Investors Retreat from Clean Energy Funds Amidst Rising Interest Rates

Small models of a wind turbine, solar panel, and electricity pylon were displayed next to the phrase 'Clean energy' in an illustration dated January 17, 2023, highlighting the focus on renewable resources.

Rising Rates and Costs Trigger Outflows

The largest clean energy exchange-traded fund (ETF) in the United States, known for tracking clean energy company stocks, is experiencing its highest level of withdrawals for the year. The surge in interest rates, increasing costs of raw materials, and disruptions in supply chains are making this fund less appealing to the investor community.

Signifying this trend, the iShares Global Clean Energy ETF (ICLN.O) has seen more than $1 billion exit its vaults this year. This situation marks a stark contrast to the previous high demand during the pandemic, where the fund enjoyed incoming flows surpassing $2 billion in both 2020 and 2021.

Tom Bailey, the head of ETF research, expressed that rising interest rates have a direct effect on growth-oriented stock valuations as future earnings are now valued lower. Moreover, the financing of clean energy projects, particularly in solar, becomes costlier with increasing rates. The iShares ETF has dropped by 30% this year, a downturn that's significantly worse than the 3% fall of the broader Energy Select Sector SPDR Fund.

Market Challenges and Sector Outlook

The fund's net assets dwindled to $2.7 billion, starting from double that value at the beginning of the year. Another fund feeling the pressure is the Invesco Solar ETF, which has lost 38% of its value this year and is expected to report record outflows since its inception in 2008. The solar industry in particular is facing delays in projects and an increase in the costs of raw materials.

The delays in clean power projects, majorly those involving solar energy facilities, have been linked to U.S. regulations on panel imports. On the other hand, offshore wind projects in the U.S. are experiencing their own set of financial challenges, including contract renegotiations and cancellations due to the surging costs.

Investors have been cautioned about the potential for further write-downs on existing projects by market analysts due to the persistent high-interest rates and uncertain material markets. However, it's not all doom and gloom in the alternative energy investment space, as uranium-linked ETFs have seen an uptick due to the constrained supply and climbing uranium prices, which benefits the mining sector.

Despite the current challenges, experts still anticipate that there's potential in the renewable energy sector, but investors might need to brace for a turbulent period ahead.

Investors, CleanEnergy, InterestRates