Environmental, social and governance (ESG) sectors bounced back last week, with the Clean Energy, Lithium & Battery Tech and Solar themes all recording a positive performance and moving back up the leaderboard on our performance screener, after languishing closer to the bottom for a number of weeks.
Clean Energy led the way, rising 5.66% over the seven days to Monday 5 April, with Lithium & Battery Tech up 5.24% and Solar climbing 4.52% respectively.
Despite largely maintaining impressive performances over the past twelve months, these themes have dropped again this week. We take a look at the main ETF in each space, delve into the reasons behind the recent resurgence, and consider whether a return to the green is likely.
Clean energy buoyed by increasing drive to renewables
Clean Energy, derived from renewable or zero-emissions sources, such as wind and solar power, is represented by the iShares Global Clean Energy ETF [ICLN] on the screener. While the ESG-focused ETF has slipped back 48% from its 8 January high of $34.25, it has still increased an impressive 124.66% over 12 months, currently sitting at $23.14 (as of 7 April’s close). Plug Power [PLUG] (7.33%), Enphase Energy [ENPH] (5.72%) and Austria’s Verbund [VER] (4.95%) are currently its top three of 33 total holdings, with 34.02% of its focus on US stocks.
Rise of the iShares Global Clean Energy ETF over past 12 months
Hydrogen fuel cell developer PLUG has had problems recently, revealing on 16 March that it would have to restate previous financial data back to 2018. The news saw PLUG’s share price drop 32.50% in March. However, the company’s announcement last week of plans to build a new, 100% renewable hydrogen plant in Pennsylvania in 2022, in addition to the one planned for New York, boosted the stock, as it looks to bounce back in April. PLUG’s share price jumped 10.26% on Tuesday after the news broke. Despite losing 55.70% since its 52-week high on 26 January, PLUG is up a huge 806.23% over the year (to 6 April’s close).
Looking at the wider clean energy sector, the backdrop is positive, with ESG stocks likely to become an increasing focus for investors across the board. US president Joe Biden’s clean energy plan could see up to $4trn in spending and tax credits, according to the New York Times. The publication reported that “the underlying message – that the next step of America’s economic recovery is fundamentally tied to countering the climate crisis – represents a major pivot in the way Democrats make the case for tackling global warming … climate change has become the centerpiece.”
Lithium battery and EV stocks boosted by Biden’s plan
The Lithium & Battery Tech theme, represented by the Global X Lithium Battery Tech ETF [LIT], started the week as the third-best performer on our theme screener for the last year, rising 156.66% (as of 5 April’s close). Albemarle Corp [ALB] is comfortably the largest-weighted stock, at 12.43%, while established EV manufacturers are also among the 41 constituents, including Tesla [TSLA], which has a 5.27% weighting.
As the EV market continues to grow, demand for EV batteries will also increase: the global EV battery market is set to increase by $37.69bn between 2021 and 2025, say Zacks, citing research by Technavio. The EV theme was top of our leaderboard last Monday, on news that Volkswagen [VOW3] has accelerated its EV investment as it aims for market leadership by 2025, and news of ARK Invest’s new target for Tesla’s share price. ARK analyst Tasha Keeney said: "we now estimate that it could approach $3,000 in 2025". Tesla closed at $670.97 on 7 April.
“US market share of plug-in EV sales is only one-third the size of the Chinese EV market. The president believes that must change. He is proposing a $174bn investment to win the EV market. His plan will enable automakers to spur domestic supply chains from raw materials to parts, retool factories to compete globally, and support American workers to make batteries and EVs” - InvestorPlace
Underpinning the positive outlook for lithium stocks is the rationale behind Biden’s infrastructure plan, specifically for the sector: “US market share of plug-in EV sales is only one-third the size of the Chinese EV market. The president believes that must change. He is proposing a $174bn investment to win the EV market. His plan will enable automakers to spur domestic supply chains from raw materials to parts, retool factories to compete globally, and support American workers to make batteries and EVs”, reports InvestorPlace. Albermarle’s [ALB] share price jumped 3.17% on 1 April following the release.
Is Enphase leading the way to a brighter future for Solar?
The Solar theme also had a decent run, gaining more than 4.5% last week. Over the last 12 months, it is the top performer on our screener, up an impressive 211.22% (at 7 April’s close). The Invesco Solar ETF [TAN] represents Solar on the screener, with Enphase Energy [ENPH] (10.28%), Solaredge Technologies [SEDG] (9.64%) and First Solar [FSLR] (6.13%) among its top holdings.
Enphase Energy’s share price, despite slipping back 34.5% from its $229.04 intraday high on 10 February, is still up 295.49% from a year ago (through 7 April’s close). Forbes is bullish on the solar microinverter provider, “considering its strong growth rates, high margins, and differentiated product.” Its gross margins “have risen to over 40% over the last year, up from around 30% two years ago.”
“Enphase’s revenues are likely to rise by over 70% this fiscal year and by almost 35% next year, per consensus estimates” - Forbes
Growth in the sector should remain strong, thanks to the global climate change movement and change of emphasis in the US under the Biden administration. “Enphase’s revenues are likely to rise by over 70% this fiscal year and by almost 35% next year, per consensus estimates”, Forbes reported last month. Enphase is unlikely to be the only solar stock to benefit.
With the International Energy Association calculating that renewable energy sources "are set to account for 95% of the net increase in global power capacity through 2025", and with an increasing number of investors aware of the impact of their investments, ESG-focused investments could continue to gain in popularity. While this week has seen something of a slump so far, the rallies of last week could stage a return.