Green or Black? Black

Monies invested in Green stories have been out of wind in 2021. The ugly guys of a carbonated economy are doing just fine by contrast. 2021 is bringing to the fore the issue of managing money with do-good intent when the abundance of risk-taking money will pile up into unorthodox assets. We already made this point back in March (‘Bloody Green’, 08-03-2021) and thus expand it a bit. 

The extent of the problem is measured in two charts: 1) Orsted an ex star of offshore wind farming vs. Glencore the ESG bogeyman of mining & trading and, 2) opposing stocks on a low Environmental rating with those on a high one (based on AlphaValue's proprietary and independent sustainability metrics).

The first chart speaks for itself: the ridiculous multiples of Orsted combined with the lack of wind to create a big question mark. By contrast, Glencore surfed on higher hard commodity prices, whether green or black.

Offshore wind farms (Orsted) vs. ‘green’ metals (Glencore): painful 2021

The second chart is opposing over two years businesses with a high environmental score (in blue) with stocks with a subpar environmental score (pink). Their green credentials make no difference performance-wise. The gap in performance that developed then disappeared in favour of clean stocks (March 2020 to November 2020) is really about (dirty) cyclicals making a comeback when a COVID-19 vaccine was made available. Then ‘dirty’ stocks outperformed quality (thus clean) stocks by c. 15% before things stabilised to equal performances.

Top clean stocks (blue) vs. bottom dirty stocks (pink); Unweighted. – 2 years

The message of the above chart is really that buying on green credentials amounts to going for quality issuers. If money is easy and animal spirits are out, green/quality stocks are a waste of time. At least for a while. The issue is whether green stocks are long-term winners.

This debate is unlikely to have a clear-cut answer for a long while as green is very much a discovery process for all: investors, obviously, who are unsure of the tools that they manipulate to gauge issuers and corporates themselves as they dig into their business models to review processes at great costs. The perplexity of all stakeholders is magnified by the fact that the largest green respectability gains are going to be achieved by the dirtiest businesses which most investors will shun today. 

The practical reality is that (dirty) cyclicals may be doing well on an easy money/recovery basis and, as well, on an ESG template when they deliver on their shift away from carbonated business models. Think of Chemicals all of a sudden becoming H2-driven propositions: they become green propositions as their processes are greener and their products are anyway essential to a greener economy. Over a few years, a sector regarded as a derivative of oil may well become an attractive green play.

The implication is that the high P/Es that have been accepted to green up an equity fund were not justified. Buying black stocks on their inevitable way to green is bound to be more rewarding. 

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