The wave of ethical investing has bid up the prices of some companies to unsustainable valuations, according to some fund managers.
Governments around the world seem to be making every attempt to steer economies towards net zero greenhouse emissions to slow down global warming.
One way they have done this is by incentivising the adoption and use of clean energy as an alternative to fossil fuels, and investors have tried to position themselves ahead of this trend.
There are many products for investors to choose from, ranging from funds using simple environmental, social and governance (ESG) metrics to prevent them from buying into industries like fossil fuels – to funds that invest directly in ESG solutions such as clean energy exchange-traded-funds (ETFs).
One of the most popular and largest funds of this type is the £4.5bn iShares Global Clean Energy UCITS ETF managed by BlackRock, which invests in companies directly involved in clean energy technology companies.
It has attracted large inflows over the past few years alongside the rise in popularity of sustainable investing, but not all investors are as optimistic around the prospects of companies within the ETF.
Laure Negiar, manager of the Comgest Growth World fund, said the wind, solar and electric vehicle companies directly linked to the transition to net zero have “gone to valuation levels that in certain cases make no sense”.
She said: “People are willing to pour in a lot of money without knowing what the end profitability is. As such we think a number of plays in wind don't make much sense from a valuation perspective.”
The manager said that with many companies trying to consolidate their respective industries, valuing them all as market leaders, does not make sense.
“Some of them are going to lose,” she said. “Sometimes it will probably make sense for one of the players or two of the players, but not 10 other players.”
However, Jon Wallace, manager of the Jupiter Green Investment trust, said the market is under-appreciating how much growth certain clean energy companies have ahead of them.
As an example, he pointed to Vestas Wind Systems, a Danish wind turbine manufacturer and the largest stock in the £4.5bn clean energy fund.
Share price of Vestas Wind Systems over 5yrs
Source: Google Finance
The company has a relatively high market share in the US wind turbine market – an area of great focus for investors given US president Joe Biden’s push for clean energy infrastructure spending.
Wallace said: “There is a mismatch between the rate of growth of clean energy that the Biden administration is suggesting is going to happen and the rates of the market implied growth that is going to come through.”
He said that the current delay in getting the US infrastructure bill and budget settlement passed through congress efficiently is being reflected in the share price of the company and the wider clean energy sector.
“We don't expect the [US wind power] market to decline in the near term at the rate which industry specialists would say,” he added.
“Wood Mackenzie have the onshore wind power market in the US declining year over year for the next several years. I think if that is the case, then that would by consequence throw real question marks around whether the US can decarbonize its grid by 2035 or get close.”
Based on Wallace’s conversations with the Vestas and other companies in the sector, the market for wind turbines is waiting for some clarity from US lawmakers.
But given the long-term opportunity for companies aiding in decarbonising energy grids around the world with renewable energy, he suggested “there is a great opportunity now in the near term”.
Negiar on the other hand thinks that “it makes more sense” to be invested in the indirect exposures to the push to net zero.
She pointed to Ecolab, an American cleaning and sanitising company specialising in water treatment through their subsidiary Nalco – which Negiar described as a “global leader” in the space.
Similar to the push towards net zero, the sustainable use of water is crucial for global sustainability efforts.
Share price of Ecolab year-to-date
Source: Google Finance
Although the company primarily treats water hotels and hospitals, Negiar was most optimistic around its new data centre business.
“What's interesting also is you can get into a number of new sub segments with water treatment,” she said. “Most recently, Ecolab made an entry into the data centre market. Data centres pollute quite a bit and they use a tonne of water to cool down the servers.
“This is now a $100m business for Ecolab from zero a couple of years ago and they think the total addressable market is a billion dollars.”
Ecolab counts some of the biggest technology companies like Microsoft, Amazon and Facebook as customers.
Given that this is just one niche of Ecolab’s water division, Negiar said it could become an important factor in the overall company’s growth profile.