Hedge Funds are Shorting ESG, With Some Exceptions

A Bloomberg analysis of roughly 500 hedge funds found that patience for ESG stocks related to the energy transition has run out.

Photo of solar panels
Photo by American Public Power Association via Unsplash

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The green transition is still much too much about green shoots for the likes of hedge funds.

A Bloomberg analysis of roughly 500 hedge funds published Monday found that patience for ESG stocks related to the energy transition has run out, and some are shorting them. There are notable exceptions — wind energy and grid infrastructure — but that’s only because of energy-hungry tech companies.

Why the Long Face?

Bloomberg’s analysis found that on average, hedge funds are adopting short positions on sectors including solar power and electric vehicles. Hedge fund managers told Bloomberg that in the solar industry, China’s overwhelming dominance makes life tough for would-be investors in the US and Europe. China doesn’t overshadow the EV market in quite the same way, but the sector has shifted down into first gear as it looks to bring a truly mass-market vehicle onto the scene, and for hedge funds the industry’s moving too slowly. One manager told Bloomberg he thinks it’s “two to three years before we can see an inflection point” in EVs.

Meanwhile, the same hedge funds are betting on fossil fuels; jitters about next month’s US presidential election aren’t doing renewables any favors. Two sectors that still have hedge fund managers seeing green are wind energy and grid infrastructure:

  • The wind energy sector is only just emerging from its first fully-fledged financial crisis, but hedge fund managers told Bloomberg they’re optimistic, with one foreseeing a “recovery story.” Another said that they’re “cautiously optimistic that we’ve seen a bottom,” so it seems for hedge funds that wind has nowhere to go but up.
  • Grid infrastructure is not an entirely ESG investment — both clean and dirty fuels use the same ones, after all — but exploding demand from tech companies whose data centers and AI ambitions require ever-more power has kept hedge funds comfortable maintaining exposure to some green energy projects.

“It’s no coincidence that two green investment bright spots, wind and energy grids, are sectors Western governments have indicated they will back heavily,” John Diklev, CEO at green energy-tech company Flower, told The Daily Upside, adding: “Investors ought to think about energy technology from a whole-system perspective. When the wind is not blowing, our systems would be well-complemented by solar energy and battery storage if deployment can be scaled up. As energy demand grows from data centers, we are currently seeing a boon for nuclear projects, but there is no reason why a blend of renewables can’t meet that need, with the right backing.”

The Nuclear Option: Last week, two Big Tech companies announced major nuclear projects to help fuel their AI dreams. Both Google and Amazon struck deals to buy power from yet-to-be-built small nuclear reactors (SMRs). They’re both following the footsteps of Microsoft, which has been bullish on nuclear power deals for a while now — founder Bill Gates also founded a nuclear power company called TerraPower. The news of Google and Amazon’s investments into the sector sent nuclear stocks up to record highs, the Financial Times reported Saturday.