The overall market may be held in sway by developments in the coronavirus outbreak, but demand has been buoyant for stocks based on environmental, social and governance factors. So much so that concern is growing about how expensive some ESG stocks have become on the back of the “green” trade. What looks like a bubble may well become the new normal.

The rush into ESG funds and stocks sharply contrasts with the general equity outflows experienced over the past year. We’ve previously explored the impact on utilities in particular, but it’s affecting all industries. With funds such as BlackRock Inc. to companies including Ferrari NV and Microsoft Corp. saying they’ll take steps to address the climate crisis, interest has never been higher.

“There is a rush to invest more and more money in a very narrow set of assets, which to me look incredibly overvalued, that fills certain ESG criteria,” said James Sym, a fund manager at Schroders Plc based in London.

“We’ve got to be very careful that while we respect ESG and while of course we want to take clients’ money and help them get more from their investments, rather than just invest in returns, that we don’t put them into bubbles,” said Sym. Easy money in the form of incentives in the solar panel industry, for example, could enable weak franchises, according to him.

Looking at renewable-equipment stocks, some names show lofty valuation ratios, limited upside to consensus, as well as high short interest.

Sanford C. Bernstein & Co., Inc. strategist Sarah McCarthy doesn’t see a bubble in the highest-rated ESG stocks. It’s more that shares which score poorly on the ESG front are growing out of favor, she said, and that has created substantial valuation gaps particularly within the energy and technology sectors. That’s different from investors discriminating against a single sector like tobacco, which trades at a 32% discount to the broader market, she points out.

The “rapidly increasing interest” has some investors believing that high ESG-scoring companies are trading at expensive valuations, note Credit Suisse Group AG analysts including Eugene Klerk, but say their own analysis indicated that ESG scores couldn’t be correlated with high or low valuation levels.

Indeed, looking at the chart below, ESG leaders may have strongly re-rated against the Stoxx 600, but they are not more expensive on average when you look at the forward price-to-earnings ratio, and they’re even cheaper on an EV-to-Ebitda basis.

Still, some ESG leaders have started to show “challenging valuation” levels, according to Credit Suisse. It names underperform-rated stocks including Tod’s SpA, Aryzta AG, Sensirion Holding AG and TalkTalk Telecom Group Plc. By contrast, it notes “cheap, quality, ESG” stocks with an overweight rating within its coverage, such as Siemens AG, AXA SA, Aviva Plc, Mondi Plc, Novo Nordisk A/S and National Grid Plc.

Investors could get more selective in the future, but the bottom line is that the trend is likely to continue, according to Bernstein’s McCarthy, as regulations, investment policies and investors’ demand are increasingly pushing money into ESG-compliant stocks. Demand for energy-efficiency company Calisen Plc ahead of its listing tomorrow seems to confirm it.

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