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ESG bubble? Only if you’re looking in all the wrong places


Bryan Turner is a partner at Spear Capital, which provides growth capital to SMEs focused on fast-moving consumer goods and local production in southern Africa.

If some commentators are to be believed, environmental, social and governance (ESG) investing is in the early stages of a bubble. According to these voices, the flood of cash going into ESG funds, which have outperformed the market, will eventually leave investors disappointed.

Investors will be disappointed because many ESG companies, particularly those in the environmental space, are making losses and yet their share prices keep rising. 

If prices keep going up at those levels, analysts reason, then there’s every chance the fall will be equally drastic. 

But comparing previous bubbles – such as the Dotcom Bubble of the late 1990s – is flawed and ignores the real, rewarding opportunities available in ESG, especially once you realise that commentators are typically referring to listed companies and ignoring the vast number of available opportunities in unlisted entities, as well as missing the mark in that ESG investing is likely to become the norm in the long term, not a cyclical fad.  

Not just another bubble

Before going into why there probably isn’t an ESG bubble, it’s worth remembering what defines a bubble. 

Typically, a bubble is characterised by the rapid escalation of market value, particularly in the price of assets. This fast inflation is followed by a rapid contraction, sometimes referred to as a crash.      

And while there can be no doubt that a lot of money has flowed into ESG in recent years – Morningstar recently reported that there are now more than $1-trillion in assets in global sustainable funds – the idea that it will be “just another bubble” is flawed. 

Even once you take into account that investors have rushed to ESG in search of returns in the wake of Covid-19, the case for an ESG bubble is still limited. There are almost certainly pockets likely to be oversubscribed, inflating prices to bubble-like proportions, but to class the entire movement to responsible investing as a bubble is somewhat of a stretch. 

Driving recovery 

For one, it ignores the fact that ESG-focused companies are likely to lead the post-Covid recovery. In the wake of the pandemic (and the clean skies that accompanied cities locking down), people have realised that business cannot carry on as usual.     

As people, corporations and countries look to improve their environmental and sustainability credentials, they will flock to the companies that allow them to do so. The last of these entities is particularly important. 

Can it really be a bubble if governments are pushing companies to become more ESG compliant because doing so is the best hope for the planet? 

Certainly, there will be funds which don’t make sound investments and lose money, but that doesn’t mean the principle behind ESG is flawed, as was the case during Tulip Mania

Beyond the stock market   

Another idea driving the perception that there’s a bubble in the ESG space is the notion that there are a limited number of available investment opportunities. While that may be true for listed stocks, there are still plenty of viable investments out there for anyone willing to look for them. 

Investors can look to the private equity (PE) space, where experienced players can help them make viable investments. PE not only plays an important role in diversifying investor portfolios, but the companies that play in the space are geared to the long term. That means they’re less susceptible to the vagaries of the stock market – something that’s become increasingly important in the wake of 2020’s economic shocks. 

Additionally, PE firms are geared not only to generate returns for investors, but also to contribute to the overall wellbeing of the companies they invest in. That’s a good thing from an ESG perspective, as it means they won’t sacrifice long-term vision and values for short-term shareholder gains. 

This key concept is that funds with an ESG mandate don’t necessarily need to invest in companies that meet the criteria today, but those with aspiration and actions to meet them in the future. 

This opens up vast swathes of investment opportunities, which makes it somewhat difficult for a bubble to be blown across the entire sector. 

ESG as the norm

And anyone who’s genuinely concerned about ESG should adopt that long-term mindset, rather than worrying about short-term ructions in the stock market. 

Focusing on ESG means focusing on building sustainable companies that are governed soundly, while worrying about their stakeholders and the environment. In many instances, this has been the basis for sound long-term investing already, without the label attached.

As it becomes increasingly clear that ESG is imperative and not merely a nice-to-have, it’s far more likely that “ESG investing” will simply become “investing”. 

And as ESG measurements become more standardised, it will become increasingly difficult for companies to fake their ESG credentials. Anyone looking to invest with their conscience and make returns will therefore have a much simpler time of things. 

ESG isn’t just a trend. 

Talking about it as a bubble misses the point and analysts who do so should remind themselves of the real priorities at hand. BM/DM


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