The hyper focus on sustainable investing is reminiscent of previous bubbles, specifically the dot.com boom and bust.

Key Points:

  • The rebound from the Covid-19 crisis is set to be the most environmentally friendly economic recovery on record.
  • Fueled by abundant liquidity, investors are flocking to back projects in renewable energy, electric vehicles, plant-based food, social inclusion and the circular economy.
  • Liquidity can be a two-edged sword: money traditionally flows to the best ‘story’, rather than to the problems that are hardest to solve. 
  • We see echoes of the dot.com boom and bust of the late 1990s and early 2000s – too much money potentially chasing too few profitable and enduring business models.

The thing about bubbles: they’re dazzling, they’re enticing … and, ultimately, they burst.

Anyone involved in the world of ESG for longer than the last few years will have mixed emotions over the recent surge in interest from investors. For much of the last decade, sustainable investing was a niche activity. Flows were meagre even though performance tended to be good, as recently demonstrated by a meta study on ESG by NYU Stern Center for Sustainable Business and Rockefeller Asset Management.[1] 

The recent surge of flows into ESG investing is a vindication of the belief and tenacity of earlier pioneers, although it can be galling to see recent converts hoovering up much of the spoils. What is more gratifying, however, is that this burgeoning interest is reflective of wider shifts in society, including among politicians. Awareness of the importance of managing the environmental impact (for example, recent wintry conditions in an unprepared Texas) and social consequences (see last summer’s Black Lives Matter-led protests) of our economic lives is beginning to shift the focus from product labels to the fundamental reorientation of business models and the allocation of corporate capital. 

‘Greenest’ Economic Recovery on Record?

Whether or not it is ‘growing green’, the rebound from the Covid-19 crisis is set to be the most environmentally friendly economic recovery on record. Fueled by abundant liquidity, investors are flocking to back myriad projects in renewable energy, electric vehicles, plant-based food, social inclusion and the circular economy. These flows are expected to bring enduring economic benefits: from the production of less waste, to cleaner and cheaper energy, to more resilient and climate-friendly agricultural practices. Achieving net-zero carbon status by 2050 has become a more realistic prospect too, beyond just ‘buying green’. While more recently we have seen a healthy correction in some of the pricing, it is no wonder that the companies providing innovative solutions and the support for transition across economies in these areas saw their stock prices soar earlier this year.

Innovation alone, however, is not going to solve the planet’s most pressing problems. Sustainable investing needs a pragmatic approach, and should not be limited to loftily valued solution providers. When profits cease to matter, you know problems are brewing. Investors need to embrace the successful implementers of sustainability solutions into business practices that drive efficiency, build brand value, and help companies remain relevant in a changing world.

Liquidity: A Two-Edged Sword?

There is another problem with maintaining a singular focus on solution providers: an estimated US$13 trillion of combined global monetary and fiscal stimulus (and with more likely to come) is providing ample firepower to fund many of our sustainability ambitions. Liquidity, however, can prove a two-edged sword. Money traditionally flows to the best ‘story’, rather than to the problems that are hardest to solve. 

Earlier this year, the valuation of many of the ESG darlings reached eye-wateringly high levels that left any notion of intrinsic value far behind; a surplus of demand-over supply is never good for rational pricing of securities. High personal-saving rates and low interest rates have triggered a retail investor feeding frenzy that has driven some stocks to almost cult-like status. 

Companies have become savvy to this trend and now label themselves on their websites as “solution providers” to optimize search engine optimization (SEO). Some even pay third-party consultants to optimize reporting to earn a coveted “high-sustainability” rating to boost the perception of their ESG credentials.

Dot.Com Bubble Echoes?

To us, all of this is redolent of other bubble eras, most notably the great late-1990s dot.com boom and bust. For a while, it was impossible to do any wrong if you were a technology investor: the environment was the investment equivalent of shooting fish in a barrel. In early 2000, the mood shifted as monetary conditions tightened. Initial public offerings (IPOs) started to fail, and the savvy, early investors quietly left the stage before the inevitable bust swept in. 

It wasn’t that the long-term prognosis on how tech would change our lives was wrong; if anything, we were too modest about the shape of things to come. The problem was that too much money was chasing too few profitable and enduring business models. Even Amazon – one of the most successful business models to emerge from the carnage – took almost a decade to regain its 1999 market high, while many simply didn’t survive. We have watched with interest the recent rise to prominence of the special purpose acquisition company (SPAC), a shell corporation that is listed on a stock exchange with the purpose of acquiring a private company, thereby making that company public without having to go through the traditional IPO due-diligence process.

Harsh Reality of Market Forces

No matter how ardent one’s passion for sustainable investing, being ‘green’ is not a sufficient condition to being a successful company. Although too little regard is often paid to business models and valuation, reality has a nasty habit of intruding at some point. Similar to the 1990s dot.com boom and bust, and the ‘Nifty Fifty’ stocks of the 1970s and 80s before that, as money floods into sustainable investing, not all of the most exciting solution providers will survive the harsh reality of market forces, even though we can expect the innovations and benefits to endure. 

Navigating the current febrile investment environment, pumped up on apparently never-ending supplies of liquidity, creates hazardous conditions for those looking for no more than shiny labels. The first rule of being a sustainable business is to survive. Business models and valuations matter, and sustainability matters. The trouble – for businesses, investors and Mother Earth – is that you won’t get the latter if you ignore the former.


[1] NYU Stern, Rockefeller Asset Management. ESG and Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015 – 2020, 2020.

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This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.

Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.

Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.

In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.

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