Climate tech’s tough year in the public markets

The gap is large and multi-year, not a bad quarter. Over the prior two years the S&P 500 was up 23% while the MAC Global Solar Index was down 34% and the S&P Global Clean Energy Index down 25%, which Mathew calls 40 to 50 points of underperformance. But the preceding five years had produced a run-up driven more by expanding valuation multiples than by earnings, on very low interest rates, high energy prices from the Russian invasion of Ukraine and COVID supply chain disruption, and the arrival of subsidy regimes. Much of the fall since is those conditions reversing rather than the businesses failing, and he adds a fourth reversal: cheaper energy weakens the payback case for heat pumps, solar and EVs, while normalized lead times leave the channel with inventory to work through.

Rates hit these companies harder than the market for two specific reasons, and both are about where the cash sits in time. Anything bought at a consumer point of purchase with borrowed money, a rooftop solar system or a car, gets more expensive when rates rise, and Mathew puts the effect concretely: a payback period that was seven years becomes ten or more, which changes the purchase decision. Separately, capital-intensive companies borrow to fund their own build-out, so they pay more interest, and they tend to be valued on cash flows three, five or ten years out, which a higher discount rate compresses much harder than it compresses the value of a company earning money today.

What then hurt the equities was not contraction but deceleration, and the EV and lithium chains show it cleanly. Global EV growth, counting battery-electric and plug-in hybrids, ran at 100%, then 64%, then 33%, with forecasters expecting closer to 20% next. That is still growth; it is also a falling growth rate, and Mathew says the real repricing came from forecasts of 50% penetration by 2027 or 2028 sliding out to 2030 or beyond as manufacturers pulled their volume targets. Lithium is the same story amplified by a commodity cycle: prices went from under $10,000 per metric ton before the EV boom to $80,000 at the peak and back to roughly $13,500 to $15,000, and the reason is supply, which grew 30% to 40% last year and is expected to do so again against demand growth of about 20%. Kann pushes back that the decade-long demand case has not disappeared, and Mathew agrees it has not, then redirects: the market is in surplus now, most sell-side forecasters still expect a deficit by the end of the decade, and whether the surplus clears quickly depends on how fast producers cancel capital projects.

The within-sector point is the one Mathew says he repeats most, that a strong subsector does not distribute its value evenly. Solar is his example, and it splits twice. Utility-scale grew 50% to 60% in 2023, mostly catching up from a 2022 depressed by regulatory delay, but the companies without delays are guiding to about 20% growth and trading several multiple points above peers guiding to high single digits, with interconnection, permitting and transformer problems doing the sorting. Residential is the genuine downturn: after roughly 30% annual growth, 2024 estimates range from down 15% to slightly positive, because California changed its net metering rules and is 40% of the US residential market, and because distributors over-ordered during the shortage and are now sitting on six to twelve months of inventory. That shows up in the accounts as SolarEdge going from nearly $1 billion in quarterly revenue to $300 million. So the money that wants climate exposure has moved twice: toward the companies inside the sector that are executing, and, more so in his observation, outward toward climate-adjacent incumbents such as electrical equipment and HVAC makers (Eaton, Hubbell, nVent, Trane), where a legacy cash flow stream comes with underappreciated decarbonization tailwinds and fewer swings.