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Green investing: is it a bubble?

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So far this year, the cost of battery metals like lithium and cobalt have risen by approximately two-thirds and a third, respectively. Orsted, a wind power producer, has increased in value by more than a third since January 2020. SunRun, a solar company, has tripled in value, while Tesla and Nio, two electric vehicle manufacturers, have increased six-fold and nine-fold, respectively.

With a combined market capitalization of $3.7 trillion, The Economist has assembled a portfolio of companies that stand to benefit from the energy revolution. Since the beginning of 2020, the portfolio has increased by 59%, more than double the increase in the S&P 500, America’s primary equities index. Many investors compare renewable energy today to technology at the millennium’s turn—both in terms of froth and the birth of an industry with significant structural consequences on the economy.

The Economist examines the world’s publicly traded companies, which are primarily owned by the top 100 or so clean-energy investment funds. Since January 2020, the smallest 25% of companies have increased by an average of 152%. Companies that generate a higher percentage of their revenue from green operations, such as electric vehicle manufacturers and fuel-cell manufacturers, have also outperformed.

In the first quarter of this year, global flows into green funds surpassed $178 billion, up from $38 billion in the same period the previous year. Every day, around two new ESG-focused funds are launched. Many of them are putting their money into green stocks like Microsoft and Alibaba. However, just about a tenth of the funds’ assets under management was concentrated on clean-energy companies.

Clean energy investing is “no longer a niche topic,” according to Morgan Stanley’s Jessica Alsford. Each firm was held by an average of 138 sustainable funds at the end of 2020, up from 81 a year earlier. According to Morningstar, the number of non-ESG holdings climbed from 390 to 624.

A changing climate

Clean-energy businesses are now more viable, putting them on par with fossil-fuel businesses. Investors believe that green legislation is here to stay, with the United States, China, and the European Union establishing “net-zero” emissions targets. Pension funds, for example, which own a large number of oil companies, have begun to mitigate this risk by purchasing clean-energy equities.

The Economist examines how the green craze surrounding renewable energy has fueled financial fads. Retail investment has increased, and investors appear to be enthusiastic about emerging sustainable technology. About a quarter of the 800-plus SPACs that have been listed since 2019 have focused on sustainability. 

Renewable-energy companies have a median price-to-earnings ratio of around the same as the S&P 500. Smaller businesses, on the other hand, have a median price-to-earnings ratio that is approximately double that of the wider index. Variations in the maturity of both the underlying technology and the market explain the disparity in valuations. Wind and solar companies began to grow in the 2000s, thanks to government subsidies. The technologies improved with time, and the subsidies diminished.

According to experts, the draw for investors is that one of them could be the next Tesla. The technology is frequently unproven, or the products require subsidies to be competitive, and there are many competing enterprises. Inflation is a source of concern. He believes that if central banks raise interest rates, it will affect renewable energy producers.

If some of the more speculative technologies fail, investors’ enthusiasm may wane, according to Nathan Anderson of Hindenburg Research. He claims that as money has flooded into green businesses, fraud has become “pervasive.” According to Fidelity’s Velislava Dimitrova, if innovations succeed, reducing product prices may counteract demand increases. The claims are “inaccurate,” according to Ormat, a geothermal power provider, and “false and libellous”.

Few believe that the energy revolution will be reversed, even if some companies prove to be duds. Many investors believe that the sector’s prospects as a whole are promising. But it’s worth recalling that, two decades after the dot-com crisis, tech companies account for 38% of the S&P 500’s market capitalization. If not in the short or medium term, the long-term future surely looks green.

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