Have I travelled back in time? Friends is back on our TV screens, Scotland are in a major championship, and, according to some, there is a bubble appearing in the market. And while some of us may prefer to talk about Ross and Rachel or who’s going to come second in Scotland’s group, I’ll focus on the third point.

The FT on 24 May 2021 had an article, “Clean energy stocks are as crowded as the tech before dotcom crash, says MSCI”, which focuses on the significant flows of investment into the clean energy sector, which had helped drive the S&P Global Clean Energy index up 150% over 12 months to end March 2021.

Now, as a reminder for any readers who don’t recall or perhaps weren’t yet working in the late 1990’s, there was a wall of positive stories, fund launches and flows of money into technology at the time and, of course, the pain as the bubble burst shortly after.

It’s fair to say there is undoubtably the potential that elements of history could be repeating themselves. However, as ever, it is not binary – within areas of the market there will be some that are overcrowded/over-priced, but there will also be worthy future winners, which may be perceived as a bit expensive today, but are also potential sound long-term investments that investors may be comfortable paying a bit more for today.

The real unknown is: how far through the re-pricing of companies to take account of the transition to a lower carbon world are we? This is not a new problem unique to ESG and carbon and transition – and it is not to suggest positive ESG companies won’t generate higher return than poor ESG companies. The question, as it ever was in investing, is what price are you paying, and as a consequence, will you earn the return you are looking for over your holding period?

Tackling this challenge in tailored model portfolios

When building Tailored Model Portfolios for our IFA clients, we integrate Responsible Investment into our investment process. This includes:

• Taking an evidence based diversified approach to asset allocation, investing across a range of asset class, sectors and styles, to reduce the risk of large exposures to single potentially overpriced areas of the market.
• Adopting a range of routes to implementation, which may include both index-tracking, where we use a number of benchmarks that aim to reduce transition risk associated with moving to a lower carbon world, and active management to manage risk and capture opportunities.
• Carrying out detailed analytics and monitoring to assess portfolios’ ESG related risks both at a portfolio and manager level e.g. portfolio level carbon footprinting.
• Supporting our IFA clients with training, engaging communications and analytics, as well as evolving our proposition as client needs and regulatory changes take place thereby helping future proofing their investment proposition.

If you have any questions regarding this blog please let us know.