Investing in energy stocks, be they traditional oil and gas companies or renewable startups, is not for the faint of heart. That's especially true ahead of the 2024 presidential election. Wars — the shooting kind and the trade kind — can upend even the best strategies in unexpected ways. So can volatile commodity prices and government policy shifts.
Consider what happened after President Joe Biden's signature climate law, the Inflation Reduction Act, squeaked through Congress in the summer of 2022. The IRA provides hundreds of billions of dollars to hasten the transition to renewable energy. Many investors expected clean-energy stocks to soar and fossil fuel stocks to sink.
Instead, the opposite occurred. Renewable-energy companies were hurt by rising interest rates, inflation, supply-chain problems and consumer hesitancy about electric vehicles. Meanwhile, Russia's invasion of Ukraine boosted oil prices and profits. U.S. oil production reached all-time highs. In the two years after the climate law passed, the iShares Global Clean Energy ETF dropped 37%. The Energy Select Sector SPDR Fund, dominated by ExxonMobil and Chevron, rose 14%.
This volatility is reflected in IBD's special report on the most sustainable companies — those companies successfully preparing for the transition to a low-carbon economy.
IBD's 100 Most Sustainable Companies
To build IBD's 2024 list of the 100 Most Sustainable Companies, we started with Morningstar's U.S. and global Low Carbon Transition Leaders Indexes. These new indexes provide exposure to companies from each sector that are taking the most action toward transitioning to a low-carbon economy. We sorted the constituents of the Morningstar indexes using IBD technical and fundamental stock ratings.
The result is a list of 100 stocks that combine strong climate management scores from Morningstar Sustainalytics with superior stock attributes. They are well-positioned for investors concerned about the climate transition.
The stocks had to have a price of $10 or more and sufficient data to create an IBD Composite Rating. We further qualified the list by removing stocks that did not meet or beat the S&P 500 in the past five years or had an IBD Relative Strength rating below 70. We selected the companies with the highest IBD Composite Rating — all with scores of 80 or better, putting them in the top 20%.
Finally, we ranked the companies by their Morningstar Sustainalytics climate management score, using the IBD Composite Rating to break any ties.
Ranking atop the list this year are financial services company Moody's, utility Southern Co. and consumer giant Colgate-Palmolive.
Read all the stories in our full special report: IBD's 100 Most Sustainable Companies For 2024
2024 Election Impacts Companies' Sustainability And Stocks
Now the 2024 election is adding yet another layer of uncertainty and complexity for energy stocks and investors. Along with health care, energy is perhaps the market sector most sensitive to politics.
A Democratic victory in November would keep the government push toward decarbonization on track and provide a more favorable political climate for sustainable investing based on environmental, social and governance, or ESG, principles. A Republican win would produce stiffer headwinds for renewable energy and renewed attacks on what critics call "woke" investing.
Topsy-Turvy Presidential Race Clouds Outlook For Energy Stocks
Whatever the 2024 election outcome, some of the consequences are likely to be just as counterintuitive as what transpired after the IRA became law. If Donald Trump reclaims the White House, his "drill, baby, drill" agenda wouldn't necessarily be an unadulterated boon to Big Oil. It could also promote an oversupply that would drive down prices and earnings.
"There is a point at which drilling for the sake of drilling doesn't work," said Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. "The more we drill, the tougher it is for companies to actually make profits." In the past five years, he notes, oil producers have become less focused on maximizing output and more on returning capital to investors through dividends and share repurchases.
This year's topsy-turvy presidential race shows how difficult it can be to make decisions about energy stocks based on predictions of 2024 election outcomes. After Joe Biden's disastrous performance in the debate on June 27, it looked like Donald Trump might cruise to victory. Then Biden stepped aside, and Vice President Kamala Harris claimed the Democratic nomination.
Harris' prospects improved after the Sept. 10 debate, where she moderated her views on fossil fuel production. As a California senator who was seeking the 2020 Democratic presidential nomination, Harris said she would ban the controversial fracking process of extracting oil and gas. But since joining the Biden administration and during the debate, she has said she would not ban fracking.
Inflation Reduction Act's Impact After Election 2024
For energy-focused investors, much is riding on the fate of Biden's climate law once he leaves office. If Harris succeeds him, implementation of the IRA can be expected to continue apace. First Solar, a U.S.-based solar manufacturer that is a prime beneficiary of IRA incentives, soared 15.2% the day after the debate.
"Steady as she goes is probably the right way to think about it," said Sasha Mackler, executive director of the Bipartisan Policy Center's energy program.
Beyond continuing to put the IRA into effect, Harris could move to restrict fossil fuel production on federal lands or require oil and gas companies to pay higher royalties. A Harris administration might also crack down on heat-trapping methane emissions and impose other new environmental regulations. These steps, however, could run the risk of being struck down in the courts if they weren't approved by Congress.
