Never buy a puzzle from a thrift store because there is too much risk of a missing piece. Last week, my wife broke that rule and bought a jigsaw puzzle from a thrift store, and sure enough, it had a missing piece right in the middle of it. Now that we are further down the road on green and ESG investing, I believe they have a missing piece: profitability.
Investors are losing excitement over green and ESG (environmental, social, and governance) investments. According to the Wall Street Journal, more than $14 billion have left in ESG funds this year. Wall Street rushed to add to green investing a few years ago when ESG was all the rage, but now they are quietly closing funds after investors have cashed out billions on disappointing investment returns.
For the first time last quarter, we saw more mutual fund managers remove rather than add ESG from their policy criteria. The Wall Street Journal noted that six mutual funds have dropped their ESG from its criteria, and even more telling, another 32 sustainable funds are closing. The demand for ESG investing will continue to be limited until they show investors they can be profitable.
Several clean energy startups are going bankrupt, waiting for government funding. Government loans are available to new green companies, but they must first show some profitability to prove they can repay the government loan. Many are using up their cash because the business costs have been much more than expected. The electric vehicle part of the sector has especially been vulnerable, with many filing for bankruptcy or showing they are near it.
It’s not just that manufacturing costs are higher, but demand for EVs (electric vehicles) is dropping quickly. This isn’t what carmakers expected. With the popularity of Tesla in 2020, GM announced they would phase out combustion engines, and Ford got to work on the Mustang Mach-E, but now they aren’t selling. Car makers have a lot of inventory that isn’t selling and are beginning to slash prices to stir up demand.
Americans are having a hard time justifying the high EV price tag, which is much more expensive than other new cars. EVs are also less convenient. I could almost throw a rock in my city and hit a gas station, church, and Chinese restaurant, but I only know of two public charging stations. (There may be more, but there are so few that I haven’t noticed them.)
It seems like the first people to get on board with EVs were wealthy, had a garage (with money to install a charger), used their vehicle only for commuting to work, and wanted to support the green political energy movement. To get beyond this smaller group of people, the EV makers must make the cars more of a “good deal” and less of a political statement to justify the high price and inconveniences.
That’s great, but will it make any money? My two almost adult kids are strong entrepreneurs who frequently tell me their ideas for new business ventures. I try not to burst their bubbles, but when they finally ask me if it will work, I often ask them, “That’s great, but will it make any money?”
Most investors don’t want to make a political statement but want a return on their investments. Companies are finding out the hard way that they can’t ask investors to give money on a great social idea until it returns them a profit.
Real profit is the missing piece of the puzzle for green and ESG companies. It will probably come in the near future, but they aren’t there yet.
Have a blessed week!
Dr. Richard Baker, AIF®, is the founder and executive wealth advisor at Fervent Wealth Management.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly.
The economic forecast outlined in this material may not develop as predicted & there can be no guarantee that strategies promoted will be successful.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.
