ESG Outperformance Evokes Memories of the Dot-Com Bubble

Socially responsible investments tracking environmental, social, and governance principles have outperformed traditional equity benchmarks, drawing some concerns that the assets could be experiencing a dot-com-esque bubble.

Nicolai Tangen, who’s been chief executive of Norway’s $1.3 trillion wealth fund, argued that worrying about bubbles comes with the job and drew some obvious parallels between today’s market for sustainable assets with tech stocks just before the dot-com bubble burst, Bloomberg reports.

Nevertheless, Tangen offered a more long-term view of the climate change investment space, suggesting that today’s frothy prices on climate friendly assets might reflect their potential similar to the staying power of technology stocks after their dot-com era bubble burst.

“What is interesting is, if you compare the situation now with, for example, the situation before the year 2000, then the stock market was right that technology companies were going to do well in the future,” Tangen told Bloomberg. “But the valuation went a little high, so it came down again, but the technological development continued.”

This suggests that ESG-related assets could be in for a short-term correction but continue to maintain their long-term growth trends.

“We may see something of the same sort now, that what is happening in the green shift is extremely important and real,” Tangen added. “But to what extent stock prices reflect it correctly is another question.”

When considering the risk of an ESG bubble, Tangen argued that it’s his instinct to be “worried about everything between heaven and Earth. Overpricing in parts of the market is one thing I am worried about.”

Norway’s wealth fund, the largest in the world, has not invested in renewable energy infrastructure for which it has a mandate since 2019. The fund managers’ reasoning is to avoid the inflated prices in the space.

“We must be prepared for corrections in the stock market,” the wealth fund’s deputy CEO, Trond Grande, told Bloomberg. “We have no view on when the correction might come, where it might come, and how powerful it might be.”

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