Just as I am getting ready to abandon the safe-media-haven of NordSIP, heading back towards the stormy waters of portfolio management, I stumble upon a graph, courtesy of Bloomberg, juxtaposing the rise of aerospace & defence stocks vs. the fall of their clean energy equivalents over the past few years. A gaping crocodile of a chart, it captures rather well the dramatic shift in priorities I have witnessed and reminds me of the quixotic quest ahead. Clearly some fitting wrap-up Snap material.
Not that it offers any surprises, mind you. It is hardly a secret that these geopolitically messy times of ours have spelled good news for arms manufacturers. Just as we were ever so slowly, and cynically, getting accustomed to the ongoing bloodshed in Ukraine, the Middle East conflict erupted, pushing up projections for government defence spending and boosting the valuation of companies hurriedly contracted to supply the weapons.
And so, investors, even the more sustainability-minded, have turned less and less squeamish about approaching the sector. A recent report from the Global Alliance for Banking on Values (GABV), Finance for War. Finance for Peace., claims that between 2020 and 2022, financial institutions – including major banks, large insurance companies, investment funds, sovereign wealth funds, pension funds and public institutions – have invested “at least $1 trillion” in the defence industry. More than a thousand funds claiming to promote ESG goals were happy to invest in the sector last year, according to Morningstar.
While defence companies are basking in the limelight, green stocks, on the other hand, have been enduring their worst slump in years. Renewable energy companies are particularly out of favour, but they are hardly alone. Despite some truly convincing impact narratives, sustainable businesses of all sorts, from EV charging stations to energy storage or heat pumps, have all been lagging behind the broader market. And don’t even get me started on the plight of sustainability aiming start-ups.
The main culprit for this lacklustre performance are, of course, the stubbornly high interest rates driving up the borrowing costs for capital-thirsty green companies. Supply chain disruptions have added extra layers of complexity and so have a myriad of idiosyncratic challenges. Wind turbine manufacturers, plagued by quality issues and cost inflation, face their own trials as they attempt to scale up. Solar solution providers, meanwhile, complain about substantial demand reduction. And, despite last year’s steep decline, green stocks are still perceived as pricey relative to their balance sheet, noticeably dampening investors’ enthusiasm.
Zooming out of the specifics, the old ‘geopolitics trumps sustainability’-syndrome has been further amplified by the past few years’ severe ESG backlash questioning the concept’s raison d’être as well as that weird ‘sustainability fatigue’ that I keep hearing whispers about.
Whatever the origin stories, the fiduciary dilemma illustrated by this spectacular divergence remains. These are testing times for prudent portfolio managers attempting to stay the course and defend the high moral grounds, year after year, even as they weather criticism amidst disappointing returns.
The inherent pendulum logic of the markets might provide some solace, of course. Momentum is indeed a strong force, but, as the beloved disclaimer goes, past performance is not a guarantee of future returns. Not that I see the geopolitical tensions subsiding any time soon, but maybe investors will decide at some point that they are sufficiently discounted in the share prices. Sure, rates are still stuck in that ‘higher for longer’ mode that doesn’t bode well for expanding businesses. Yet perhaps green companies, at least the survivors among them, will emerge on the other side of the rate cycle stronger and better equipped to provide the solutions of the future.
Until the tide turns, let us remain steadfast and unflinching like a modern-day Don Quixote, resisting the many temptations to diverge from the principles we have sworn to protect. Except these days we should be tilting at arms rather than windmills.
