As the enthusiasm for climate-friendly investing hits fever pitch, analysts warn that investors are pumping cash into anything that looks “green” — sending valuations of eco-friendly companies into the stratosphere and fanning fears of a bubble.
Larry Fink, chief executive of the world’s biggest asset manager, BlackRock, said last month that the market is undergoing a “tectonic shift” towards sustainable investments. Global funds linked to environmental, social and governance principles took in nearly $350bn last year, compared with $165bn in 2019, according to data from Morningstar.
The green portion of that investment has been encouraged by a massive change in consumer demand. BloombergNEF data show that companies, governments and households spent more than $500bn on renewable energy and electric vehicles in 2020.
With countries committing to cut their greenhouse gas emissions, ESG enthusiasts expect green investments to shoot even higher. But some executives and analysts think sustainability-linked stocks are starting to get overheated. This week, oil group Total’s chief executive warned of “crazy” valuations in the renewable sector, in an interview with the Financial Times.
“I think we’re 100 per cent in a green bubble,” said Gordon Johnson, chief executive of GLJ Research. “Pretty much every solar company I cover, their numbers got worse and the stock, like, tripled . . . This is not normal.”
The S&P Global Clean Energy index, which tracks the share price of 30 companies, has almost doubled in value in the past year, giving it a valuation of 41 times its companies’ expected profits, according to Bloomberg data. By contrast, US blue-chip stocks are up about 16 per cent in the past year, and are valued at 23 times forward earnings.
A recent paper by Morgan Stanley found that a basket of “green” stocks saw their PE multiples increase by an average of 24 points over 2020, compared with two points for sector peers.
One example of a dizzying single-stock rally is US-based solar provider SunPower, which saw its share price skyrocket in late 2020 and early 2021, before giving up some gains in February.
Retail investors have piled in to the stock, said Moses Sutton, analyst at Barclays, because it is a well-known brand linked to the energy transition. They have gone up against hedge funds betting that SunPower will struggle to gain market share against larger operators in the solar panel market such as Sunrun and Tesla. “Who’s going to win that battle is a great question,” said Sutton.
Danish power company Orsted, one of the leading players in the offshore wind market, has also soared. It is one of a few large energy companies that clears the bar for strict climate-conscious investors. It has seen its stock price almost triple in three years, despite only modest earnings growth.
“There was a period about seven or eight…
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