Four Potential Green Catalysts for 2024 and Why AI Will Allow for More Precise Climate Investment Strategies

Taking stock of where we are is key to determining where we are going. The IEA’s recently published World Energy Outlook estimates that we are on track to invest a record $1.8 trillion in clean energy this year, and if that figure increases to $4.5 trillion a year by 2030 we will be on the right path to NetZero. The agency estimates the demand destruction for the three main hydrocarbon sources by 2030 if the world can deliver this scenario: coal demand would fall from about 5,800 metric tons carbon equivalent in 2022 to 3,250 by 2030; oil would decline from 100 million barrels per day to 77 by 2030; while natural gas demand would drop from 4,150 billion cubic metres in 2022 to 3,400 in 2030.

The overwhelming evidence of the scaling up of key decarbonizing solutions that replace fossil fuel ones points out to further acceleration of adoption of EVs, batteries, solar rooftops, energy efficiency solutions and heat pumps to name a few. However, green shares have struggled since 2022 despite the abundance of long-term tailwinds. Epitomizing that struggle, the iShares Global Clean Energy ETF (ICLN) is down almost 30% in the past year, as many of the companies at the forefront of the decarbonization effort are facing short term headwinds. The cohort is now quite oversold, given the magnitude of growth that is ahead. I acknowledge that this has been my personal view since 2022 when LNG was seen as the winner of the energy crisis in Europe exacerbated by the invasion of Ukraine, so I have been wrong. I argue I am early, but that is a euphemism for wrong.

Multiple narratives will abound next year

Investors like a clear narrative and since last year, we have multiple views. Are we at the beginning of a seismic shift in our energy economy? Are we to get to NetZero or the revenge of the old fossil fuel economy will be so strong that we are destined to fail to move away from coal, NatGas and oil?

Soft landing, to deep recession to no recession, the world will continue to second-guess the U.S. Fed's actions next year. Adding to that macroeconomic uncertainty, the U.S. presidential elections will further polarize society, and as a consequence, the narrative of investors and portfolio managers in the U.S. market. What narrative will prevail? Depending on the combination of Fed actions, Chinese economy indicators and the outcome of the U.S. election, we may have the requirements for a broad green rally in 2024.

The overlap of four catalysts will determine breadth and depth of potential green rally 

I believe there are four factors that will determine the breadth and depth of a 2024 green rally. The more they overlap, the stronger is the case for very solid gains for the green shares so oversold. Namely: 

1. An indication that U.S. Fed Fund Rates will go down

In case of a deeper U.S. recession, Chairman Powell is likely to become dovish over the risk of creating a massive economic slowdown. In case of a soft landing, a victory lap once CPI is back to the 2% target level would enable the Fed to lower real interest rates too. Lower interest rates will help the green consumer to finance the fixed assets with long useful life that are usually bought with leverage (like EVs and solar rooftops), as well as the funding of utility scale renewable energy projects. This is a “be careful what you wish for” situation as lower interest rates would mean the U.S. Fed would be responding to a recession in the American economy. Again, early cycle names like green infrastructure would likely do well in that scenario (with potentially throwback if the European economies too recover in 2024).

2. Chinese economy picking up steam again

China has been at the forefront of a green industrial revolution. While the U.S. consumer has 50 EV models to choose from, the EU consumer has 100 but the Chinese has over 150. China added more renewable energy in 2021 and 2022 as the rest of the world combined. It has built over 21,000 miles of High Voltage Direct Current (HVDC) transmission lines since 2009. China makes more than 50% of all the electric bikes on the planet. If China's economy grows faster again, it will be done with greener electricity, heat and electric transportation.

3. The U.S. Inflation Reduction Act (IRA) finally flowing through the economy

Although this climate bill is more than one year old, the complexity that the executive branch agencies have faced to implement the 700-page legislation has been material, as well as the tension between federal and state level allocation of the funding. For example, starting in January 2024 the U.S. consumer will finally be able to get the $7,500 rebate on a new EV at the point of purchase, as opposed to waiting for the IRS to process a rebate via income tax filing. 

