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ESG ‘Bubble’ Is a Risk in Crowded Climate Bet, Schroders CIO Says

ESG ‘Bubble’ Is a Risk in Crowded Climate Bet, Schroders CIO Says

The chief investment officer of Schroders Plc says there’s now so much money chasing a limited universe of climate assets that clients need to be aware of the potential pricing risks they face. 

“Clients want to decarbonize, but on the other side there are not many opportunities,” Johanna Kyrklund, group CIO of the $1 trillion London-based fund manager, said in an interview. “There are not as many places to invest, and this can create a bubble.”

Kyrklund isn’t the first to suggest that some corners of the ESG market may be overpriced, as investors throw more money than ever before into assets that promise to fulfill environmental, social and governance goals. 

At the same time, the political, regulatory and business environment means the ESG market will probably continue to grow. Bloomberg Intelligence estimates that ESG assets will reach about $50 trillion by 2025, representing roughly a third of the global total under management. 

“There is nothing more fundamental to economic activity than the energy transition,” Kyrklund said. It “will affect politics, economics, and everything,” she said. 

BlackRock Inc, the world’s biggest money manager, last year predicted a “vast reallocation” into ESG funds. It also recently told investors that financial markets are just starting to price in the effects of climate change, creating investment opportunities in industries including oil and gas. 

For investors willing to look at so-called transition assets, there’s a bigger ESG market to work with, reducing the risk of bubbles. Kyrklund said the “investable universe” of ESG assets is actually “growing very rapidly.” 

“We are not going down the path of exclusion,” she said. That would be tantamount to “undermining the portfolio. Active ownership is a better way forward, and that is what we have been doing.”


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