EnergyWatch

Tesla and other sustainable stars fly high on equity sky

But they still risk falling deep. An excess of sustainability-earmarked capital is chasing too few green investment targets. This can potentially create some spectacular ups and downs in future stock markets.

Photo: TINGSHU WANG/REUTERS / X06979

The Covid-19 crisis has brought with it a flood of money flowing into sustainability-labeled mutual funds. Simultaneously, the stock prices of many high-profiled green companies have gone through the roof.

Some of these are based in Denmark, such as Ørsted and Vestas, but the most remarkable equity appreciations have revolved around global companies such as car manufacturers Tesla from the US and Chinese Nio.

Experts hold that some companies will be more efficient at transitioning to a new sustainable world economy than others, for which reason they should be rewarded boosted stock prices.

In other instances, as asset manager Maj Invest claims, these explosive price surges owe to a sense of over-optimism surrounding the firms' opportunities in the greened world of the future.

In the worst-case scenario, which may turn out to be the case for Tesla, this could be the early signs of a green economic bubble, according to the AM's CEO Jeppe Christiansen and Chief Strategist Johan Javeus at Swedish bank SEB.

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The Copenhagen Business School Professor of Business and Society Andreas Rasche claims that too many stakeholders with sustainable capital are chasing too few sustainable shooting stars.

This could send the price of the most popular sustainable firms on a years-long roller coaster ride with turbulent ups and downs.

"This won't go away any time soon. This a direct consequence of sustainability going mainstream," says Rasche, who has conducted research in sustainable mutual funds, sometimes called ESG funds.

"We see firms acting more aggressively, making themselves more sustainable, and we see investors frantically searching for more opportunities. We will see a lot more of this," he continues.

In 2016, sustainable funds had USD 22.9bn in assets under management. In 2018, the equivalent figure was USD 30.7bn and, according to the Global Sustainable Investment Alliance (GSIA), the figure had risen to more than USD 40bn at the end of 2020. Nothing seems to indicate that this biannual appreciation rate of around USD 10bn is about to slow down.

According to the accountancy and consultancy firm PWC, ESG funds investing in, for instance, ethically responsible and sustainable firms will triple their sizes before 2025, and the European share of the market will increase from 15 percent to 57 percent.

Three-fourths of 300 investors in a recent PWC inquiry stated that, towards the end of 2022, they planned to have entirely stopped buying conventional mutual funds. Instead, they would only invest in ESG-related funds.

Just in the US, sustainable funds attracted USD 30.7bn at the end of September 2020, whereas they drew in USD 21.4bn in all of 2019, according to Citigroup. This capital flowed into companies that lived up to sustainable criteria.

Nasdaq's sustainable index OMX Green Economy, which consists of 315 companies, and which has a specialized sustainable profile, rose almost 40 percent before Christmas in 2020.

That's almost twice as much as the Danish C25 index, which was one of the best indices in the world during the pandemic, and it's almost four times as much as the global MSCI World index.

"Financial markets are opening their eyes to the opportunities of sustainability, and many things points towards even central banks jumping on the bandwagon. A lot of money is flowing into climate investing, which has its risks, and sustainable investments are by no means immune to financial bubbles," says SEB's Javeus.

If you take it down a level to look at individual companies, 2020 had some drastic share price increases.

Danish Ørsted was listed under the name Dong Energy in 2015 at DKK 235 (EUR 31.6) per share, after which the stock price has increased more than 350 percent, and now it's worth more than DKK 1,000 per share.

This development accelerated over the course of 2020, during which time the share rose 92 percent from DKK 592 in March to DKK 1,136 on Nov. 20.

This amounts to more than twice the value of the impressive return exhibited by the broad C25 index in the same time period.

In spite of a minor value decrease, the firm remains Denmark's second-most valuable in mid-December at a market value of around DKK 450bn – equivalent to A.P. Møller-Mærks, Danske Bank and Carlsberg combined.

Wind turbine manufacturer Vestas also had tailwind last year. On Nov. 1, 2019 its share price was DKK 560 – below the DKK 620 peak from the summer of 2017. In March 2020, it went down to DKK 517, but it rose 143 percent to DKK 1,257 in the middle of December, which is more than three times as much as the increase on the C25 index.

