The dark secret of sustainable energy investing: big tech, tax avoidance, and Wall Street frenzy

In 2017, the former CEO of Amazon Jeff Bezos inaugurated the “Amazon Wind Farm Texas”, located in Snyder. Pictured above, Bezos proudly raised and smashed a bottle of champagne to mark the company’s first investment in green energy. A video of the inauguration was even broadcasted live on Twitter in order to signal the beginning of a new era for Amazon to its consumers, and in particular to its younger and more environment-focused ones.

Since then, Amazon has become the largest corporate buyer of green energy, not only in the US but globally. Followed by some of the biggest names in the tech industry, the GAFAs (Google, Apple, Facebook, Amazon) dominate this sector. Combined, their power usage surpasses 45 terawatt-hours a year, approximately equivalent to New Zealand’s. Moreover, this demand is not set to slow down. In addition to the required cooling of tech firms’ numerous servers, the growing development and use of machine learning and artificial intelligence will only further their demand for computing power.

Investments in clean energy create an incentive for rival companies to follow the trend in order to retain a good “image” to both their consumers and investors. When asked about this topic, Microsoft’s president Brad Smith answered with a chuckle “I think of all the competitive dynamics in the tech sector, this is probably the best”. For example, Amazon was at first slower than its rivals in participating in renewable energy projects, which prompted its employees to strike. If Amazon’s competitors had not led clean energy investments, it is unsure whether Amazon would have done the same.

Regardless of the companies’ motives, a shift to green energy investments must be a great initiative, right? Unfortunately, the answer is not as simple, but looking at self-proclaimed ESG companies’ tax accounts might shed a light on this (ESG stands for Environmental Social and Governance, which refers to the three pillars used to measure sustainability). For example, if you look at the US-listed Russell 1,000 companies with the best triple-A ESG rating from MSCI — Morgan Stanley’s investment research division — you will notice that these firms paid on average 18.4% in taxes last year, compared to 27.5% for triple-C-rated companies. In fact, the relationship between effective tax rate paid and ESG rating seems almost perfectly inverse. The main issue is that these differences are not that much driven by government tax subsidies favoring firms with ESG goals but by sectoral effects. Indeed, tech companies tend to be those that are ESG focused. However, as most of their assets are intangible, these are the same companies which are capable of consistently taking advantage of different tax regimes between countries. For instance, Microsoft, a leader in ESG investing and a massive player in the tech industry, pays 17% in taxes per year compared to most companies paying an average of 45%. Therefore, an obvious question that can be raised is: would taxing Microsoft more and using the money for the state to fund clean energy be more beneficial than letting the firm take on glossy ESG projects for the sake of their corporate sustainability reports?

Whether increased taxes or fair competition between companies is the right solution to tackle clean energy investments is a matter of political views more than anything. Nonetheless, it is true that the markets are rewarding companies that are taking on green energy projects. In 2020 only, assets under management in ESG ETFs — publicly traded funds which contain a basket of securities — rose from $59 billion dollars to 174, while, on the other hand, the price of oil is stagnating, and forecasts say it will not reach back its pre-covid levels soon. Furthermore, Morgan Stanley’s green stocks have an average price-to-earnings ratio which has jumped by 24 points, significantly more than most stocks on the market. This trend is accelerating as, for instance, the Danish wind turbine Vestas’ implied annual earnings growth rate out to 2050 is of 4.5%, double what was calculated by analysts a couple years ago. The growth in the valuation of green energy companies on equity markets has been driven by several factors. Due to the pandemic, governments injected massive amounts of cash in the economy, with a significant portion of it focused on sustainable companies. This is the case in Europe, where 1/3 of the EU’s €750 billion Covid Recovery Fund is dedicated to ESG investing, and might also be in the United States through Joe Biden’s infrastructure bill which proposes to invest $174 billion just in the market of electric vehicles. This, combined with tighter environmental regulations represents an immediate opportunity for energy start-ups to provide solutions to offset large multinationals’ pollution emissions. Secondly, last year, private-equity firms have for the first time done more deals in clean technologies than in oil and gas. However, another big player has joined the clean energy industry and encouraged the skyrocketing valuations of companies in this sector — SPACs. Special Purpose Acquisition Companies, also called blank cheque companies, “raise cash on the stock market and hunt for a private company to take public”. There are numerous reasons which can explain why SPACs are being preferred to Initial Public Offerings (the process through which a private company starts selling its shares on the public stock market) and how they have enabled the current trends in the energy sector, but one of the main ones is that many investors cannot understand the complexity, and thus the potential, of startups in the clean energy sector. Therefore, by investing in a SPAC instead, investors leave the responsibility to the SPAC to use investors’ money and find the right company to acquire. The graph below focuses on the energy tech SPAC activity last year, which generated over €27 billion euros in potential public market liquidity.

The Wall Street frenzy around clean energy stocks is, obviously, making many raise an eyebrow. It is important to remind ourselves that investors are pouring money in these stocks for their high return, not just for the firms’ ambitious motives. But the problem goes further than this. It is true that consumers’ demand is shifting, as highlighted by the fact that in 2020 over $500 billion was spent on renewable energy and electric vehicles by companies, governments, and households alone. However, Gordon Johnson, chief executive of GLI Research, shared: “Pretty much every solar company I cover, their numbers got worse and the stock, like, tripled . . . This is not normal.” What Johnson means is that while these companies’ main business metrics such as profit or sales are decreasing, the value of these firms on the stock market keeps rising to, what he judges to be, irrational levels.

Patrick Pouyanné, CEO of Total, called renewable energy assets’ valuation “crazy”. After all, Pouyanné is the head of one of the largest oil producers, which could explain why he is not as enthusiastic as most investors are regarding renewable energy stocks. Earnings for these stocks might not be the best, or even be negative, but that does not mean they are overvalued. It could reflect investors’ confidence that, soon enough, the companies owning these stocks will represent the future of our energy consumption. Therefore, we cannot tell for sure if investors believe in a clean energy transition or a just participating in a green bubble for the sake of higher returns. However, if we are in the latter case, we will see its effects as bubbles, sooner or later, always burst.


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