Global ESG Summit: Green tech bubbles help clean up climate

Panellists say new rules may be needed for valuing companies at forefront of decarbonisation

Inflated prices for green tech investments present an opportunity for the planet because they lower the cost of building assets such as battery factories and wind farms, ESG Clarity’s Global ESG Summit heard.

In the third panel session for the UK and European part of the conference, The innovative industries and technologies that will dominate the new era of net zero targets, Craig Mackenzie, head of strategic asset allocation research at abrdn, told delegates although some would lose out if they invested at the top of the bubble, there is certainly a place for such price fluctuations.

“Ultimately if too much money is chasing too few opportunities, the price goes up and the expected return goes down. That’s not necessarily a bad thing if you’re an early investor, because if you invest in something before the bubble inflates you’re going to get spectacular returns,” he said.

“It’s also not necessarily a bad thing for the world in the sense that high prices for equity means low cost of capital for equity, which means the people who need to deploy the capital to build the gigafactories, etc. get to do so more cheaply.”

Mackenzie noted his team has developed climate scenario tools that allow fair value assessments of individual companies based on projections of the most likely climate transition trajectory.

“That’s the key to identify whether a company’s valuation is fair or in bubble territory,” he said.   

Discussing ESG price trends Gemma Woodward, director of responsible investment at Quilter Cheviot and ESG Clarity Committee member, said she does not believe there has been an ESG bubble, as some claim, but rather a growth stock bias within markets. She said she does not believe there is such a thing as an “ESG stock”.

“If you are seeing higher valuations, then you’re probably going to have more funds coming to market because they know there’s that end market,” said Woodward.

New rules

Tim Cockerill, head of responsible and values-based investing at Rowan Dartington and ESG Clarity Committee member, questioned whether there is something out of step between the market as it stands now and the way we evaluate companies. 

“Talking about decarbonising the global economy, there’s huge opportunity. There’s going to be huge investment.

“But rules that investors and markets have been playing by for many, many years got really thrown out the window when we had the global financial crisis,” he said.

“We saw interest rates come down to what at that time was said to be an emergency level, it was only a short-term fix. It stuck at that level for the past 12 years.

“There’s a discussion to be had around growth in these new areas in industry and whether the traditional way of looking at them from a valuation point of view makes sense.”

Carbon Capture

In terms of opportunities for investing in renewable technologies, Cockerill said, carbon capture might be hard for end investors to make the most of.

“Oil companies… like Shell, Chevron, etc. are very much involved in developing carbon capture technology. There’s also a small number of early-stage businesses out there involved in carbon capture too.

“But from what I see, at this stage it is not the easiest sector to actually invest in from a retail client perspective,” he said.

“I see the bigger players that could ultimately dominate that sector because they have certain vested interests to engage with it.”

Carbon markets

Carbon markets also cropped up as a prospective opportunity for investors but summit panellists showed little enthusiasm for them at this early stage.

“Voluntary carbon markets are still a bit wild westy in that there are lots of different standards,” said Mackenzie citing “significant credibility issues”.

“There could be really substantial capital flows, if only because there are now hundreds of companies around the world with net-zero targets and they’re going to find relatively soon that they can only get the last bit of the carbon reduction by getting it out against offsets.

“So there’s a huge need for really good high quality offsets that genuinely are additional and transforming the carbon profile of the economy. But I think we’re still some way away from being able to really trust the voluntary markets,” Mackenzie said.

For Peter Burke-Smith, portfolio manager at Lombard Odier Investment Managers, there are a couple of things to look out for first in terms of assessing how companies are using carbon credits.

There is the quality of the carbon credits being used, and also how many are being used.

“We want to see a company that has a decarbonisation plan that doesn’t rely on offsets, using carbon credits, carbon capture and storage,” he said.

“So on the one hand it’s all about the quality of the credit but on the other hand it’s about finding those businesses that don’t need the credits to still decarbonise their operations.”