It's likely that by now you are familiar with Extinction Rebellion, Greta Thunberg and/or the millions of school kids across the world who have been going Climate Strikes as part of the Fridays for Future campaign.
Their message of the urgent need to tackle the ongoing climate crisis has been emboldened by wildfires in California, the Amazon & Australia, as well as recent flooding across the UK. And the world has started taking note in a meaningful way, with many high profile individuals and organisations donating large sums of money to provide relief during the recent Australian wildfire crisis.
This hasn't exactly gone unnoticed in the financial industry, either - banks & asset managers have faced renewed pressure to stop funding and investing in polluting industries. From a banks perspective, there is an effort underway to address this by shifting their lending away from fossil fuel industries. Meanwhile, asset managers point to a ready-made solution: SRI - specifically ESG investing.
Once a relatively obscure niche in financial markets, the ESG investing world has been growing (🤪) from strength to strength in recent years. Sparked by individuals like you and I that have become increasingly focussed on sustainability when making investment decisions, asset managers across the world have been busy creating funds and ETFs which cater to this demand. This has helped drive the kind of robust growth which has made the ESG investment industry worth more than $32 trillion today.
And the demand for sustainable investment products doesn't look like slowing down anytime soon. As an example, the UK's best selling fund in January this year was BlackRock’s £1.6bn World Low Carbon Equity Tracker, which scooped up over £700m of investments in the first few weeks of the year alone.
This kind of information, combined with a constant stream of headlines which include increased focus on companies to properly account for climate risk, the aforementioned push by banks to engage in more environmentally friendly lending and even Jeff Bezos' recent announcement to set up a $10bn Earth Fund which will fight climate change paints an increasingly hopeful picture for those of us wondering whether enough is being done to tackle climate change.
But this explosion of demand for ESG funds also raises fresh concerns for those who spend a lot of time looking at the space. There are a growing number of investors who are worried that ESG focussed ETFs could be inflating the value of “green” companies to the point where there is a material discrepancy between company valuations in the stock market and their actual operating performance, or the money they earn. As an example, Enphase Energy, an American solar systems provider whose stock traded between $0 — $20 since listing in 2012 has seen its shares take off since July 2019, closing this week at $59.09 or a 49x forward P/E ratio which is more than double the S&P500 average. There are plenty other examples of solar and wind stocks also experiencing sharp share price rallies without any real fundamental driver after years of going sideways.
We see two ways of looking at this:
Hopeful: You could think of this as a kind of "moral premium" which is being increasingly attributed to those companies which are aiding our transition towards a sustainable future, or perhaps an "immorality discount" which fossil fuel companies will have to face going forward thanks to the great "awokening"
Skeptical: If you don't really believe that it is possible to sustain a valuation premium of this kind, you could argue this looks more like an ESG bubble starting to form
While it's probably too early to make a real judgement one way or the other, it's a theme worth considering when you are making your own investment decisions.
There's clearly a lot at stake - we think the success or failure of ESG investing will define financial markets in the coming decade, and probably help define whether humanity is able to overcome its greatest ever challenge 🌍 - watch this space.
What Else is Going On?
Retail Matters 🧍♀️🧍♂️
Morgan Stanley
Etrade, a business which offers its more than 5.2m American clients who have $360bn invested on the platform the ability to trade a broad range of financial assets, has been acquired by investment banking giant Morgan Stanley for $13bn.
The move comes following last November's $26bn merger between Etrade rivals Charles Schwab & TD Ameritrade with the industry forced into consolidation due to the rise of low cost investing.
For Morgan Stanley, the 5.2m customers it acquires represents an opportunity to access the "pipeline of emerging wealth" that comes with it in order to bolster its own wealth management business which manages c. $2.7 trillion for 3m wealthy clients.
Know Your Customers
Wells Fargo
US consumer banking giant Wells Fargo has agreed to pay $3bn in penalties and admitted to setting unrealistic sales targets and pressuring employees between 2002-2016 in a culture which led to the opening of millions of fraudulent customer accounts in order to boost the bank's profits.
This penalty is the latest in a series of run-ins the bank has had with US regulators, authorities & investors in recent years with then-CEO John Stumpf also having recently been made to pay a $17.5m personal fine for his failure of leadership during the tumultuous period for the bank.
The reputational damage which has been done to the bank has caused it's valuation to lag behind peers Bank of America, Citigroup & JP Morgan in recent years.
Economic Data Roundup
PMIs
This week bought with it a few signs of divergence between the US & European economies, at least according to the latest Purchasing Managers Index readings - often used as a barometer for economic activity.
In the US, February PMI readings indicated a contraction in the private sector despite encouraging signs elsewhere in the manufacturing & construction sectors. The unexpected signs of a slowing economy have been attributed to the effects of COVID-19 - something worth keeping an eye on.
Meanwhile in Europe, the composite PMI outperformed versus expectations and climbed to a 51.6 reading versus 51.3 in January (anything above 50 indicates expansion). The manufacturing component of the composite PMI saw improvement, rising from 47.9 to 49.1 in February - above and beyond what was expected.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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