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In recent years, investors of all kinds bet big on the future of the so-called Green Economy. But now, some hedge funds are shorting green stocks — a sign that investor enthusiasm may be waning.
A new Bloomberg analysis examines the positions that more than 500 hedge funds have taken on the green economy. On today’s Big Take podcast, Bloomberg ESG reporter Sheryl Lee joins host David Gura to discuss the findings, and why some investors who had bet on a sustainable future are now betting against it.
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Here is a lightly edited transcript of the conversation:
David Gura: A few years ago, it seemed like everyone was betting big on the future of the so-called "Green Economy.”
Sheryl Lee: So there were thousands of these ESG funds being launched, and we had sectors like solar, wind, EVs, uh, battery technology doing very well. Investors were talking about these themes with a lot of enthusiasm.
Gura: Bloomberg’s Sheryl Lee covers ESG investing.
That's shorthand for investments that have to meet certain standards: environmental, social, and governance goals.
And back in 2021, Sheryl says, some of the biggest names in finance were all in … on ESG.
Lee: Larry Fink, the head of BlackRock, which is the world's biggest asset manager, was really promoting those three letters.
Gura: Fink wrote about it in 2021, in his annual letter to CEOs. A document that’s widely read on Wall Street. And he marveled at how much momentum there was behind ESG investing … in an appearance on Bloomberg TV:
Larry Fink: In my 44 years of doing this, I've never seen the speed in which this narrative is evolving and changing. I believe there will be a future that all investments are going to be looked through sustainability.
Lee: People thought that this was the start of the transition away from fossil fuels. And there were going to be a lot of returns from companies leading the clean energy revolution.
Gura: But Sheryl says the landscape has changed, along with investor appetite.
In 2023, Larry Fink said he’d stopped using the term ESG, because it’s been, as he put it, “weaponized.”
It was a stark shift that underscored just how quickly the world of finance changed its tune on one of the biggest investment trends in recent history.
I’m David Gura, and this is “The Big Take,” from Bloomberg News.
Today on the show: why investors that had bet on the future of the green economy … are now betting against it.
Gura: Bloomberg’s Sheryl Lee analyzed positions more than 500 hedge funds have taken on green energy, and she found that more of those funds are now going short on ESG than are going long.
Gura: When we talk about a hedge fund going short, what does that mean exactly?
Lee: I think we all know that if you take a long bet on a stock, that means you're buying the shares with the expectation that the price will rise over time, and you'll make a profit. And when it comes to taking a short bet, and you're hoping that the stock's price will decrease. So basically what a short bet is, is a bet that the stock is going to fall in value.
Gura: I wanted to ask you, how transparent hedge funds are or how transparent hedge funds have to be, when it comes to what positions they're, they're taking. Is it easy to find this kind of information about what kind of bets they're making?
Lee: It's really difficult. The challenge is really having the data from hedge funds. So the $5 trillion hedge fund industry, it's subject to less stringent disclosure rules than many other types of asset managers. So it's not easy getting that data at all, and short bets are even harder to get.
Gura: But Sheryl and her colleagues found a way to peek behind the curtain. They looked at data collected by a company called Hazeltree — data hedge funds had shared anonymously, about positions they’d taken.
Lee: So, using Hazeltree's data, we looked into like 400 stocks across the energy transition space to understand how this extremely money-minded group of investors was betting on specific stocks and sectors.
Gura: Sheryl couldn’t see what individual hedge funds were doing, but she and her colleagues were able to spot trends.
Lee: So we would know, for example, 5% of all these hedge funds are net long in a specific stock, and maybe 8% are net short in that stock. And then we also averaged it out across companies to get a sector average.
Gura: And that information gave Sheryl a pretty clear sense of how the hedge fund industry is thinking about the future of the clean-energy transition — of investments in companies that are part of the green economy.
On the whole, Sheryl and her team found that more hedge funds were short green stocks than long. In other words, the emerging consensus seems to be that clean-energy investments, which have fallen in value for years now, are expected to fall even more.
But something else jumped out at her.
Lee: You had more funds long fossil fuels than were shorting oil and gas and coal.
Gura: I think that'll surprise a lot of people, given what we've talked about, that there was this moment of such enthusiasm for ESG for a kind of transition to a green economy. Why is that the case? What did hedge fund managers say to you about why they are long on fossil fuels in particular?
