THE COMING GREEN BUBBLE

'When I see a bubble forming, I rush in to buy it' - George Soros

Feb 11, 2020

Although I was aware of the trend towards E.S.G investing, I didn't understand the true magnitude of it until the recent action in Tesla. Lots of people tell me that Tesla went up on its own and that E.S.G. investing had nothing to do with the wonderful investment opportunity offered by this preeminent alternative energy/car company. Yeah, ok...

I will concede that recently Musk has been delivering on the operations front. The stock definitely needed to be re-rated higher on this improvement late last year. But if you are telling me that without the E.S.G. investing trend this stock would have run from $300 to $975 in a little over two months, then we don't have much more to discuss. I contend that E.S.G. was a crucial part of this rise. Tesla has become the go-to alternative energy car company. How can a portfolio manager run an E.S.G mandate without owning Tesla? The answer is they can't, which is why Tesla has run faster than Winona Ryder outside a Saks Fifth Avenue department store.

But what exactly is E.S.G. investing? Instead of trying to describe this recent development that's caught the investment world by storm, I will lean on this great interview in Barrons titled, "Investors are Flocking to Sustainable Investments. Here's why."

Alex Eule: Can you define ESG for us?
Leslie Norton: Right, ESG stands for environmental, social, and governance principles. They now are critical to what we think of as sustainable investing. It used to be socially responsible investing. That was the previous iteration, and that was just about screens, about divesting from Sudan or South Africa. Or various other countries that people didn’t find socially acceptable because of their social practices. So now we are in this ESG iteration, where everything is looked at through the lens of risk. And in the future, it is probably going to evolve to impact, where investors are going to try to measure the social impact of their corporations in a variety of sectors.
Alex Eule: And I just want to point out, then the E, the S, and the G, governance, and sort of the makeup of a company’s board really has as much of a factor in these ratings then as how you’re affecting the climate, as a company.
Leslie Norton: Right, because the governance and the board actually tells the company what to do in terms of their practices. And they follow up to make sure that a company has done what the board has asked.
Alex Eule: So climate change is also a major topic at the World Economic Forum in Davos this week. Tell us a little bit more about the evolution. I mean, how have we got into this point? How long have you been thinking and writing about sustainability?
Leslie Norton: I’ve been writing about sustainability for a few years here at Barron’s. We started covering it about four years ago, when we started publishing our annual ranking of sustainable funds. It is part of our mutual fund coverage, and it was about an area of the fund industry that was growing, and we thought we should shine a light on it. But what has happened is, partly because of Larry Fink, who, a couple of years ago, wrote a very, very widely read letter that said that corporations should have a social purpose. This has gathered steam within the corporate community.
This year’s Davos is specifically about sustainability, and I’ll give you a little bit of background to that. Last year, the Business Roundtable, which is, along with the Chamber of Commerce, one of the biggest sort of corporate trade groups, I would say, issued a letter that said that corporations should have a purpose. And that corporations should not only focus on shareholder return. But that they should also focus on the needs of a variety of stakeholders, including customers, employees, and including suppliers.
Alex Eule: And that is a big change from the days of just driving shareholder return.
Leslie Norton: That is right. In the 1970s, Milton Friedman, the eminent economist, said the sole purpose of a corporation should be to produce shareholder return. And now it is moved away from that. Now the people at the Business Roundtable and also sustainable investing would argue that this is about producing long-term shareholder return. This is about making sure companies are durable, that they survive for the long-term because they have a clientele that is happy with them.

E.S.G. is the buzzword on all market practitioners' lips. I have heard anecdotal stories of clients walking into investment advisors' offices insisting that not a single share of dirty fossil fuel companies be in the portfolio. And restrictions are already upon us in some of the more regulation-heavy countries. Take a look at this piece from KPMG regarding the EU developments:

By the end of 2020, firms will have to publish their policies on the integration of sustainability risks (SRs) in their investment decision-making process and whether they consider adverse impacts of investment decisions on sustainability factors. They will have to disclose to investors the integration of SRs and the consideration of adverse sustainability impacts in their processes, and provide related information for funds. Importantly, if they do not consider such matters, they will have to state that they do not so, their reasons for not doing so, and whether and when they intend to do so.
In particular, asset and fund managers will have to set up new controls and have sufficient human and technical resources for the assessment of SRs. Remuneration policies will have to be linked to SRs and targets, and all other policies and documentation will need to be reviewed and amended.
It is clear that investor demands coupled with regulatory imperatives mean that consideration of ESG factors is now a must for all asset managers and investment funds.

And as they note in the Barrons article, this trend has definitely picked up steam:

Alex Eule: We’ve been talking about sustainable investing for years now, but have we finally reached a tipping point?
Leslie Norton: I think so. Just last week, Larry Fink wrote his widely read letter to CEOs and to clients.
Archived Recording: Larry Fink, founder and CEO of BlackRock, announcing today that the firm will make investment decisions with environmental sustainability as its core. And in the letter, he said that BlackRock (ticker: BLK), which is the world’s largest asset manager, with more than $7 trillion under management, would seek to double the number of sustainable ETFs that they offer. Fink writes: “The evidence on climate risk is compelling investors to reassess core assumptions of modern finance. He continues to say, quote, in the near future, and sooner than most anticipate, there will be a significant reallocation of capital.”
Leslie Norton: And also, to boost, by tenfold, the number of sustainable assets that they manage. Right now they have $90 billion in sustainable assets. They want to get that up to $1 trillion.
And I would bet that they can do it. Many people are interested in sustainable investing. Assets into sustainable investing funds grew fourfold last year. And just after Larry’s letter dropped, there were inflows of $1 billion into one of BlackRock’s big sustainable ETFs.

If you don't believe Larry's insight on reaching the tipping point, have a gander at the recent inflows into a few E.S.G. ETFs:

Money has poured in over the last quarter. This is the hottest investment theme out there bar none.

As many of you know, I am contrarian to a fault. You might think the massive flow of funds would lead me to write an "it's going to end badly" article. I cannot tell a lie, that's the article I want to write.

Instead the more mature MacroTourist will take a page out of George Soros' book:

You might think of this as my new found Stranger-Things-maturity versus my old Reality-Bites-adolescence.

I have no desire to discuss the fundamental merits of this E.S.G. trend. I don't care. It could be the best thing for our planet since the introduction of sliced bacon - that does not influence how I trade it one bit. If I thought it was headed lower, I would write that bearish article.

However, I don't think it's headed lower by any means. This trend towards "green investing" has just begun. This will capture the public's attention in a way only rivaled by the DotCom bubble. Capital will continue to get allocated at a fierce rate. In all likelihood, it will probably accelerate. In fact, it will spread to governments as even the European Union seems to be willing to enter into fiscal deficit spending to combat this climate threat. This will be a monster bubble.

We have already seen the start of the coming madness with moves from Tesla, Ballard Power, PowerCell Sweden, Brookfield Renewable Partners LP, and I am sure you can add to my list. This is like the early days of the internet in the mid-1990s.

Here is my call; these "green energy" names will vastly outperform FANG (me - I am partial to FAANGM) over the next couple of years.

I will do some work figuring out how to structure this trade, but the advice I would like to leave you with is DO NOT FADE the strength in this new climate-green-energy trend. You might think they are overpriced. Yup - they probably are. But the odds favour them getting even more overpriced.

In the coming months, I suspect we will see the "cool" hedge fund kids making the case why some of these names are shorts-of-the-century. At that point, I suggest you take some advice from Winona, when she said,