The Danish private sector has its shooting stars in the universe of sustainability, but they're the size of peanuts compared to what can be seen for high-profile global companies.

Battery and electric car manufacturing companies, especially, have managed to draw in climate-friendly billions.

For one, US firm Nikola Corporation, which manufactures electric vehicles using a groundbreaking new battery technology, rose to the market value of no less than USD 28bn in summer. By this point, the firm had yet to produce a single truck.

In September, investment firm Hindenberg Research published a report claiming that the firm's technology was actually unable to achieve the promised results.

Furthermore, Hindenberg expressed concern that Nikola Corporation had paid suspicious and significant amounts of money to a select few employees within the firm, and that it had meddled with an ad campaign.

This halved the share price immediately, which led to a price loss at nearly DKK 90bn in just a matter of days.

The media storm turned out to be so detrimental that the firm's founder Trevor Milton had to resign from his role as board chair. Not long after, the US Department of Justice opened a case against the firm.

By late September, Nikola's valuation had plummeted 75 percent to USD 7bn, but soon after an odd thing happened.

With no income, no finished products, red accountancy figures and doubts from the firm's biggest partner, General Motors, the firm's shares found solid ground and even started increasing in value. In mid-November, the firm's group's valuation was back to more than USD 10bn and in the middle of December, it was at a steady USD 7.5bn.

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Photo: PR / Nikola

However, stranger things have happened in terms of investors counting their chickens before they hatch at some point in our sustainable future.

In early December, the value of Chinese-US car manufacturer Nio stood at USD 65bn – in line with the market value of General Motors – even though the firm's revenue was only USD 629m in the quarter before this. General Motors' revenue stood at USD 35bn in the concurrent time period.

Car manufacturer Tesla constitutes an extreme example of green optimism, according to Maj Invest. Having the charismatic founder Elon Musk on the media frontlines while also having a strong sustainable profile has turned the company into the epitome of a transitioned, climate-friendly world economy.

In two years, the carmaker's equity has skyrocketed by more than 800 percent.

In the same time period, analysts have raised their price targets by 450 percent, but according to Bloomberg they have also lowered the firm's income goals for the period 2020-2024.

In the first week of December, Tesla's total worth amounted to nearly twice as much as all major western car manufacturers.

In mid-December, the firm's market value stood at around USD 600bn, even though the firm has only just started earning money from selling cars in recent quarters. The firm's revenue constitutes but a tenth of that produced by for example German automotive group Volkswagen.

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According to investment bank J.P. Morgan, the reason why the firm's shares have skyrocketed could be explained by the fact that Tesla has become the center point of green speculation.

The firm's inclusion into the leading US index S&P 500 also forced passive index funds to buy into the shares.

Now, the share price is at a point of being dramatically overrated, according to a J.P. Morgan analysis from mid-December. The Bank's analysts raised their share price target to USD 90. At this point, however, the shares were traded at more than USD 630.

"You can see clear signs of price bubbles in parts of the stock market. This is most evident in Tesla stocks," Christiansen writes.

Other observers have a more positive outlook, such as the small US investment firm Ark Invest, which is leaning in a different direction.

At the beginning of 2020, the firm presented an analysis, according to which Tesla's best-case scenario might have share prices soaring all the way up to USD 22,000 in 2024.

The report considered the fact that the firm's goals look beyond manufacturing cars in a more cost-efficient way than existing players. Its interests extend to the establishment of new related business areas, such as a taxi service using driverless cars.

Nordea's Head of Responsible Investments Pedersen steers clear of shares like Tesla's, which he thinks might easily plummet.

Investors should take a broader view of the green economy than just batteries, cars and wind turbine manufacturers, which he thinks have stolen the spotlight.

"If something is as overrated as Tesla is, you won't find a lot of it in our funds. If you spread out properly, we don't see a bubble in ESG," Pedersen says.

"However, I do get nervous on behalf of some investors, when they're lured into investing very narrowly."

English Translation: Nielsine Nielsen

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