"We would not expect Harris to take an extreme approach toward the oil and gas industry," wrote Coco Zhang, who covers ESG topics for ING Bank. "U.S. oil output would likely continue to hit record highs."
If Trump wins, the outlook gets more complicated. He has called for repeal of the IRA and mocked "windmills" and other forms of renewable energy. He has derided ESG principles as "radical-left garbage."
Read More About The Top Winners On Our Most Sustainable Companies List: NRG Energy, Moody's, T-Mobile US
Even For Trump, The IRA Could Be Hard To Kill
Former President Trump has also routinely ridiculed electric vehicles, though his disdain for EVs became somewhat tempered after he received the full-throated endorsement of Elon Musk, CEO of Tesla and owner of X, the social media company formerly known as Twitter.
If the 2024 election returns Trump to the White House, most analysts don't expect the IRA to be fully repealed. However, parts of the law could be gutted administratively. In Washington, it's harder to enact a new program than to kill an existing one that has developed a supportive constituency.
"When there is a conversation on reforming the IRA in 2025 under a new presidential administration, my intuition is that we are going to find that's a much more difficult proposition than it sounds at first blush," Mackler said. "Many of the tax credits have bipartisan support. The lion's share (of benefits are going to) red states and red districts. Republican support is stronger than you might imagine, so that's going to be difficult to unwind."
The most vulnerable parts of the IRA, analysts say, are the EV tax credits. They provide rebates of up to $7,500 for purchasers of certain vehicles. Also at risk is a $27 billion fund to set up "green banks" and other greenhouse-gas reduction programs around the nation. Least vulnerable: incentives for carbon capture technologies, clean hydrogen and domestic manufacturing.
IRA Repeal Risk Could Hit Energy Stocks
Natalia Luna, an investment analyst at Columbia Threadneedle, agrees that full repeal of the IRA is unlikely, even if Republicans win in November. A partial repeal "could be the most likely outcome, and the market is underappreciating this risk and all the investment implications that go with it," according to her sector-by-sector analysis.
Partial repeal could involve capping or shortening the availability of some of the tax credits, cutting funding for programs administered by the Environmental Protection Agency and Department of Energy, and reversing EPA emissions rules.
Given all the political moving pieces, how can investors navigate the 2024 election uncertainties when it comes to energy stocks?
"I think the key is, regardless of the outcome, to not overreact one way or the other," said Brett Castelli. He follows clean energy for Morningstar and recommends that investors focus on individual companies.
Energy stocks are part of "a specific sector that is tough to invest in via mutual funds and ETFs. And the reason is that the quality of companies within the space varies wildly," Castelli said. "The easy thing for investors to say is: Clean energy is going to grow, so let me just buy a mutual fund or ETF. But, in reality, it's not that easy."
This space is intensely competitive, Castelli says. "Investors really need to select companies that both have exposure to the long-term growth of the clean-energy sector but also have some sort of competitive advantage. That will allow them to protect profits long term as more competition comes into the sector," he said.
Follow Companies Poised To Profit From Electricity Demand
Two energy stocks that Castelli likes are Brookfield Renewable Partners, a global owner and developer of renewable projects, and GE Vernova, the General Electric spinoff that is poised to benefit from rising electricity demand from data centers, the use of artificial intelligence and recharging EVs.
Brookfield Corp., which is on the IBD 2024 list of the 100 most sustainable companies, is the parent organization of Brookfield Renewable.
In addition to the financial incentives provided in the 2022 climate law, lower inflation and interest rates should boost clean-energy stocks more broadly. That's because they typically have to borrow to finance growth and new projects.
For environmentally conscious investors who are queasy about the volatility of clean-energy stocks, another option might be mutual funds and ETFs that invest in companies with high sustainability ratings. In the two years after the IRA was enacted, the Invesco Solar ETF lost more than half its value. But the Vanguard ESG U.S. Stock ETF — which holds tech companies such as Apple and Nvidia — increased 28% during the same period.
Nvidia also is on the 2024 IBD list of 100 most sustainable companies. Other stocks in ESGV that made the IBD list include Broadcom, Eli Lilly, JPMorgan Chase and UnitedHealth Group.
On IBD's list of most sustainable companies, utilities ranked highly, including Southern Co., Alliant Energy and NRG Energy. All three rank among the top five stocks on the list.
There's No Turning Back For Energy Stocks
Election 2024 aside, analysts say investors in the energy sector must recognize that two things are simultaneously true.
One is that the need for fossil fuels isn't going away anytime soon. In the U.S., EVs represent slightly more than 1% of the 288.5 million vehicles on the road and less than 10% of new-car sales. The U.S. and the rest of the world will need fossil fuels for decades to come.
The second truth is that the shift toward cleaner sources of energy in a warming world is irreversible. The question isn't so much whether it will happen, but when and how quickly. "Coal is not coming back," said Castelli. "The clean energy transition will continue regardless of who is in the White House."
