Wall Street bets against future, turns its back on green economy

A few years ago, the green economy was the talk of the town, with investors making bold bets on its future growth.

But Wall Street is now betting against it, according to an investigation by Bloomberg.

Fadhel Kaboub, senior advisor at Power Shift Africa, a climate and energy think tank based in Nairobi, says policymakers, particularly in industrialised nations, are “failing to show real commitment to decarbonization”.

He tells TRT World that the financial sector is responding to this “lack of seriousness” by recalibrating its stance on green investments.

As companies and fund managers alike jumped on the bandwagon of the green economy not too long ago, environmental social governance criteria or ESG’s became the central theme. Its origins can be traced back to the1970s when ‘socially responsible investing’ emerged as a tool to align companies' investments with values.

Though it wasn’t until 2004 that the term ESG was formally coined in the UN’s Global Compact, a non-binding agreement to get firms worldwide to embrace sustainable and socially responsible policies.

By 2021, the heavy weights in finance, such as BlackRock, were publicly endorsing ESG principles and championing sustainable investments.

Backing ESGs happened for a number of reasons: investors realised companies long-term success wasn’t exclusively tied to profits - but how they managed environmental and social impacts.

The idea was businesses with strong ESG practices will be less risky and more resilient - which appeals to investors.

Similarly, there was pressure from consumers, employees, and regulators for companies to be accountable when it came to environmental and ethical issues, and Wall Street responded to this demand.

However, critics argue that ESG has lost its sheen and rather become a marketing tool, with some companies accused of "greenwashing." Since businesses set their own metrics, they can highlight positive aspects that make them look good while downplaying negative impacts.

Still, many believed this marked the dawn of a new era: a shift away from fossil fuels, with companies driving the green revolution expected to reap huge benefits.

Data from the firm Hazel Tree shows hedge funds are placing more bets against clean energy stocks than in favour of them according to the analysis by Bloomberg.

Of the 400 stocks within the energy transition sector tracked, more investments were found to be net-short than net-long.

And the number of hedge funds placing long bets on oil, gas, and coal companies now exceeds those betting on clean energy stocks.

In financial terms, ‘going long’ on a stock means buying shares with the expectation that the price will rise, allowing the investor to profit from the appreciation.

On the other hand, ‘shorting’ a stock involves betting the price will fall, allowing the investor to profit from a decline in value.

Trump and geopolitics

The outcome of the 2024 US presidential election could further shape the future of climate friendly investments. As Donald Trump makes a historic comeback, Kaboub warns "deregulation and further incentives for fossil fuel investment" would likely follow, with investors continuing to gravitate toward those sectors.

A report by Business for Nature reveals that the world spends approximately $2.6 trillion annually on subsidies that contribute to global warming and environmental degradation.

In the past two years, these subsidies increased by $800 billion, largely driven by the war in Ukraine, which has disrupted global supply chains and energy markets.

Sanctions on Russian oil and gas exports and the scramble for more stable energy sources have prompted some investors to double down on fossil fuels.

Meanwhile, rising interest rates and global supply chain issues have created a difficult environment for clean energy investments.

Projects like offshore wind farms, which require large amounts of capital, are becoming challenging to finance due to increased borrowing costs.

Conservative lawmakers, particularly in the United States, have also alleged that ESG investments violate antitrust laws, which essentially means environmental principles are anti-competitive.

And in June last year, Larry Fink, CEO of BlackRock, a firm with assets worth $11 trillion announced they would no longer use the term ESG, arguing it had been politicised and weaponised.

Cleo Rank, an analyst at InfluenceMap, a global climate policy think tank, argues that the "anti-ESG" pressure on the financial sector is coming from a small group of fossil fuel-linked actors aiming to prolong the use of coal, oil, and gas.

Speaking to TRT World, Rank also points out that claims of "boycotts" of fossil fuels by major banks like JPMorgan, Citi, and Barclays are misleading. In fact, these banks remain some of the largest financiers of fossil fuels, according to InfluenceMap’s FinanceMap research

Despite this, the momentum that once carried ESG investments is faltering, and investors' attitudes with it.

According to Bloomberg’s analysis, the S&P Global Clean Energy Index has plummeted by nearly 60 percent in recent years, while fossil fuel indices have witnessed major gains. During this spiral, firms such as Impax Asset Management, known for their clean investments, have seen their market value cut in half.

However, Kaboub says the trend towards a green transition is unmistakable in light of renewable energy becoming “more efficient, cost-effective, and appealing to homeowners, investors, and governments alike.”

“We can expect continued gains in the profitability of renewable energy technologies. Those betting against the sector today will ultimately be proven wrong."

To meet climate targets, the International Energy Agency estimates that global investment in electricity grids must double to over $600 billion per year by 2030

Achieving net-zero emissions by 2050 demands global clean energy investments to increase more than threefold by 2030, reaching an annual total of approximately $4 trillion.

While many initially believed that renewable energy would flourish as it became cheaper than fossil fuels, the reality is more complicated.

As Jason Hickel, a critic of the green economy’s reliance on private capital, pointed out on his X page, capital will only flow where profits can be made—and green energy, for now, is simply not as profitable as fossil fuels.

So while hedge funds and other investors recalibrate their positions, the immediate future of the green economy remains uncertain.