Events
- The S&P returned 18.39 during 2020, the OMX Water index returned 20.84% while the Clean Tech Index surged 52.51% and the Russell 2000 was up 19.93%.[i]
- Enphase Energy, a manufacturer of inverters, led the Clean Tech Index with a 571% return. Blink Charging, an operator of EV charging stations, returned over 2000 times last year, exemplifying some of the enthusiasm around cleantech.
What happened
As is well documented 2020 was a good year for equity markets, those involved in wind, solar and EVs thrashed the main indices. Flows chasing ESG funds were robust, during the 3rd Quarter year to date flows into ESG related ETFs totaled $22 billion tripling net inflows for all of 2019[ii].
Decarbonization was a big theme as stocks of solar, wind and hydrogen companies were bid up. Aside from flows there were fundamental reasons for this; announcements from China and the EU about investments in hydrogen fuel certainly helped the rally as did Biden’s election win in the U.S. which presaged greater investment, tighter environmental regulations, and US reentry into the Paris agreement.
Enphase is one of the many green energy companies whose stocks appreciated greatly in 2020, the company is set to enter the S&P effective January 7th following Tesla’s inclusion last month. Enphase makes microinverters for solar panels that converting solar power from direct to alternating current; it competes directly with Solaredge in North America where the two companies now control over three quarters of the market. Enphase’s entry into the S&P is further indication that decarbonization of our economy is a real thing. The company’s revenue grew 12% on a five year CAGR through December 2019 and have recently accelerated into the mid teens.
Blink Charging, a microcap until recently with revenues below $3 million in 2019, saw its stock price grow over 20 times last year. Blink operates electric charging stations for EV and its revenue grew in the past year, albeit off a very low base. I am not suggesting in any way that Blink is not a real business but while the entire market’s valuation is some cause for trepidation: I believe investors might want to be even more careful with Blink. A negative report out by short seller (to be clear to readers that is not at what I am doing here) highlighting some irregularities in related party transactions easily found in Blink’s last 10K would not be surprising. Also, Blink’s founder, Michael Farkas, has had some issues with FINRA in the past if broker check is to be believed. All of this is not to specifically impugn Blink’s business plan, product or staff; but emerging industries often have entrants led by unconventional sorts. Farkas, a former stockbroker, may turn out to be the next Thomas Edison for all I know but given the cleantech sector in general and the EV space in particular having more than its share of colorful characters, and some disappointing stories like Nikola, I’d like to see Blink achieve more critical mass before delving in too much. Again, in fairness, many justifiably questioned Elon Musk years ago and that company, though its valuation is inarguably stratospheric, just announced nearly 500 thousand vehicles produced in 2020.
There were other technical reasons for the overall market’s performance last year. Aside from around $14 Trillion of stimulus in the form of buying from central banks and the implementation near zero interest rates, net equity issuance in recent years has declined causing a net reduction of supply. This is primarily due to share repurchases and M&A activity predominantly in the U.S. It also explains why the S&P has handily outperformed the European Bourses over the past several years.
What’s next
I am forced to be in the prediction business, but I don’t operate like many pundits who offer their opinions at this time each year. My thoughts on the year ahead are conditional and subject to change at any moment given new data; Bayesian to the cognoscenti. If 2020 did not remind you that unexpected phenomena can develop quite quickly you weren’t paying attention. One such event that imminently represents a binary, or perhaps trinary, node in any forecast is the election in Georgia on Tuesday, though how long it will take to count votes is another matter. If the democrats pick up 2 seats in the Senate a larger infrastructure bill looks increasingly likely; any other outcome could preclude a smaller bill or none at all. Similarly, the results of this election will influence the speed and success of appointees being confirmed by the Senate for the Biden Administration (which at the time of this writing does not seem as certain as it would under more normal circumstances).
Additionally, I would not be surprised to see a significant pullback in the equity markets given the resurgence of the virus and mere regression to the mean following a substantial run in equity returns; but I remain confident that ESG stocks could still outperform in this context given 1) Biden’s election 2) decarbonization becoming a world wide theme and 3) the valuations of many of these companies are premised on long term secular trends right now.
Another item of increasing importance in the year ahead is the measurement of ESG criteria for investors. At present there are a host of services that rate ESG criteria for investors, for those not equipped nor inclined to do it themselves, but we haven’t really had a substantial debate on just what are viable criteria for ESG. Do they include activities undertaken by the company? The composition of the board in terms of gender and or diversity? How the company treats its employees? How the company interacts with regulators and the communities within which it operates? How the company treats the environment? All of these, and others, are qualities that ESG investors weigh in the decision making process but how are they measured? and how much weight is given each subsequent metric?
If a company makes environmental equipment and is judicious in its own carbon footprint is that company an ESG ideal firm if, at the same time, it routinely harasses employees or purposefully produces a shoddy product to maximize profits in the short term? How about a firm that has historically polluted, and formerly not embraced any diversity nor tried to compensate and develop its employees yet now has decided to change and has embarked on a meaningful transformation that has yet to yield results?
This has implications for all types of investors passive and active. This is a debate that may well surface in 2021 as investors, giddy with recent returns, may want to contemplate or be forced to under a broad range of scenarios.
Opinions are expressed are solely my own. Any investments mentioned do not constitute a recommendation to buy or sell anything. If you do act on the opinions of errant writings without doing your own research you might consider talking to an investment advisor, a psychologist, foregoing that third drink or reexamining your decision-making process. I do cite sources and use end notes but amidst other responsibilities and foci I apologize for any plagiarism or regurgitation of other’s ideas though we all know there are not many original ideas. If you disagree with my content or opinion don’t read it.
[i] Bloomberg; Index returns include imputed dividends not just price return.
[ii] Bloomberg.
