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Dot-com era stock valuations bringing bubble fear to ESG Funds

It’s reality-check time for ESG funds.

Danish utility Ørsted trades at 55 after significant inflow into clean energy ETFs , which strategists from Bank of America believe has created a bubble in the stock. | Photo: Martin Lehmann/Politiken

Exchange-traded funds investing in companies with responsible environmental, social and corporate governance practices lured a record USD 85 billion in the U.S. and Europe in 2020, and are still raking it in.

Pumped up by the flows, stocks in many of these funds are trading at frothy price-to-earnings multiples that are increasingly hard to justify. Take U.S. fuel-cell maker Plug Power Inc., for instance. The unprofitable company’s more than 2,000 percent rally since early 2020 outpaces even Tesla Inc’s.

"There is a risk that holdings that populate ESG funds have become overvalued,"said Chris Dyer, director of global equity at Eaton Vance. "Investors -- both active and passive -- are increasingly chasing these themes and driving valuation to uncomfortable levels in some cases. This type of naïve investing tends to end badly."

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