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 sure enough, the puzzle had a missing piece right in the middle of it. Now that we are further down the road on investing in green companies and those in the environmental, social and governance space, I believe they too have a missing piece: profitability.
Investors are losing excitement over green and ESG public companies. According to a Morningstar report, more than $14 billion in ESG funds have left the stock market this year, leaving the sustainable funds tally at $299 billion. 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 ESG from their criteria, and even more telling, another 32 sustainable funds are closing. The demand for ESG investing will continue to be limited until the mutual funds show investors they can be profitable.
Several clean energy startups are going bankrupt – or on the verge of it – and awaiting government funding, according to a report on OilPrice.com, citing filings by Lordstown Motors and Proterra. 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 electric vehicles is dropping quickly, according to a USA Today article titled “Here’s why people aren’t buying EVs in spite of price cuts and tax breaks.” This isn’t what carmakers expected. With the popularity of Tesla Inc. (Nasdaq: TSLA) in 2020, General Motors Co. (NYSE: GM) announced they would phase out combustion engines, and Ford Motor Co. (NYSE: F) 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 – up over 500% from a year ago, per a CarGurus report in October – 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 can only think of two public charging stations. There may be more, but they’re few enough it doesn’t give me confidence to buy an EV because it seems inconvenient.
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 as I ask my two nearly adult kids when they often share entrepreneurial ideas: Will it make any money? I try not to burst their bubbles, but then there’s reality.
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.
Richard Baker, an accredited investment fiduciary, is the founder and executive wealth adviser at Fervent Wealth Management LLC in Springfield. He can be reached at email@example.com.
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