The imminence of climate change on livelihoods is ubiquitously felt in all sectors, but especially so in the world of finance and economics. While the growing interest in the renewable energy market has thus far presented itself as the coveted reconciliation of wealth and ethics, marrying profit and social good, the stock market is nothing if not constantly waiting for the pin to drop. The risks of a potential green bubble are sneaking into conversations, driven by murmurs of past karmic retributions.
The belief in a green bubble, it seems, is dominated by predecessors and stains in financial history that have left analysts somewhat jaded. The 2006 ‘mini green bubble’ (Day, 2021) has acted as a premonition of a potential future; just as David Attenborough, Greta Thunberg, and scores of cum laude activists have done in recent times, voices in 2005 and 2006 successfully geared the public’s attention towards the implications of climate change. Al Gore’s ground-breaking documentary, An Inconvenient Truth, snagged the Oscar for Best Documentary, amidst a “Silicon Valley gold rush” (Nast, 2012) where entrepreneurs, investors, and venture capitalists alike flocked (very publicly) to renewable energy in hopes of reaping the long-term returns on solar panel companies and wind farms, the supposed way of the future. In a wonderful historical time capsule, a WIRED article written in 2012 nods its hat to “PayPal cofounder Elon Musk [who] put $96 million of his own money into the electric-car start-up Tesla Motors”. (Nast, 2012)
The green bubble eventually burst in 2007, hoisted by a culmination of factors. Silicon, the primary component of solar panels, was in a deep shortage, whilst natural gas prices had dramatically fallen, offering fierce competition to producers employing sustainable processes. Although the silicon supply managed to steady itself by 2008, the bubble was well and truly popped by the financial crisis, which not only halted all business activity, but also introduced the new creeping fear of growing demand and bubbles. The 2008 financial crisis left in its wake an economy terrified of optimism and a population too exhausted to scrutinise climate change and its eventual repercussions on the stock market.
“Eventually” has inched closer and closer over the decade, and the past year has seen a resurgence of demand for green stock. An obvious reason for the immense focus on green industries and stock is the proliferation of recent attention focused on climate change, both in the form of government action, i.e., the 2016 Paris Agreement, and of numerous social movements, such as the global school climate strikes. Households, governments, and firms globally spent more than $500 billion on renewable energy and electric vehicles in 2020, compared to $458 billion in 2019. Growing customer awareness and pressure to support climate-friendly businesses likely spurred Shell’s new endeavour into clean energy, an economy-wide mass integration of ESGs into investment portfolios, and countless other transitions towards sustainability in an effort to appease public demands. The sheer growth of the electric vehicle industry also speaks volumes about a second, equally important factor influencing attention towards green stock: new green technology. In 2018, demand for electric vehicles in the U.S. increased by 80%, predominantly pioneered by Tesla’s commercial success (Pyper, 2019). The excitement of dynamic innovation and its potential has been reignited in the past decade as technology has grown, undeniably supporting green stocks as investors search for the next big thing.
Accompanying this hope is, as expected, finance’s dubious players. “This isn’t the first time an eco-bubble has inflated and then burst,” authors and environmentalists Ted Norhaus and Michael Shellenberger wrote back in 2009. “In fact, the modern environmental movement was born in a bubble.” (Nordhaus and Shellenberger, 2009). Analysts and industry experts predict another green bubble and subsequent crash in the coming years, except projected onto a much larger scale (Temple-West, 2020). Firms are desperately investing in green stock, creating an enormous jump in ESG investments from $165bn in 2019 to $350bn in 2020 and subsequently resulting in a valuation of the S&P Global Clean Energy index 41 times its companies’ expected earnings (Nauman, 2021). For investors, the long-term return on ESG stocks eclipses near term valuations, instigating predictions of a burgeoning green bubble as investors ignore real-time valuations in favour of focusing on long-term potential return. Orsted’s trajectory emulates analysts’ anxieties best; the Danish power provider’s plans to massively expand their offshore wind farms has been met with fervent approval, resulting in their stock price tripling over the course of three years and shares currently going at 49 times expected 2021 earnings (Karunaratne, 2020). The rampant buying of green stocks has begun translating into gross overvaluations beyond assets’ real values, and expectations of a future crash loom to effectively discourage investment into green stock.
This trepidation, although understandable, is arguably outdated. Ten years has had a metamorphic effect on both climate change and technology; Elon Musk, previously known best as PayPal’s cofounder, now flips between being the richest and second richest man in the world- a result of Tesla’s mind-boggling growth made achievable thanks to constantly advancing technology. Current innovation in green technology is miles more exciting than it was in the 2000s, when investors primarily focused on manufacturing pre-existing products– namely solar panels- rather than on new developments in energy production (Day, 2021). The advancements made in technology in the past decade have demonstrated the growth potential of experimentation, suggesting the risk is often worth the reward.
Musk’s oscillation between top spot and second place also suggests consumers are still aware of risky investing, buying and selling stocks constantly. Within bullish forecasts, expectations are still poised to fluctuate at any given point, creating a healthy level of volatility the stock market thrives on. Warnings of a green bubble are largely founded on a fear of growing demand, triggered by a history of repeated burns, and while there is substantial evidence to corroborate this claim, a crash is not necessarily imminent. Some analysts predict Tesla, rather than the entire industry, to face the snap and pop of a bubble crash. This seems more feasible than a crash of the entire industry, given Tesla’s “two-year return is 324 percentage points higher than the S&P 500” and the recent shakiness of their stock prices, but still appears pessimistic when one considers what the company, and other innovative firms, have thus far accomplished (Hulbert, 2020). Moreover, just because a bubble exists within an industry, does not mean the entire industry is at risk of collapse, even when considering a firm as influential as Tesla (Prestridge, 2021).
Fear and worry in the stock market are inescapable. Even now in a global recession, endless articles are devoted to the impending inflation in the eventual recovery. Surging demand must be mitigated by the eventual escalation, innovation will be accompanied by redundancy, upturns are short-lived with the prospects of a bubble. But if Malthus has taught us anything, it is to not underestimate the rapid growth and capacity of technology (Roser, 2020). As worthwhile as a healthy bout of caution is, green finance should nevertheless be celebrated and continually developing. The green bubble should be treated as a valid but unnecessary fear, encouraging perspectives to depart from the hindsight and focus on the future.
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