means the stage is set for an intensifying price war.

Chinese carmakers are competing fiercely on price at home, and are set to expand that fight into the European market. Trade barriers are effectively keeping Chinese EV companies out of the US market, but Tesla has been slashing prices there too, in a bid to fend off the big global carmakers’ assault on its dominant market share.

China’s BYD Han electric car

Plenty of investors rate Tesla’s chances of doing so, judging by the 133 per cent rise in its share price this year. Those wanting to back a Chinese horse can go for BYD, or younger start-ups focused on higher-end EVs such as Hong Kong-listed Li Auto or New York-traded Xpeng Motors.

There’s no question that the long-term future of road transport is electric. But Buffett is right to be wary of the bloody price competition emerging among electric car producers. Those seeking exposure to the electrification of road transport should not forget another investment area highlighted in the COP28 declaration: the infrastructure needed to support it.

It has been a miserable couple of years for investors in EV charging companies. Many of their shares have fallen dramatically — reflecting disappointment at EV sales growth, as well as the interest rate crunch.

Blink Charging and ChargePoint Holdings — two of the biggest US operators of car charging networks — have both suffered huge drops in their market valuation over the past two years.

But this might be a good time to look at this space, according to UBS. It predicts that investment in public charging stations is set for lift-off, with a 40 per cent annual growth rate lifting the number of public charging ports in the US to 2.2mn in 2030, from 150,000 at the end of last year.

This week, Blink Charging shares enjoyed a modest bounce after the giant hedge fund Citadel, headed by billionaire Ken Griffin, disclosed a small stake. With the stock still down more than 90 per cent from its 2021 peak — and 70 per cent this year alone — Blink, and some of its rivals, might be worth a punt for green investors with strong stomachs.

Minerals and miners

The supply of “critical minerals” is a crucial piece of the energy transition. If countries are to achieve the goals set out in the COP28 agreement, this means a big increase in demand for a range of metals: copper for hugely expanded electric grids; rare earth metals for magnets in wind turbines; and lithium for electric car batteries.

Anyone viewing these minerals as a one-way bet, however, may have been badly burnt this year. Lithium is a case in point. The price of lithium carbonate used in EV batteries rose 15-fold in the two years to last November. It has since fallen by 84 per cent, as supply has outpaced demand from electric car producers.

Yet the long-term growth of the lithium market looks unstoppable. Unlike cobalt and nickel, lithium cannot be “engineered out” of the lithium-ion batteries that power the EV sector. And while recent developments in alternative sodium-ion battery technology have sparked excitement, few in the industry contest that lithium batteries will be central to the future of road transport.

The IEA predicts that lithium demand in 2040 will be 13 times the level of 2020, in a lower-growth scenario — and 42 times in a scenario where the energy transition proceeds more rapidly.

Bargain hunters looking at the critical minerals sector will note that Chile’s SQM and US rival Albemarle, the world’s two biggest lithium miners, have both lost roughly a quarter of their market capitalisation this year amid the metal’s price fall.

Investors would also do well to peruse the section of the COP28 agreement that — in contrast with the vaguer language in earlier COP texts — names several specific areas of the energy sector that countries are called upon to develop and promote.

One of these is nuclear power. A global pro-nuclear declaration of this sort would have seemed unthinkable a decade ago, when the world was still reeling from the 2011 Fukushima disaster, which led Germany to shut down its nuclear power plants.

This is a major win for nuclear advocates who argue that this low-carbon, 24-hour power source must be at the centre of the energy transition. And it is bullish for listed uranium miners — many of which are listed in Canada, the world’s second-biggest uranium producer after Kazakhstan. The biggest of these is Cameco, with a market capitalisation that has nearly doubled this year to reach $27bn.

London-listed Yellow Cake offers a different sort of uranium play, buying and holding Kazakh uranium to give investors exposure to the mineral’s spot price — which has surged this year, sending Yellow Cake shares up 58 per cent.

Slow demise of oil and gas

On fossil fuel investment, the COP28 agreement talked about “transitioning away” from fossil fuels, a stronger line than in previous COP declarations but weaker than the “phase out” pledge many had demanded.

In another concession to fossil fuel-producing nations, the closing text stated that transitional fuels could “play a role in facilitating the energy transition while ensuring energy security”. The phrase was a clear reference to fossil gas.

Investors in Exxon and other major oil and gas companies have had a fine time of late. Since the start of last year, the aggregate market capitalisation of the big five western supermajors — Exxon, Chevron, BP, Shell and TotalEnergies — has risen 45 per cent, or $360bn. The increase reflects how Russia’s invasion of Ukraine sent oil prices surging.

These companies are racing to expand their fossil fuel operations. Two major takeover deals by Exxon and Chevron in recent months, for a combined $112.5bn, will greatly increase their oil and gas reserves. BP, Shell and Total have all backtracked on pledges to shift from fossil fuels to clean energy.

While this industry’s marketing materials abound with green imagery, investments in clean energy amounted to just 2.5 per cent of its total capital expenditure last year, according to the IEA.

Recent studies by the IEA make clear that the oil and gas sector’s expansion plans are incompatible with the goal, reaffirmed by nations at COP28, of limiting global warming to 1.5C above pre-industrial levels. Use of oil and gas would need to drop to a quarter of current levels by 2050 to keep that goal alive, the IEA says. Under that scenario, it estimates — in a warning that should be noted by all investors in energy industries — the market valuation of private sector oil and gas companies would drop by up to 60 per cent.

At this stage, then, to buy shares in oil and gas companies is to bet against the world’s chances of avoiding catastrophic climate change. There is clearly no shortage of investors willing to make that wager — and over the past two years, they have been handsomely rewarded, unlike their peers seeking to profit from the shift to cleaner energy. But financial history suggests that betting against human ingenuity is rarely a winning proposition in the long term.

Simon Mundy is editor of the FT’s Moral Money newsletter and author of the book Race for Tomorrow (HarperCollins)