Lee: The hedge fund managers that we interviewed said that they were buying fossil fuels because they feel like it's a needed reliable source of energy as the world transitions.
GURA: But there were other factors that led to bigger bets on fossil fuels. First and foremost: conflict in Europe, which sent shockwaves through the global energy market.
Lee: We had the Russia-Ukraine war, and then there was a boon for fossil fuel stocks instead, because it was worsening supply constraints. You have Russia, which is one of the world's largest oil and gas producers, and the conflict led to sanctions on Russian energy exports. So that created a lot of uncertainty and disruptions, and a lot of countries were worried about where they were going to get a secure source of energy, and that led to a boon for fossil fuels.
Gura: That explains why hedge funds went long on fossil fuels. But why are they betting against the green economy? And what does that mean for investors – and the future of the planet? That’s next.
Gura: Bloomberg's Sheryl Lee and her team did an extensive analysis of data from more than 500 hedge funds, and discovered that more of those funds are now betting against the future of the green economy than are betting on it.
Gura: I know you've talked to hedge fund managers. What did they tell you about why this shift is happening? And why they're shorting green stocks.
Lee: So, they’re shoring green stocks for a couple of reasons. Performance hasn't been very good, so momentum has been negative for green stocks for the past couple years. We had the unwinding of COVID trades and higher interest rates and supply chain issues. So many investors left the sector.
Gura: And Sheryl says that, even though the Federal Reserve – and other central banks – have begun to lower interest rates, the economic environment is still challenging for these companies, including the San Francisco-based solar company Sunrun, and Tesla.
Lee: We have a tough macroeconomic backdrop. Higher interest rates have upended capital-intensive projects, like offshore wind farms, and limited funding for emerging technologies. And we are only now starting to see rates fall.
Gura: But Sheryl says hedge fund managers are also worried about politics, and especially, about the upcoming election in the United States.
Lee: So investment managers who are very much pro-ESG, they have to defend themselves against US Republicans who call ESG an anti-capitalist conspiracy. And the most important factor of all, according to all these hedge fund managers that we interviewed, is geopolitical risk between US and China. So, they feel obstacles such as tariff wars between the two countries will directly hit green products like EVs and solar. So that's why they are unwilling to invest in these classic green bets. The risk of a full blown trade war targeting China's products is a direct threat to the appeal of clean energy stocks.
Gura: There is so much rhetoric from the Republican candidate about the kind of tariffs that he would impose and what that might do to the trade relationship with China. What did these hedge fund managers say just about the, the prospect of, of what would happen if, if those tariffs were to be put in place or those kind of extreme punitive tariffs?
Lee: So, if those tariffs are put in place, they see greater fallout because what that would result in is higher prices and inflation across the board. So, that would hurt these green sectors even more. So if Donald Trump regains the White House then he has already added his plans to take back unspent climate funding and raise duties on Chinese-made goods to 60% or more. So the outcome of the US elections is also something that the hedge fund managers are watching very closely.
Gura: What kind of a difference would it make if, if Kamala Harris were to be elected?
Lee: When they contrasted Kamala Harris versus Donald Trump presidency, they feel Kamala Harris would be more favorable towards the green sectors. So, that said, none of them have expressed views as to who they think will likely win the election. So that's also one of the reasons why the hedge funds are staying out of green sectors for now. Because you can price risk, but it's really difficult to price, um, uncertainty and so over the next few months once the election is done there will be more clarity on how supportive policies might be around clean energy or EVs for example, and some of the hedge fund managers said that that's when they would consider getting into the market again.
Gura: I asked Sheryl what conclusions she and her team can draw from their analysis — what the data tell them … about the overall appetite for ESG investing, and what they don’t.
Lee: I think it's a window to a moment in time. Uh, what one part of the financial sector sees how the transition is going. Hedge funds are a certain type of capital. They are the fast money. They will look at things in the short term. It's quite different from other types of asset managers. But at the same time, when you look at broader pools of capital, you have pension funds, for example, pushing out mandates that are sustainability-focused. Performance will determine how much appetite there is for investments in this space. So, I think what this data tells us is that there has been a bump in the road. It wasn't as rosy as what we expected the future would be like in 2021, but the energy transition is still ongoing. I think that is a good way to think about how the long-term prospects could be.
Gura: Sheryl, thank you very much.
Lee: Thanks a lot, David.
This is “The Big Take,” from Bloomberg News. I’m David Gura.
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