World leaders will gather in Dubai this week for climate talks that could be a catalyst for clean-energy stocks to rally, though the backdrop for the sector remains challenging.
The United Nations Climate Change Conference, known as COP28, starts Thursday in the United Arab Emirates, one of the world’s biggest oil producers. Sultan Al Jaber, CEO of the Emirati state-owned oil firm Abu Dhabi National Oil Company, or ADNOC, will preside over the annual negotiations to tackle the climate crisis.
While clean-energy stocks are suffering through their worst slump in years, renewable energy is expected to take center stage during the talks. Shares of clean-energy companies could get a much-needed pop if countries announce meaningful new measures to combat climate change.
The Invesco WilderHill Clean Energy exchange-traded fund (ticker: PBW)—a green-power benchmark—is down 30% since the start of the year, compared with a 19% gain for the S&P 500 index, as of Nov. 22.
“The renewable sector right now is in the bottom, but this is a cyclical business, and I think we’re going to see the renewable sector come back up in the next few years, so investors should pay a lot of attention to what happens at COP,” said Atul Arya, chief energy strategist at S&P Global Commodity Insights.
The U.A.E., U.S., and European Union are leading a push for countries to triple renewable energy capacity this decade.
This month, the U.S. and China, the world’s biggest polluters, agreed to “pursue efforts to triple renewable energy capacity globally by 2030” with the intention “to accelerate the substitution” for coal, oil, and gas generation. Fossil fuels are widely agreed to cause global warming.
That sets an optimistic backdrop for this week’s talks, as well as for the clean energy sector.
“Any government momentum that favors renewable energy is going to be positive for a lot of stocks in the energy, utilities, and renewable energy industries,” said Travis Miller, an energy and utilities strategist for Morningstar Research Services.
Morningstar recently updated its 10-year U.S. renewable energy forecast. The firm estimates 45% of U.S. power generation will be renewable energy by 2032, excluding hydropower.
Amir Sokolowski, global director of climate change at CDP, a global nonprofit that helps companies disclose their environmental impact, said “it is fitting” that COP28 is taking place during the year of the “global stocktake,” which assesses countries’ progress toward meeting the goals of the Paris Climate Change Agreement.
The global stocktake is a two-year process slated to happen every five years. The first got under way in 2022 and will conclude during this year’s conference.
Despite bold climate promises from nations and companies to reduce carbon emissions, countries are falling short of their targets and demand remains strong for fossil fuels.
“We’re already past the point of ever stopping climate change,” said Leslie Samuelrich, president of Green Century Funds, a family of environmentally responsible mutual funds. “So now we’re at the point of trying to curb it the best we can.”
A closely watched annual report released in June—the Statistical Review of World Energy from the Energy Institute—found coal use and greenhouse gas emissions are still very high.
The argument over phasing out fossil fuels—versus a more gradual “phase-down”—is expected to be a key battleground during this week’s talks.
“There could be some rules around the phase out or phase down of fossil fuels,” Arya said, adding such rules could affect investors’ allocations as well as the returns of companies that deal with fossil fuels.
Even as this year is on track to be the hottest on record, energy companies are doubling down on fossil fuel production. That leaves some doubtful that a full phaseout of fossil fuels is possible.
“The emphasis on fossil fuel within the energy mix is not going to disappear,” said Amit Bando, chief economist and senior advisor on just and inclusive economics at sustainability nonprofit Ceres. “I think the COP will highlight and demonstrate the successes and the efforts that are under way to change the mix considerably in favor of renewable energy.”
The cost of not accelerating the energy transition, however, is high. Anne Kelly, vice president of government relations at Ceres, said there has been “profound economic loss as a result of the climate damage we’ve seen over the past few years.” So far in 2023, the U.S. has suffered 25 weather/climate disasters with losses exceeding $1 billion each, according to the NOAA National Centers for Environmental Information.
“Any investor that’s looking forward has to take into account the potential loss of those assets, as well as the economic opportunity associated with investing in the clean energy economy,” Kelly said.
Write to Lauren Foster at lauren.foster@barrons.com
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