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The world’s largest investment fund warns of a new bubble

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The market for socially responsible investments may face a collapse soon, although it has great long-term potential, believes Nicolai Tangen, head of the Norwegian sovereign wealth fund, the world’s largest pension fund.

For the CEO of the $ 1.3 trillion funds, there are some glaring parallels between today’s market for sustainable assets and tech stocks just before the dot-com bubble, related to internet-linked companies, burst.

He indicated that the assets of companies that meet environmental, social, and governance standards – ESG, are highly overvalued. The green finance market will be at least $ 1 trillion this year, according to SEB AB, the Swedish bank behind the world’s first green bond for more than a decade.

The situation resembles the dot-com bubble that occurred in the second half of the 1990s as a result of the implosion of internet company stocks, Tangen said. Back then, rising prices from online businesses caused a massive market crash.

The analogy suggests that ESG stocks and bonds could undergo a short-term correction.

“We may see something of the same kind now, what is happening in the green shift is extremely important and real,” Tangen stressed. 

“But to what extent stock prices reflect it correctly is another question,” he added.

However, he suggests that current prices for climate-friendly assets could reflect their long-term potential, as did tech stocks in their day.

“What is interesting is, if you compare the situation now with, for example, the situation before the year 2000, then the stock market was right that technology companies were going to do well in the future, Tangen said in an interview with Bloomberg. 

“The valuation went up a bit, so it went down again, but technological development continued,” he added.

Commenting on the risk of an ESG bubble, Tangen specified that he is concerned about the overvaluation of parts of the market. By the end of January, the fund had failed to invest a single penny in the renewable energy infrastructure space to avoid buying at inflated prices.

Part of the challenge is operating in an environment where almost all asset classes have been inflated thanks to unprecedented monetary support.

“We must be prepared for corrections in the stock market,” said Trond Grande, deputy managing director of the fund. 

“We have no view on when the correction might come, where it might come, and how powerful it might be,” he acknowledged.

Last year, governments, companies, and other groups raised a record $ 490 billion by selling green, social, and sustainability bonds. Another $ 347 billion went to mutual funds focused on social and environmental issues, a historic record, and more than 700 new funds were launched around the world to capture the flood of inflows, according to Morningstar researchers. Inc.

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