Polluters trying to go green have been tipped by analysts and fund managers as the next companies that could attract billions of dollars worth of ESG inflows.
Bank of America believes the best prospects include reforming firms that are currently high carbon-dioxide emitters in the energy, metals and mining industries. Newton Investment Management favors companies looking to dispose of coal assets and switch to sustainable energy.
The Biden administration’s commitment to the environment and the European Union’s green stimulus plan are spurring demand for more responsible investing as the world recovers from the Covid pandemic. About 86% of investors say climate change will be at the center of their policy or a major factor in the next two years, up from 33% two years ago, a Robeco survey has found.
The surge in ESG assets in the past year has pushed valuations into the stratosphere. The MSCI World ESG Leaders Index, which tracks more than 700 stocks screened for high environmental, social and governance criteria, has jumped about 80% from its March 2020 low to a series of record highs. Its price-to-earnings ratio is up to 30.4, from just 14 in March last year.
The Bloomberg Barclays MSCI Global Green Bond Index, which is based on more than 600 ESG-compliant bonds, has jumped 11% in the past year, defying a selloff in global debt markets.
“Over the last 12 months, market returns have been very, very compelling,” said Arian Neiron, managing director and head of Asia Pacific in Sydney at VanEck, which oversees $50 billion globally. “They’ve tapered off a bit with the technology complex and with the long end of the curve going off. We think it’s an entry point, particularly in clean energy. ESG is going to be standard.”
VanEck favors companies that offer home-energy solutions such as Enphase Energy Inc., wind-turbine manufacturers like Vestas Wind Systems A/S, and Verbund AG, a producer of hydropower. The money manager began a clean energy exchange-traded fund in Australia in March to take advantage of increasing demand.
‘Decade Of Opportunity’
Bank of America also sees potential in firms moving toward climate improvement in the chemical, fertilizer and paint industries.
Companies that have set near-term emission reduction targets are more appealing because they have an action plan and are undergoing change now, said Sameer Chopra, head of Asia ESG research at Bank of America in Sydney.
Chopra said concerns about expensive valuations are premature. “Is it a bubble? No, not really. It seems like a lot because it’s come off a very small base, you are doing big numbers off a small base, but it’s very early and we think this is another decade of opportunity to grow.”