October 3, 2023 - 7:00am

It’s been a bad couple of months for the renewables sector. As of this week, its share prices have fallen around 20% in only two months. At the same time, oil and gas stocks have rallied by around 6%. Some of this can be blamed on rising oil prices as Saudi Arabia and Russia cut their production targets, but not all of it.

 It all started back in June when BlackRock CEO Larry Fink said that his company would no longer be using the ESG (Environmental, Social and Corporate Governance) label. This was a huge blow to the industry — not just because BlackRock is the largest asset management company in the world, but also because it was an early adopter of ESG products.

Fink claimed that the reason he was ditching ESG was because the term had become “politicised”, but seasoned market-watchers saw more cynical motives at play. ESG had come into fashion amid buoyant markets and low interest rates. But now that there were rougher waves in markets, these fashionable products would get their hulls tested.

The same was true of the renewables sector. The sector had grown up alongside ESG investing, becoming more and more fashionable as Net Zero became a mantra for most Western governments. The height of this fad was just after the lockdowns, when markets were casting around for any positive messaging to put the pandemic doom behind them.

Now the results are in, however, and it looks like the renewables sector is taking a beating. As Louis-Vincent Gave of the influential Wall Street research firm Gavekal Research notes:

Embracing lofty alternative energy goals was fine when states enjoyed unlimited funding at near-zero interest rates. In such an environment, why not placate single-issue voters with expensive promises? But this dynamic changes rapidly once capital is no longer free. So perhaps the simplest explanation for the alternative energy face-plant is that in a world in which the cost of capital is on the rise, projects whose returns consist largely of virtue signalling go out the (Overton?) window.
- Louis-Vincent Gave

This poses a huge problem for the Biden administration. It has bet the White House on the renewables sector. President Biden’s flagship policy, the Inflation Reduction Act (IRA), is a behemoth, authorising $891bn in total spending — nearly double the GDP of Ireland. Most of this spending goes to the renewable and green sectors, with $6 flowing there for every $1 invested in manufacturing.

Biden’s bet may have looked good when the bill was passed. The renewables sector was booming then, while Net Zero was on the tip of everyone’s tongue and ESG was seen as the future. Now, with renewables stocks getting hammered and stock markets reawakening to the importance of fossil fuels, the President’s signature spending pledge looks less like an act of responsible statesmanship and more like an oversized bet.

Can the companies that the IRA backs survive when the markets are pricing their peers for a bad ride? It seems unlikely. The green stocks that are currently trading lower have been market-tested. The companies backed by the IRA will have every incentive to milk the subsidies provided even if their business model is not viable. As these companies start to fail, expect Republican lawmakers to have a field day pointing out the money wasted on bad investments.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics