16-01-2024 15:41

Nordic cleantech: Light at the end of the tunnel

After several difficult years, the Nordic cleantech sector looks set for a comeback. Some of the past headwinds are receding and may even turn into tailwinds, according to a new report from Nordea’s ESG Research team.
Solar energy field and wind turbines seen from the air during sunrise

The cleantech sector, which covers companies that produce technology to improve environmental sustainability, has struggled in the past few years. In just the past 12 months, global cleantech stocks have underperformed the market by around 40%. However, that looks set to change, according to a new report from Nordea’s ESG Research team. 

“We see the main headwinds behind the cleantech downturn either receding or turning into tailwinds. This should provide a more positive backdrop for this segment during 2024,” says Marco Kisic, head of ESG Research and a co-author of the report.

Cleantechs across all regions have experienced difficult years, with the weakness continuing into 2023. Companies in the Nordics and the US were particularly hard hit, in particular small-cap and especially micro-cap companies. In terms of technology theme, batteries, carbon capture storage (CCS) and hydrogen underperformed, while cables and energy efficiency fared better. 

Global green basket share price performance vs. MSCI global

Index: 30 December 2022 = 100

Source: LSEG Data & Analytics and Nordea

Nordic green basket performance, end of 2022 to date


Source: LSEG Data & Analytics and Nordea
Marco Kisic, Head of ESG Research, Nordea

However, the difficult years are behind us, according to Kisic. He sees four main reasons for past underperformance in the space and argues that these headwinds are now receding or turning.

1. Interest rates

Cleantechs are extra sensitive to changes in interest rates, due to their cash flow and growth profiles. With central banks raising interest rates rapidly to fight inflation, cleantechs have felt the pain. The normalisation of interest rates should be especially powerful for this group of companies.

The ESG team assesses the interest rate sensitivity of these companies based on their cash flow duration, in other words how long it will take for future cash flow to materialise. Nordic cleantechs have a duration around 20% longer than the market. In general, stocks with a long cash flow duration should outperform in an environment of falling interest rates, Kisic says.

2. Inflation

Cleantechs have suffered from higher inflation, due to higher input costs, for example, for materials for the wind industry. What’s more, against an inflationary backdrop, consumers have been less inclined to choose premium products. Falling inflation should bring some relief. 

3. Policy uncertainty

In addition to higher rates, cleantechs have also faced policy headwinds. Kisic argues that several policy “mistakes” in 2023 left the market questioning policymakers’ commitment to the transition. He cites the UK’s fifth offshore wind auction, in which the price of the contract was not adjusted to reflect inflation, resulting in no bids. He also points to the debacle around Germany’s gas boiler ban

With some policy U-turns in the right direction, the ESG team sees positive policy momentum in certain segments, such as wind power. 

4. Operational risk

Operational issues have also hampered cleantech companies, especially in the wind industry. These issues have included equipment issues, delays and quality concerns. While such problems are quite idiosyncratic and company specific, Kisic argues that these operational risks should diminish as the technologies mature.

“We expect to see some normalisation in 2024,” says Kisic.

What is cleantech?

The “cleantech,” or clean technology, is an umbrella term covering companies and technologies that make it possible to reduce or avoid harm to the environment. Segments within the cleantech sector include:

  • Energy efficiency
  • Circular economy
  • Cables
  • Electrification
  • Renewables
  • Minerals
  • Batteries
  • Carbon capture storage
  • Hydrogen