The short-lived success of green SPACs is starting to fade, with shares of the ESG-minded blank-check companies that take too long to close acquisitions found to be losing quicker than those of their non-green counterparts, according to a piece in the Wall Street Journal citing data from SPAC Research. Over the past five years, special purpose acquisition companies with a sustainability mandate have typically outperformed those without, but that’s only if they manage to close acquisitions shortly after announcing targets.

SPACs looking to merge with ESG-focussed companies won big at the start of the year, with the value of such transactions totalling USD 117 bn for the best part of the first quarter. This was over 2.5 times more than what they raised in FY2020 and accounted for 38% of all SPAC mergers, according to data by New York-based Nomura Greentech cited by Reuters in March.

Where green SPACs outperform: On average, successful green SPACs that find a target and close an acquisition see a 10% increase in their share price within the 90 days after they close an agreement. This is better than their traditional counterparts, whose share price typically drops an average 3% despite making transactions.

… And where they lag: If circumstances change and we look at the 90 days after a SPAC has announced a target, but is yet to close a transaction — green SPACs typically lost 24% on average in share prices. By contrast, average share prices of normal SPACs fell only 9% under the same conditions.

Why are green SPACs performing worse? With their focus on renewables, electric vehicles, or other sustainable investments, Green SPACs have fewer options and a lot of funds already raised. Accordingly, their investor terms require them to return this capital if they take too long to close an acquisition target. Many of the targets suitable for green SPACs are also often building ambitious, somewhat futuristic businesses that are not currently generating much revenue.

SPACs also aren’t necessarily the best vehicle for ESG investing, sustainable financing firm PathStone’s chief impact officer and long-time green SPAC skeptic Erika Karp says. Inherently, SPACs in general aim for profit, which runs counter to investing with the goals that define environmental, social and governance principles, Karp adds.

The contrarian view: Green SPACs open up startups building green businesses to a new type of investor, as the blank-check companies are typically backed by strong institutions and funds who can also make informed decisions and invest in the right company, said Nomura GreenTech Managing Partner Jeff McDermott. Those companies previously only had access to VC funds and other risk-taking investors, but many of those investors became less risk-friendly in the aftermath of the 2008 financial crisis, according to McDermott.

Here at home, green startups actually face a similar situation: Green startups in the country are often seen as less enticing for backers, compared to other tech-focused companies, VCs and angel investors we spoke to for Going Green told us. That’s likely due to the perception that most of them are plagued by negative cash-flow cycles that can take up to 6-8 months to recover, and they can also be very asset-heavy. Those startups often have no recourse but to look for alternative sources of funding including crowdfunding, philanthropy, and revenue-sharing.

So are green SPACs actually a viable, useful option for startup funding? Maybe not now: Lets not forget that SPACs, both green and regular, haven’t been doing great anyway. According to data from SPAC Research, they raised over USD 190 bn between the start of 2020 until now, but the bulk of those proceeds came in early 2021 — when a SPAC craze that drew enormous interest from retail investors, institutional powerhouses and celebrities alike was at its height. Before the first quarter of the year drew to a close, SPACs suddenly came under increasing regulatory scrutiny in the US — where most of the transactions had taken place.

They’re expected to face even more headwinds going forward after the US’ Securities and Exchange Commission appointed a new hardliner head, Gary Gensler, who built a reputation for being tough on Wall Street in the aftermath of the financial crisis, and has promised to introduce further regulations to protect retail investors from SPACs going flop.