ESG stocks: What’s next?

ESG stocks were some of the best performers over the last year, before a general selloff hit the group in February 2021.

Their general dynamics can be clearly seen in the movements of Invesco Solar ETF (NYSE:TAN) concentrated on global renewable energy: 


As it can be seen from the chart, TAN at present has retreated from its peaks in February, falling from 52 wk maximum of 125.98 to 75.15 as of May, 7, which is more than 40% decline.

The same picture can be observed when analysing separate field-oriented stocks, for instance – SolarEdge Technologies (NASDAQ:SEDG):
 
This company has also plunged significantly – from 377 (ATH) in January to 220.40 now, which marks almost 42 % decline.

The main reason for such a downturn could be profit taking by investors, who earned well in winter 2021 on ESG stocks soaring. For instance, the rise of abovementioned TAN and SEDG from November 2020 to February 2021 was about 80 and 60 percent respectively. This fast growth can be attributed to highly positive expectations after election of Joe Biden with new American President prioritizing green agenda and renewables.

At present the correction of ESG stocks continues, and they become a more and more attractive buy in the mid- and long run. There are several reasons for that.

In the first place, according to Allianz (DE:ALVG) Life survey, millennials, whose role on the market will only increase, tend to invest in ESG companies more often (64 % of investors) than generation X (54 %) and boomers (42 %).

Second, the policy pursued by many developed countries (take European Green Deal as a good example) is likely to leave no option for state pension funds and other institutional investors but to attend more to ESG stocks.

As a result of this process, as PwC analysis indicates, ESG assets will make up between 41% and 57% of total mutual fund assets by 2025 in European markets. Moreover, more than 75% of European institutional investors surveyed by PwC in the end of 2020 said they planned to stop buying European non-ESG products within the next two years.

These fundamental factors make ESG stocks particularly attractive choice for long-term investors. Even though one should keep in mind that technically they still have room for correction.