The Environmental, Social and Governance (ESG) movement which has really taken hold in the financial world in 2020 has transformed the way in which many investors, myself included, view investments.
In setting mandates to focus on companies which meet a set of ESG criteria, various institutional investors such as pension funds, hedge funds and endowments have driven up valuations across a number of sectors to a degree many, including myself, did not predict in the past.
This valuation increase we’ve seen in sectors like renewable energy, for example, that meet the ESG mandates for many institutional investors, has been a key driver of multiple expansion over the past year.
It has been estimated that approximately 80% of last year’s equity increase was attributed to multiple expansion, with investors left with few options with regards to where to put their money due to low interest rates.
Mandates for ESG-focused investors are just one driver of this phenomenon.
When valuations do not matter anymore, and investors “need” to invest in a given sector or group of companies, opportunities for market mispricing exist. In this day and age, exchange traded funds (ETFs) are furthering this “piling in” effect, and multiple expansion/inorganic stock price appreciation should be becoming a concern for the average investor right now.
I am very pro-ESG and believe we do not need to pick stocksand sectors we feel ethically deserve to receive public capital to grow; at some valuation level, however, even the company with the best of intentions becomes too expensive.
Unfortunately, I do believe this is where we stand today with most ESG-focused stocks (and the broader market as well).
Invest wisely, my friends.
