The green equity investing craze perhaps reached its zenith at the end of 2020. Huge underlying flows into clean energy and dedicated green funds left asset managers and hedge funds scrambling to buy whatever assets they could.
The iShares Global Clean Energy ETF, often used as a benchmark for renewable energy equities, soared 282% from the end of March 2020 to the beginning of January 2021.
Green companies were particularly popular in equity capital markets, where larger sales and big allocations allowed fund mangers to allocate more capital to renewable energy stocks.
Nevertheless, since the beginning of the year the momentum has reversed. The iShares Global Clean Energy ETF has fallen by 31% from its January highs.
Investors sold down some of their green exposure in response to the high valuations that renewable energy companies were trading at in December, as well as in response to rising US Treasury yields since February.
The decline has stabilised and the iShares ETF is still trading 63% higher than it was before the pandemic. However, the exuberance has clearly left the market, which has fed through to equity capital markets.
Luckily, good renewable energy companies with strong balance sheets and a management team that investors believe in are likely to find no trouble when raising equity capital.
French firm Neoen, a beloved issuer, found that demand for green equities had not diminished when it priced a €600m rights issue rights issue last week.
However, other firms will not be as lucky. Profitability is a big concern for a sector where there is huge exposure to electricity price fluctuations and a fear that small players will be eaten up once the oil majors decide to fully commit to renewable energy.
But equity investors say they are still interested in renewable energy assets. There is still huge underlying growth predicted for the sector and growing interest on the buy-side in funding in a greener planet.
Nevertheless, ECM investors will not buy deals just because they look green.
An IPO investor speaking to GlobalCapital said that over 40 green IPOs had been pitched to him for 2021. That number is unmanageable. Therefore, with so many companies competing for attention, renewable energy firms now have to differentiate themselves from the rest of the pack.
Many will do this on the same basis that Neoen did, by presenting strong balance sheet fundamentals and by selling a convincing plan for growth.
Investors are keen to place money in businesses that can navigate a volatile electricity market and increased competition from larger challengers in the future.
Companies that can will be welcomed in equity capital markets.
But any firm hoping simply to ride a wave of investment sentiment without giving thought to how credible a business it is, is going to find it very tough to persuade investors to part with their money, no matter how green they look.