4. A Biden re-election solidifying the continuation of climate supportive policies

The U.S. will hold its presidential election on November 5, 2024. A clear win for the Democratic party would give a clear indication of continuation of the existing climate supportive legislation. Even though a Trump re-election would likely mean a catastrophic second exit from the Paris Agreement, the IRA in most of its form may still remain in place as many Republican states are receiving material funding and would be loath to give that up.

A 2024 end of year rally could persist even with a Republican election victory

A green rally at this point is as inevitable as the energy transition itself. The price point of the key technologies – solar panels and batteries – makes the economic benefit of lower emission technologies so strong that there is no way for even a new Trump administration to preclude adoption of solutions that bring so many positive externalities to consumers. While a GOP-led House and Senate could formally repeal the Inflation Reduction Act after the 2025 inauguration, it would take time for Republicans to do so. Again, 2025 would be the earliest Republicans could take action to successfully rescind the law. There would be little that could be done to claw back the funding as the money would have largely left Congress’ purview. This means that, supposing a Republican wins the presidency in the 2024 election, there would still be a steep uphill battle to overturn that legislation.

Energy transition is inevitable but not orderly; volatility will remain high

Only investors with a severe fear of missing out may feel compelled to “buy the green dip” at this point. The third quarter results have just started, with Tesla announcing lackluster numbers, at a 5% year over year increase in automotive revenues. Green companies are not immune to the higher interest rates and very positive catalysts are needed for a change in the narrative to take place and markets start to see the decarbonizing companies as those posed for so much value generation and growth. Management of companies in the forefront of solar-distributed solutions like Enphase, SolarEdge, and Sunrun have warned of weaker sales for the next couple of quarters, but it is possible that demand will be strong again by spring.

AI to the rescue

Four years ago, I thought it was premature to call (green) winners. As Biden was elected, the U.S. went back to the Paris Agreement and 90% of world GDP was committed to NetZero. We saw a broad, indiscriminate green rally at the end of 2020 when the iClima Global Decarbonization Enablers Index, with over 150 constituents, was up over 83% in the year. Four years later we are seeing losers and winners. It is becoming clear that certain technologies, battery chemistries, and companies are likely to prevail.

Even pure players with a path to profitability, enough cash to deliver growth, and capable management, are struggling, with current markets rewarding mostly big balance sheets. Four years ago, my view was that it was premature to call winners, but now it is not. The companies failing to deliver today may still catch up and live to their potential tomorrow, so a dynamic process that analyses deep data on a daily basis to capture trends is key.

Therefore, active long-short strategies in the climate space have the potential to perform very well next year. Going long on the universe of relevant companies that represent decarbonization with material momentum, and shorting those with material headwinds, could be an alpha-generating strategy for 2024. Here, deep learning technology will likely play a fundamental role. AI has matured, leveraging extensive data availability and computational power. When converging predictive models with the right climate taxonomy that focuses on the impactful solutions, an AI model can choose from over 300 listed green companies to determine those likely to outperform and those with poor fundamentals, weak sectorial momentum likely to do poorly in the near future.

Our hypothesis is that after 2025, it will be time for an even more ambitious strategy

While 2024 a long-short theme on the decarbonizing solutions may be the source of great alpha, the following year we may be in the position to call winners in the energy transition itself. My hypothesis would be that the decarbonizing solutions would have advanced in adoption and replacing coal, natural gas and crude would then be a question of when, not if.

An active long-short energy transition strategy would capture the positive green names with favorable momentum and short the high emissions, business as usual fossil fuel aligned names. The energy transition is not only the biggest investment opportunity of our lifetime, but also one of the most complex ones to model and analyze. AI is coming to the rescue.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

ICLN

Other Topics

Technology Sustainability Artificial Intelligence