Capital gushed into climate technology and other sustainable investments in 2021. Now the market is selling off, but investors don’t see a repeat of the clean tech bust that occurred more than a decade ago.

Driving the surge: a sea change in investors’ priorities and increased alarm about climate change amid devastating heat waves, storms and fires. The shift in sentiment helped push Tesla Inc.’s market capitalization above $1 trillion and made Elon Musk the richest person in the world.

Some…

Capital gushed into climate technology and other sustainable investments in 2021. Now the market is selling off, but investors don’t see a repeat of the clean tech bust that occurred more than a decade ago.

Driving the surge: a sea change in investors’ priorities and increased alarm about climate change amid devastating heat waves, storms and fires. The shift in sentiment helped push
Tesla Inc.’s
market capitalization above $1 trillion and made
Elon Musk

the richest person in the world.

Some say such frothiness signals a bubble. The Financial Crisis Observatory, a bubble-tracking outfit at the Swiss Federal Institute of Technology, or ETH, in Zurich, has declared it a green energy bubble. In November, the group predicted Tesla shares would decline. They are now down more than 20%.

The 2000s saw a similar love affair with sustainable investments such as solar, wind and rechargeable battery companies. Industry insiders call it Climate 1.0. The bubble popped in the early 2010s after the failures of solar startup Solyndra and battery maker A123 Systems.

A123 went public to great fanfare in 2009, its stock surging more than 50% on its first day of trading, raising about $380 million. It went bankrupt three years later after a string of setbacks, including a defect in one of its batteries. Solyndra never went public.

Solar-panel manufacturer First Solar was one of 2021’s hottest ESG stocks.
Photo: Dustin Franz for The Wall Street Journal

This time, investors are confident the money will keep flowing into what they dub Climate 2.0, even if there are some losses.

“We have seen a tectonic shift of capital,”

Larry Fink,
chief executive of
BlackRock Inc.,
the world’s largest investment firm, said in his annual letter to CEOs earlier this month. “Actions and ambitions toward decarbonization have also increased. This is just the beginning.” Overall, sustainable investments have reached $4 trillion, Mr. Fink said.

Big banks are lining up to fund efforts to curb carbon emissions. Last year at the Glasgow climate summit, most of the world’s big banks as well as major investors and insurers with a combined $130 trillion in assets signed on to an effort to shift funds to investments that lower emissions.

Through the third quarter of 2021, $56.3 billion flowed into sustainable funds, up from $51.2 billion for all of 2020 and just $5.5 billion in 2018, according to
Morningstar Inc.
Global issuance of bonds under the Climate Bonds Standard, a framework for judging a project’s sustainability, surpassed $200 billion in late 2021, according to Climate Bonds Initiative, a U.K. charity.

The 13 large-cap ESG index funds available to U.S. investors that are tracked by Morningstar posted average gains of 29.2% last year, better than the S&P 500’s 27% advance, driven by hot stocks such as Tesla and solar-panel maker
First Solar Inc.
and technology giants such as
Apple Inc.
and
Microsoft Corp.
that have made aggressive commitments to curb emissions.

Money is a sticking point in climate-change negotiations around the world. As economists warn that limiting global warming to 1.5 degrees Celsius will cost many more trillions than anticipated, WSJ looks at how the funds could be spent, and who would pay. Illustration: Preston Jessee/WSJ

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One factor potentially curbing the enthusiasm for green stocks is the performance of energy companies. The S&P energy sector rose 48% last year, rebounding from a brutal 2020, when Covid-19 ravaged the global economy. The surge has continued into the new year.

More speculative clean-technology companies, meanwhile, have taken a beating amid expectations that the Federal Reserve will raise interest rates. And the near-term failure of President Biden’s Build Back Better plan, which included more than $500 billion allocated toward climate projects, has for now removed a tailwind for the sector. Mr. Biden in a Wednesday press conference vowed to push Congress to pass parts of the plan and said the climate components of the package were a priority.

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Some high-profile, speculative clean-energy stocks have been pummeled after an early wave of enthusiasm. Battery startup QuantumScape Corp. has lost about 90% since surging in late 2020.
Fisker Inc.,
a Los Angeles electric-vehicle maker, is off more than 50% from its early 2021 peak.

At least one factor in the 2020s makes today much different than the 2000s. Auto makers around the world have committed to shifting their fleets to electric vehicles in the next few decades. That is driving huge amounts of cash into rechargeable battery companies as well as the array of commodities that make up the batteries. Prices for battery-grade lithium surged more than 400% last year, according to Benchmark Mineral Intelligence, and they jumped another 21% in the first half of January.

Gene Berdichevsky,
an early Tesla employee and CEO of Sila Nanotechnologies, a Silicon Valley battery startup that raised $590 million a year ago, said he has little doubt that Climate 2.0 is here to stay because the technology is vastly improved and savvy investors are eager to take advantage.

“The odds of us getting 10 Teslas 10 or 15 years from now is very high,” he said, adding that he is “seeing $5 billion climate funds pop up like weeds.”

Write to Scott Patterson at scott.patterson@wsj.com