MILAN :A return of fund inflows into renewable energy stocks is helping to breath new life into these companies’ shares, powering their strongest quarterly rise since the sustainability boom early this decade.
After two years of bearish sentiment and relentless redemptions that made the sector a short-sellers’ hotspot, a fundamental shift in the U.S. power demand outlook and greater policy certainty are luring investors back.
U.S. President Donald Trump’s “One Big Beautiful Bill” and the subsequent move to direct the U.S. Treasury to restrict tax credit rules have hit the renewables industry. But money managers say the outcome was not as bad as many feared, and offers enough certainty for investors to engage and companies to resume projects.
“Valuations were so disconnected from the fundamentals that even confirmation of negative news became a positive catalyst, said BlackRock portfolio manager Alastair Bishop. “It allowed investors to start focusing on the fundamentals.”
With the outlook improving, Bishop said outflows from BlackRock’s active clean-energy strategies had slowed.
Robeco portfolio manager Roman Boner said flows into the company’s Smart Energy strategy had recently turned positive after sustained outflows.
Lipper data shows alternative energy funds had their first net monthly inflow in June, after 25 straight months of outflows totalling around $24 billion. Investors pulled out money again in July before inflows returned in August and neared $800 million in September, the largest since April 2022.
Quarterly data from Morningstar shows outflows from Clean Energy/Tech have shrunk to their lowest since the last recorded inflow in Q2 2023.
These green shoots coincide with double-digit gains in clean energy indices, ETFs, and a surge in individual stocks across the sector — from producers to infrastructure plays.
Bloom Energy is a prime example, teaming up with Oracle to deploy fuel cells at data centres. Its shares have rallied 300 per cent in four months to become the biggest weight in the iShares Clean Energy ETF, a jump some investors view as over-exuberant.
The Federal Reserve’s dovish tone has also helped. Capital-intensive renewable projects benefit from lower borrowing costs, though rates remain well above the ultra-low levels seen during ESG’s heyday.
PRIVATE EQUITY MOVES IN LOOKING FOR VALUE
Private equity is also moving in, ignoring political noise to focus on long-term value. Global Infrastructure Partners is reportedly in talks to buy AES, potentially one of the largest deals involving a Wall Street power company.
The MSCI Global Alternative Energy Index has halved since its January 2021 peak, but rose 17 per cent in the three months to September — its strongest quarter since end-2020 and more than double the broader market’s gain.
The rally, from a record-low base, has extended into October and is not purely U.S.-centric
First Solar, a U.S. solar bellwether, climbed about 33 per cent over this period. Portuguese renewable energy company EDP Renovaveis rose 18 per cent.
SHIFT IN MARKET FROM SUBSIDIES-DRIVEN TO DEMAND-LED
Driving the rally is rising electricity demand from Big Tech’s rapid AI data centre build-outs, electrification of transport and industry, and the upgrading of grid infrastructure to handle new loads.
U.S. power consumption, stagnant for over a decade, is forecast to grow sharply. With gas turbines in short supply and nuclear years away, solar-plus-storage is emerging as the only scalable short-term solution.
“Data centres need electricity in two to three years. People will just add as much renewables as they can. It’s not only the cheapest source, but also the fastest to build,” said Boner.
These trends show renewable energy is morphing from a sector driven by policy and subsidies, to one shaped primarily by market forces, where strong demand requires all forms of energy.
“Every electron counts,” Boner added.
Cumulative new U.S. power generation demand is seen at 450 gigawatts by 2030, based on data presented by renewables developer NextEra. Of that, only 75 GW is projected from gas-fired plants, around 40 GW from deferred coal retirements, and limited nuclear contributions.
Jonathan Waghorn, who manages both sustainable and fossil fuel funds at Guinness Asset Management, sees renewable earnings picking up, noting electricity demand forecasts have surged eightfold in just a few years.
“That’s starting to get earnings momentum into the companies, especially those with AI, data centre, and grid-building exposure. The industry has just started to get going again, and the market is reacting.”
Waghorn’s fund holds stocks involved in electrifying the energy mix like Eaton and Legrand. He also likes European names like cable maker Prysmian and grid services company Spie.
Bishop expects earnings upgrades, typically supportive of price performance, and sees room for valuations to rise.
At 14.6 times forward earnings, MSCI’s Alternative Energy Index trades at a 40 per cent discount to world stocks, vs a 10-year average premium of 7.4 per cent, based on LSEG data, illustrating how the sector is currently valued well below the broader market despite historically commanding a premium.
There are still risks – including higher-for-longer interest rates, policy reversals, and speculative retail excitement in unprofitable areas like new-generation nuclear – but some managers say unwinding bearish bets could help sustain the rally.
“There are still shorts to be squeezed out of the renewable space,” said Luca Moro, CIO at SpesX, an energy transition fund.