Many investors are worried that the huge growth in ESG assets might be causing a bubble in the most common stocks in ESG funds. However, the reality is that they are not. According to Bridgewater Associates: “The shift to ESG appears to be still in its early innings. Investor positioning in sustainable equities is not yet overextended … The US ESG index looks very similar to the aggregate market, and much less frothy than stocks that have been most popular with retail investors where we think valuations are most stretched”.
FINSUM: In other words, despite all the hype about ESG asset growth, overall valuations are in line with the broader market so there is no specific risk to ESG funds.
There has been rising anxiety of late that the growing assets in ESG stocks have created a valuation bubble in the most popular shares in the category. The idea is that rush into ESG has funneled a ton of capital into a relatively small group of shares, “artificially” inflating valuation. However, the Financial Times argues that there is definitively no bubble in these stocks. In fact, they are not valued any more richly than any average basket of shares. Overall, the average PE ratio of a global basket of ESG stocks is the same for an average basket of all stocks: 14x.
FINSUM: This is actually quite a relieving study, as there have been some very lofty AUM growth figures thrown around lately for ESG. And in case you are nervous, the same metrics/comparison listed above also hold for US/domestic ESG stocks.
ESG may have started as a play from the conscience but as of late it has turned out to be just as potent of play for the wallet. Since the start of the pandemic green power exposed stocks in the S&P 500 such as First Solar, NextEra, Albemarle, LG Chem, and Samsung SDI have averaged 140% return compared to the S&P’s 41%. But the real hidden gem has been at home solar company Sunrun which posted a 212% return over the same time frame. The CEO says its wide base of customers draws in democrats and republicans and boosts demand. It also has dealt with Ford Motor Co. to cooperate on in-home charging for the new F-150 Lightning. It has risks as Tesla and Home Depot are trying to take up market share but Sunrun is the leading market contender.
FINSUM: At-home solar is one of the top plays right now, but wider ETFs could provide the exposure with less risk.