Are Investors Paying a “Green” Premium for Clean Technologies?
The dramatic run-up in stock returns of sustainable-technology, or clean energy, companies during 2007 has been viewed by some financial market observers as a “green bubble,” similar to the NASDAQ internet bubble that occurred in 1999 and 2000. Indeed, some have asserted that this green bubble burst beginning in 2008.
We have been examining possible explanations for those excess returns. We have been using the QCLN exchange-traded fund as a proxy for activity during 2007 and 2008. The QCLN is designed to track the performance of publicly traded clean-energy firms in the United States.
Our research and analyses are ongoing; the chart presented here, which shows excess returns relative to the Russell 2000 Index, offers just a snapshot. But the preliminary results indicate QCLN’s excess returns are consistent with:
- investors’ placing a small-firm premium on QCLN constituents;
- investors’ placing greater weight on future rather than current cash flows for clean energy firms;
- and a substitution effect for traditional energy prices.
Market metrics such as price-to-earnings, price-to-sales, and price-to-bookvalue ratios suggest that investors were placing greater weight on future performance for QCLN constituents than for non-clean-energy firms, and that the market may have been overly optimistic in 2007. Other explanations (for instance, news-driven performance of firms and the impact of government subsidies or venture capital investments) provide only limited insight into QCLN’s excess returns.
||Excess returns for clean energy firms may be explained by intangible value not captured by current accounting rules; that is, a greenwill premium.
Although the preliminary results of our analyses are consistent with some previously unidentified risk factors contributing to QCLN’s excess returns, these returns may be explained by systematic mispricing or intangible value not captured by current accounting rules.
This might represent a “greenwill” premium, defined as a net benefit that exceeds the present value of future cash flows due to potential societal benefits beyond those captured by traditional metrics. In response to skeptics who may believe such a premium could not exist in an efficient market, one need only point to the premiums people are willing to pay for commodities obtained via “fair trade” and “sustainable harvesting,” such as gold or coffee. ■
Ted Laguerre and Gene J. Kovacs are Vice Presidents, and Manesh Jethmal is a Senior Analyst, in Analysis Group’s Boston office.
(From Analysis Group Energy Bulletin, Spring 2011)