Monthly Decarbonisation Enablers Report | February 2024

Climate Change ETF Key Takeaways

The market was ahead of itself at the end of 2023, pricing an interest cut as early as March: The risk of a correction in January was tied to the probability of the Fed not cutting rates early in the year. In the 2022 to 2023 rate increase cycle, the US Fed increased interest rates 11 times, from a near zero Fed Fund rate to a 5.25% to 5.5% level. At its two-day Federal Open Market Committee (FOMC) policy meeting on January 30th and 31st, the Fed left rates unchanged at 5.25% to 5.5% and Powell explicitly said, “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March is the time to do [rate cuts].” The two-year US Treasury Bond was above 5% on November 10th, dropped to 4.13% on January 13th and closed the month at 4.24%. The 10-year Treasury closed the month at 3.95%, widening the inversion between the 2 year and 10 year as the latter peaked at 4.17% yield on January 24th.

The elephant in the room is the risk of a crude prices spike, re-igniting inflation: Around 14 million voters in Taiwan out of a 23.5 million population elected on January 13th the candidate of the Democratic Progressive Party, committed to Taiwan’s sovereignty, for a third consecutive time. That keeps the tension in the Taiwan Strait high, as China remains firm on its “One China” principle. Meanwhile, in the Middle East, attacks by the Iran-linked Houthis militia in Yemen and in a US airbase in Iraq increased fears of escalation of tensions in the region. The geopolitical risk, coupled with U.S. crude output that fell from a record high of 13.3 million barrels per day at the beginning of the year to a five-month low of 12.3 mbpd, meant that prices of crude went up. The WTI that was at a $69.17 low on November 13th surged to $77.31 on January 31st, with Brent going from $73.87 on December 13th to $82.78 on the last day of the month.

Private sector and governmental leaders gathered to discuss the year ahead: Davos (and COP) may be turning into large tradeshow events, with companies showing off new products and strategies, but it is also useful as a barometer for what is top of mind for world leaders. The top brass was present in cold Switzerland to discuss what is ahead, from private sector CEOs talking a lot about AI to political leaders like Ukraine’s Zalenski focussing on keeping western backers engaged. JP Morgan CEO Jamie Dimon seems to have spooked markets in an interview at the World Economic Forum on January 17th saying that “not everything is hunky-dory.” However, from that low point on January 17th when the S&P500 index closed at 4,739 points it went on a straight-line up, closing the month at 4,845 points. Megatech, excluding Tesla, continued to push the index up.

Microsoft overtakes Apple at the $3 trillion market cap summit: The AI leadership continues in January, with Nvidia up another 24.24% just in the first month, reaching a $1.5 trillion market cap. In the last week of January several large tech names reported 2023 results, including Microsoft, Meta, Apple, Amazon and Alphabet (as well as Tesla – more on that below). Overall, figures were below consensus and indicate that AI is going to cost more to deliver. Nonetheless, Microsoft overtook Apple on market capitalization leadership, closing January at a $3.04 trillion market cap, versus $2.91 trillion for Apple (down -4.2% YTD). Tom Lee, the Fundstrat head of research that called the Magnificent 7 rally of 2023, expects the AI story to continue bringing the markets up and forecasts the S&P500 index to close the year at 5,200 points. Mike Wilson, Morgan Stanley’s CIO, that was a bear (and wrong) in 2023 thinks a rally can only continue if economic growth accelerates.

CLMA Performance in January

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 lacklustre numbers, at a 5% year over year increase in automotive revenues. Green companies are not immune to higher interest rates and very positive catalysts are needed for a change in the narrative to take place. Markets are not yet seeing decarbonizing companies as those poised for so much value generation and some names (like Jinko Solar, more on that below) continue to trade at very discounted multiples.

Green strategy red again: The green shift will continue, but the segment faced sales pressures in the first month of the year as the expectation on interest rate cuts that would have benefitted growth names and equipment financing companies were challenged.  CLMA started the year with negative performance (down
-9.52%), potentially a correction as the November & December rally was more like a stampede. The equity market got “ahead of itself” pricing in a first interest rate cut as early as March.

After the ‘23 MegaTech rally, analysts look for new leadership: Acronyms that could represent what is the flavour of the year were discussed by analysts trying to predict the next companies to outperform. These included ZEBRA (Zoom, Electronic Arts, Alibaba, Rivian, Applied Materials) and BICEP (Alibaba, Amplify International Enhanced, Chevron, Estee Lauder, PayPal). MegaTech companies are priced for perfection and if their earnings do not grow on material revenue improvements (beyond cost cuts), multiple expansion looks unlikely.

