Investors betting against green trades are going up against the world’s most powerful governments.
The leaders of the biggest economies have in the past week pledged massive cuts on greenhouse gas emissions, paving the way for a torrent of regulation that is set to benefit green stocks and bonds. And it’s likely to deal blows to companies not positioned for the transition to a lower-carbon economy.
During a climate summit on Thursday, U.S. President Joe Biden announced a goal to halve emissions by 2030 on 2005 levels, a vow that could mean penalizing fossil fuel use or mandating renewable power. Canada and Japan raised target cuts to 40%-46% by 2030, while the U.K. topped that with a vow to slash 78% by 2035.
“The direction of travel is in one way only,” Mairead McGuinness, the European Union’s chief for financial services, said in an interview about new green investment rules. They form a “re-engineering of the economy and re-engineering of the financial world.”
In Demand
With the world’s biggest polluter China only reiterating plans to attain net-zero status by 2060, these efforts are still not seen as enough to meet goals to limit dangerous temperature increases under the Paris Agreement. That only means more targets and rules are likely in future.
The EU is a case in point. It’s now following up goals with detailed legislation to drive money toward a sustainable future. Lawmakers reached a deal last week to make a 55% cut in emissions by 2030, compared to 1990 levels, legally binding. Its executive arm then unveiled a labeling system, or taxonomy, to classify green investment.
That’s expected to divert financing to activities on the list, starting with a third of the bloc’s $2 trillion joint budget for the next six years. In favor are producers of rechargeable batteries, energy efficiency equipment, low-emission cars, wind energy and solar plants.
“There is still much, much more to come from the global community,” said Eoin Murray, head of investment at the international business of Federated Hermes. “From an investment perspective, policy risks continue to loom large for long-term portfolios.”
European renewables are poised to be among the biggest beneficiaries of the green spending spree, after a pullback this year. A gauge of stocks in the sector rallied 7% on Thursday, though remains about 20% down from a record high in January.
The underperformance has created an attractive entry point, according to Berenberg analysts including Henry Tarr, who named wind turbine maker Vestas Wind Systems A/S and Aker Carbon Capture AS as top picks this month. Wall Street banks poured out similar research in recent days, with Citigroup Inc. liking hydrogen producer ITM Power Plc and JPMorgan Chase & Co. eyeing Siemens Gamesa Renewable Energy SA.
“The recent market correction affecting clean energy stocks, driven by short-term catalysts and what we view as unsubstantiated medium-to-long term catalysts, presents a buying opportunity,” Societe Generale SA analysts led by Rajesh Singla wrote in a note.