“Green assets are on a tear,” The Economist observed recently, in a smart look at the exuberance (irrational and otherwise) that has sent green stocks soaring at twice the rate of the S&P 500—doubly impressive, giving the overall market’s skyward trajectory.
Source: Bloomberg, MSCI, Business Insider
But Wall Street and Silicon Valley, with some help from Capitol Hill, have puffed up bubbles in green-tech investing before—most recently the “cleantech” bubble that began around 2005 and burst during the Great Recession, sending high-flying companies such as Solyndra tumbling into oblivion.
Some bubbles do more harm than good to society at large. But as a provocative column in the Financial Times points out, technology revolutions often look bubbly at the start; only later does it become clear that they are more analogous to balloons, lifting the economy to a higher plane of productivity and better standards of living. That was true of the energy transition in the early 20th century from filthy coal to cleaner oil and gas.
A green balloon is arguably just what the world needs to accelerate the energy transition now underway, harnessing tens of trillions of dollars of investment to carry us to a new normal. Among the many eyebrow-raising conclusions in the IEA’s new roadmap for achieving “Net Zero by 2050” is that, as John Kerry put it, “50% of the reductions we have to make to get to net zero are going to come from technologies that we don’t yet have” commercially available.
So as green investment blows up, is that something to fear—or cheer? Let’s look at the situation from bullish and bearish points of view.
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The Balloon Hypothesis
Green finance is expanding out of its niche
to enter mainstream investing
1. Pension funds and other big institutional investors have committed to decarbonizing their portfolios. Last August, a group of 70 pension funds that collectively manage $16 trillion worth of assets pledged to follow newly published guidelines to invest more in clean-energy and energy-efficient technology and buildings. BlackRock, which holds more assets than any other company in the world, has started using its shareholder voting power more often to pressure companies to disclose and reduce their climate risks. And, as Anthropocene recently reported, investors don’t have to compromise returns to clear carbon from their holdings.
2. Investors are banding together to name, shame, and reform major polluters. This week, in a coup that will reverberate throughout corporate boardrooms, an activist hedge fund gained enough votes from giant institutional investors to replace at least two of Exxon Mobil’s 12 board members with green-leaning dissidents. And Chevron shareholders passed a resolution demanding the company cut carbon emitted by the use—not merely the production—of the oil giant’s products.Simultaneously, powerful financial groups are calling out heavy emitters by name. In March, investors with $54 trillion at their command published detailed assessments of how 159 companies measure up against a benchmark for emissions reductions, governance, and disclosure.
3. Governments are piling on. This month, Bloomberg reported that the U.K. is asking the G7 to force big companies to disclose the risks they face from climate change. A positive announcement on this at the G7 meeting in early June could signal to investors that polluters will not be able to hide their dirty deeds much longer, at least in the richest economies.
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The Lesson of History
Bubbles—and even balloons—tend to pop eventually
1. Globalization often does an end-run around new regulations. Just look at how quickly manufacturing shifted away from rich countries as workers’ pay and protections increased. In finance, witness how tech giants have parked trillions in profits in tax havens like Ireland and Luxembourg.
2. Markets respond to prodding from governments—but the reverse is true as well. Bull markets don’t run forever. And governments have a bad habit of rolling back regulations when times get tough. The U.S. is now recovering from a nasty bout of this.
3. There will be casualties. A long-time investor in these markets recently warned in Forbes of “inevitable high-visible flame-outs among the new publicly-traded electric vehicle and clean-energy startups.” As a global macro strategist writing in Business Insider says, “even a permanent energy paradigm shift probably can’t indefinitely support firms like hydrogen fuel cell company Plug Power, which trades at 70 times sales.” Buyer beware.
Recall the yellow-vest marches in France, a reaction to increased taxes on gas and diesel fuel.
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What to Keep an Eye on
1. The price of polysilicon and other key ingredients for renewables. Disruptions to supplies of everything from microchips to lumber to rental cars has prices of many goods and services soaring—including a material crucial for solar panels that has recently quadrupled in price.
2. China’s new carbon market—and progress by other nations in raising the cost of emissions. Major climate reforms are making their way through the U.S. Congress. The French parliament is struggling with a massive package as well. And Chinese leaders are rolling out a nationwide carbon market within the next few weeks. Governments have the power to energize climate investment—or hobble it.
3. “Brown-spinning” gambits. Writing in the Financial Times, the CEO of a major international investment firm cautions that the risks of greenwashing pales next to those of “brown-spinning.” Some companies have started spinning off the brownest, highest-emitting components of their businesses to private equity and hedge fund actors at a discount. That makes the company look cleaner—but it does nothing for the climate. Investors should push for universal disclosure rules, he says, so that all companies—private or public—must disclose their climate-related risks and liabilities.
