The Coming ESG Bubble
Bubble status
I am constantly updating my roadmap for market movements over the next few years so I can plan investment strategies. After reading a post further up about selling out of an ESG fund it prompted me to relook at the ESG side.
A quick outline of some asset statuses
Housing market – prices to high, they have been for a long time supported by government and low interest rates
Bonds – artificially low interest rates has pushed gov bonds too high and also the spread between gov and junk is too low. Games by governments have removed price discovery.
Tech/EV’s – big investment cycle has caused a more conventional bubble, valuations are made compared to each other rather then fundamentals, risk is under priced.
ESG – this is the interesting one. A quick search on Google gives the following
This shows the bullshit, ESG – Environmental and Social Governance, is being marketed as a profit centre and investment strategy in it’s own right. I am unsure how a company makes money out of social governance. For the purposes of this post we will take it to mean green investing.
I see this as different from the other bubbles listed above as people with a lot of money and resources, including the government are using it as a way to reduce guilt. It’s very easy to convince oneself that there is an investment case whilst ‘doing the right thing’, it also allows you to write off losses as ‘at least it was a good cause’.
People are also going to be making money as more people pile in, chasing a very small pool of decent assets. The whole sector is ripe for fraud, just make up a fund or a company based on nothing and market it. If cryptos can NFT’s can be so successful with no substance, then think what ESG can do with a great cause, the whole world and governments behind it (and the woke religion). It could be like all the other bubbles above added together.
Fossil fuels.
I am a bull on this sector because of the reasons discussed to death on here but this sector is inter-related with the ESG one. Currently depressed by being on the wrong side of the ESG coin but they are also being mandated to be 40% green by 2030. This makes them big players in the ESG energy sector but only for quality ESG that can produce lots of energy (otherwise their investment doesn’t help get closer to the 40% CO2 free target).
So the oil companies will be competing hard for a subsection of the ESG assets and these companies will have different value projections than the ESG investment companies.
Differing value projections
My theory here is that ESG investors believe in pink unicorns. They imagine a world with cheap, plentiful green energy. The oil companies are more pragmatic and they are projecting using more conventional tools which show an increase in energy costs and most likely an energy shortage pushing prices even higher. It is these differences that lead to BP ‘overpaying‘ for the wind farm lease a few months ago. I hope this difference continues as it enables the oil companies to buy the assets they need without being affected too much by the ESG bubble.
ESG Bubble Innovation
So the ESG people might be drawn to a similar type of asset to the tech bubble – fast growing, high risk long shots and technology that can change the world. There will be billions chucked at lost causes, the amount involved will be eye-watering. But there should also be some lovely new technology that comes out of it. This technology could generate power, reuse power, store power, capture carbon, make hydrogen out of waste plastic etc etc. Nearly all of it won’t be worth the development money put in or the valuation during the cycle. But as the cycle develops this tech will suddenly be available at a fair price once that is known. It is my hope that this will hep society and other asset companies including the oil companies that can buy the IP or asset at a fair price.
Making money on both sides
As you can see, I hope the oil companies can make money from every stage of this cycle and end up in 2030 as diversified Energy giants that keep planes running whether it’s kerosene or hydrogen. They will efficiently manage and sit in the middle of the whole energy cycle. They might sit in the middle of the power grid buying electric out of peoples car batteries to make up for a lack of wind.
But I also don’t really want to sit out of a gigantic ESG bubble. I believe money will be thrown in all directions so it probably doesn’t matter what I invest in early in the cycle. ESG bond holders could lose it all, they are the ones providing incredibly low cost finance for high risk projects so bond funds are obviously out.
