With more attention on environmental, social, and governance investments, some warn of a potential bubble forming in high-flying socially responsible companies, but ESG investors may not mind.
For instance, Tesla is trading at more than 1,000 times trailing earnings, and a fund that tracks the Nasdaq clean energy index trades at 52 times trailing earnings or almost double the overall market’s current historically high multiples, reflecting the current euphoria in green energy, Greg Ip writes for the Wall Street Journal.
“The bubble in renewables is probably the stupidest that I have seen in my career,” Charles Gave, chairman of money manager and research firm Gavekal, wrote last month.
While some bubbles can be destructive, like the one that initiated the financial meltdown of 2008, the bubble in green energy may be socially constructive to ESG investors’ goal of doing good. There is little incentive for risky innovation in the private markets since shareholders only capture a portion of the benefits, but the current bubble could provide the needed capital on new ventures to push the green tech envelope, even if the ventures fail.
Tesla has benefited from this bubble-like pricing as it has perennially run the risk of running out of funding when transitioning from a niche seller to a mass manufacturer.
Green energy may also benefit from its reliance on technology, along with advances in tech that would provide greater efficiencies down the line.
“The key technologies of renewable energy systems—solar, wind, and batteries—… follow a learning curve: each doubling of their installed capacity leads to the same decline of costs,” Max Roser, founder of Our World in Data, said in a note, pointing out that between 2009 and 2019, the cost of photovoltaic solar power fell 89%, of onshore wind by 70%, whereas the cost of gas- and coal-generated power, which depend mostly on the price of the fuel, fell by a third and 2%, respectively.
Looking ahead, demand for these ESG companies may not abate as more retail, and institutional investors look into socially responsible investments that track ESG criteria.