Climate Change ETF Performance Table
As of 31.01.2024

iClima Global

Decarbonisation Enablers UCITS ETF

CLMA iClima Global Decarbonisation

Enablers Index


Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/01/2024

Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. When you invest in ETFs and ETCs your capital is at risk.

Outlook for the quarter and year ahead

The long-term trend is clear in that the solutions that decarbonize the planet benefit from tail winds across the planet, from the 3x in renewable energy installation as per the pledge signed at COP28 by over 180 countries, to the deflationary curve solar PV and batteries continue to experience. While the climate change mitigation super cycle story remains intact, the snapshot picture, reflecting all the challenges listed in the Outlook section above, paints a different story in the short term.

Near death experiences working on survival: Companies with no clear path to profitability and high capex needs received the force of investors’ scepticism last year. Li Cycle, ChargePoint, PlugPower (that issued an ongoing concern warning in 4Q23) are examples of that. EV charging network companies are suffering from both an expectation of a slowdown in EV sales (although in the US sales passed the 1.2 million level for the first time and were up more than 50% YoY), and the consequences of Tesla opening up its network of over 50,000 superchargers in the USA to other brands, consolidating its proprietary charging (now called North America Charging Standard, NACS) technology. Until the EV network developers (Blink, EVGo, Chargepoint are all part of CLMA) have written off equipment inventory of non-Tesla chargers and have a clear path to profitability, it is unlikely that they will receive confidence from a broad investor base.

Election talks that will intensify and make green solutions adoption more political: SunRun, Sunpower, Sunnova, and Tesla itself are not only facing the pressure of higher interest rates on the affordability of their solutions (given their products are mostly financed by consumers), but are also facing volatility from political discourse in America. In an election year, climate and climate policies are at the forefront of the presidential debate, and Biden’s stance on green policies are under attack. The decision to buy an EV or install solar panels in America seems to be – this year – not only an economical one, but also a political one. As we get closer to November, it is likely that the political aspect of what should not be a political purchase will intensify. Higher natural gas prices, lower interest rates, and clarity on the election outcome in the US would be important catalysts for these companies.

Green Chinese dragon is awake and prosperous, but valuations say otherwise: Bashing China wins bipartisan applause in the US, despite Xi’s visit to California in 4Q23 and the closer flow of communication between the Biden administration and the Chinese government. The commitment of the Chinese government towards clean energy solutions is not in question (more on that in the February newsletter) but valuations of Chinese companies (see Jinko Solar comments in the last section below) will likely improve only when we see better GDP growth figures in China, the consequence of a stronger stimulus package, and less concerns of a geopolitical nature.

Bullwhip effect will continue to haunt solar equipment names in the quarter: Enphase and SolarEdge (both in CLMA) are closely tied to the growth in solar energy generation. However, both names saw their shares implode last year on the basis of revenue decline and lower guidance. Both companies sell their equipment (inverters, batteries and all solutions for behind the meter solar system installations) via a distribution network, on a B2B model. The change in inventory levels by distributors tend to be more volatile than the change in end-demand itself, a phenomenon referred to as a “bullwhip effect.”

Lithium prices and the mining conundrum of this key transition mineral: Prices of the energy transition’s much talked about commodity collapsed in 2023.  From November 2022 to November 2023, the average price of battery-grade lithium carbonate in China dropped from $84,500/ton to $18,630/ton. This ca -78% drop is attributed to a reduction in pace of EV sales and consequent increase in inventory levels. The cyclical aspect of this industry is not new and puts pressure on higher cost lithium producers, but is potentially good news for consumers of BEVs. They will see the main cost component of electric vehicles go down further (continuing the deflationary curve), which will itself help further accelerate adoption, increasing demand and continuing the positive spiral in the battery space.

Stories & snapshots: key decarbonization developments in January

Tesla is the best sold car in 2023: No, we are not referring to the best EV sold last year. This is an absolute statement as the best-selling vehicle in the world in 2023 was the entry level, crossover, Tesla Model Y. This model, that started production only four years ago, was also the best-selling car in both Europe and China and put the Toyota’s two previously most popular models in second and third position. Tesla’s Model Y sold 1.23 million units, followed by the Toyota RAV4 (an ICE) at 1.07 million and the Toyota Corolla (also an ICE) at 1.01 million.

