Why ESG Investing Could Be Tricky Right Now

The rise of the Environmental, Social, and Governance (ESG) focus many investors have taken on in recent years has driven certain stocks in specific sectors absolutely wild of late.

Companies with a focus on zero-emission vehicles or renewable energy have seen valuations absolutely skyrocket. This sort of investing trend is one that has been very powerful, and has driven capital inflows into these companies to all-time highs, in many cases.

Of course, with capital inflows over time, investors can expect higher valuations and higher stock prices. Money really only has one way to flow, and that’s into the stock market right now.

That said, if we see capital outflows from stocks materialize in any meaningful way, we could see some significant revaluations in core ESG-oriented sectors.

I think valuations always matter. Whether a stock has secular tailwinds or not, at some point, every stock is either overvalued or undervalued. Buying a stock because one thinks more money is going to flow into a sector is akin to the greater fool theory.

Thinking someone will buy an overpriced stock at an even higher price is a dangerous game to play.

I think we’re now entering a period of time in which valuations are approaching unsustainable levels. Whether this means ESG or other sectors, investors need to be careful with how they choose to invest. Investing at these prices leaves a lot of downside risk. Accordingly, I’d caution investors to be patient and wait for better valuations on companies they really like with secular tailwinds.

Invest wisely, my friends.