Clean tech and energy

For Now, Higher Valuations Go To Those With Higher Carbon Footprints

Markets change. And when they do, perhaps it’s best to revisit our assumptions about what they’re saying.

In September 2020, I penned a short column headlined: High Valuations Go To Those With Low Carbon Footprints. The thesis, based on market dynamics at the time, was that capital was flowing away from companies that consume and extract vast amounts of fossil fuels and toward those with low carbon footprints.

That’s certainly how it looked in private and public markets. Both venture capital and public investment dollars were pushing up valuations in such areas as enterprise software, fintech,  electric vehicles, and online gaming, which don’t use a lot of fossil fuel. Oil companies, meanwhile, were taking a beating, with Exxon Mobil shares around the lowest point in over a decade.

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Well, things have changed since then. Exxon shares have more than doubled, and scores of fossil fuel-guzzling energy companies are close to multi-year or all-time highs. This was evident from a perusal of publicly traded members of the Greenhouse 100 Polluters Index, a list of the top U.S. greenhouse gas emitters compiled by University of Massachusetts researchers using EPA data.

Shares of the No. 1 company on the list, Texas-based utility Vistra, are around the highest point in two years, while the No. 2, Duke Energy, is trading around all-time highs. Of the sample set of companies from the list, shares of all had risen significantly in the past year-and–a-half.

Meanwhile, the top-performing newly public tech companies of 2020—a low-carbon-producing bunch overall—have mostly fallen sharply. Shares of data warehouse company Snowflake—which ranked as the biggest software IPO ever when it debuted in 2020—have lost over half their value in the past year-and-a-half. Palantir and Unity, two other big tech debuts, are also way down.

It’s not just the big names. As we noted in our recent review of tech companies that took the SPAC route to market in 2020 and 2021, truly terrible performers abound in a range of low carbon-footprint industries. The pipeline of venture-backed, ESG-minded companies that have filed to go public, meanwhile, is thin to nonexistent.

There are a lot of reasons tech and software stocks are performing badly. Among recently public companies, it assuredly doesn’t help that the overwhelming majority lose money. Among big tech names, sharply rising shares over the past few years means that even with recent pullbacks, they’re still the most valuable public companies.

Meanwhile, there are some obvious drivers behind higher recent valuations for some higher carbon footprint companies. In particular, demand for U.S. fossil fuel is rising, especially as European nations seek alternatives to replace Russian imports. For those who’ve visited a pump lately, gas prices are also way up, padding profits.

Hopefully, the rising market fortunes of greenhouse gas-intensive companies will prove temporary.

While the most carbon-spewing companies are seeing shares rise, they’re doing so while attempting to build public images that accentuate their green side. Vistra’s homepage, for instance, features solar projects, stats on diminishing greenhouse gas emissions, and a quote from its CEO about climate change and social justice. Exxon’s site touts its “sustainable energy solutions.”

As for actual investment in low-carbon energy, that has been sharply on the rise. In 2021, global investment in the low-carbon energy transition totaled $755 billion, up from $595 billion in 2020, per BloombergNEF. The largest sectors last year were renewable energy, electrified transport and electrified heat.

On the venture side, meanwhile, investment in climate software, EV battery tech, and other climate-centric areas is booming, even as we continue to see a lot of capital flowing to crypto and NFTs, two areas that have drawn criticism for having an outsized contribution to greenhouse gas emissions.

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Illustration: Dom Guzman

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