US solar expected to grow 75% by 2025: The US Energy Information Administration (EIA) expects solar generation in America to go from 163 TWh to 286 TWh by 2025, a 75% growth rate in two years. Solar still accounts for a single digit share of the country’s overall electricity production, at ca. 5.8% in October 2023. The EIA anticipates that 45 GW of utility-scale solar projects above 1 MW in size will be added to the US grid in 2024, and 53 GW in 2025.

Largest US solar & storage project reaches COD: Located in California, a utility scale solar project has a 875 MW capacity combined with a 3.3 GWh of energy storage, and 1.3 GW of interconnection capacity. The 1.9 million solar panels were supplied by First Solar while the batteries are BYD, Samsung, and LG Chem. This is a public-private collaboration as part of the solar park at the Edwards Airforce base. Financing of the first phase closed in 2021, while the second phase $1 billion project finance debt closed in 2022.

Germany is not letting a (energy) crisis go to waste: The country added 14.28 GW of new solar capacity in 2023 therefore reaching total solar capacity of 81.3 GW by year end. In 2022 the solar capacity added was 7.2 GW, while in 2021 the sum added was 5.26 GW. Prompted by the invasion of Ukraine in February 2022 and consequent NatGas volatility and supply constraints, Germany has been accelerating renewable energy additions, and the almost 100% growth in solar PV installations in 2023 over 2022 is a positive development.

Bad for producers (in the short term) but good for consumers: Analysts have been concerned about an over capacity of polysilicon in China. In 2023, overall production in China reached 1.45 million tons of polysilicon, an 81.4% YoY increase. Because of the oversupply, prices have fallen. China Mono Grade, the benchmark commodity indicator for polysilicon prices in the country, dropped to CNY60.25/Kg (equivalent to $8.40/Kg) on January 16th this year, 51.8% below the price a year ago. The effects of the Chinese polysilicon price drop were felt in Europe, with manufacturers of solar panels (a case in point being Meyer Burger, more on that below) struggling to compete. The US market however (to the benefit of a company like First Solar, part of CLMA) has not seen the same price competition as the US price tariffs restrict solar PV imports from China, so solar PV prices in the US were down ca. -10% to -15% last year.

Global clean energy investments reach $1.8 trillion in 2023: According to BloombergNEF global investments towards clean energy grew by 17% vis-à-vis 2022, with China leading with $676 billion (38% of the total investment). Another notable figure is that green transportation is now the largest segment receiving inflows ($634 billion), up by 36% YoY. Renewable energy received $623 billion, up 8%. Following in third place at $310 billion was investments into the power grid. The solutions with the deepest acceleration of investment inflows were hydrogen (reaching $10.4 billion, inflows tripled YoY), carbon capture & storage (reaching $11.1 billion, double) and energy storage (reaching $36 billion, up 76%). The effects of the Inflation Reduction Act (IRA) started to be observed, and the overall investment towards green solutions reached $303 billion, up 22% YoY. In the words of Albert Cheung, Deputy CEO of BNEF “Our report shows just how quickly the clean energy opportunity is growing, and yet how far off track we still are.” BNEF estimates annual investment needs from 2024 to 2030 of ca. $4.8 trillion p.a. to be in line with the Net Zero goals. Particularly interestingly, BNEF estimates that investments into clean energy supply chains are on track to deliver a Net Zero world. The decrease in prices of polysilicon and lithium (more on that below) is a consequence of companies that are investing in capacity for a demand that is to triple. One would jump in and invest into Jinko Solar, for example, if he or she believes that indeed China and Asia will triple investments into renewable energy in the next three years.

EV sales continue to grow at a fast pace, but not at the same level: In 2023, the global sale of fully Battery Electric Vehicles (BEVs) reached 9.5 million, with PlugIn Hybrid EVs (PHEV) selling 4.1 million units (so both forms of EVs sold 13.1 million units). BEV sales were up 50% in the U.S. and Canada (still quite behind the EU and China, but now above the 1.2 million level), and were up 27% in the EU and 15% in the more mature Chinese market. Global sales of BEVs + PHEVs in 2023 rose 31% over that of 2022, and that was a material reduction over the 60% increase between 2022 and 2021.

Source of all performance data: iClima Earth / Bloomberg. Data as of 31.01.2024. Past performance is not indicative of future performance and when you invest in ETFs your capital is at risk.

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