The Big (Climate) Short

Bloomberg Audio Studios, podcasts, radio news. A few years ago, it seemed like everyone was betting big on the future of the so called green economy.

So there were thousands of these ESG funds being launched, and we had sectors like solar win EV's battery technology doing very well. Investors were talking about these themes with a lot of enthusiasm.

Bloomberg Cheryl Lee covers ESG investing that's shorthand for investments that have to meet certain standards environmental, social, and governance goals. Back in twenty twenty one, Cheryl says some of the biggest names in finance were all in on ESG.

Larry Fink, the head of black Rock, which is the world's biggest SSM manager, was really promoting those three letters.

Think wrote about it in twenty twenty one 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.

In my forty four 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.

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.

But Cheryl says the landscape has changed along with investor appetite. In twenty twenty three, 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 Gera, and this is the big take from Bloomberg News today.

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 shot bet, and you're hoping that the stock's price will decrease. So basically what a shot bet is is a bet that the stock is going to fall in value.

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 taking. Is it easy to find this kind of information about what kind of bets they're making.

It's really difficult. The challenge is really having the data from hedge funds. So the five trillion dollar hedge fund industry is subject to less stringent disclosure rules than many other types of asset managers, so it's not easy getting that data at all, and shot beds are even harder to get.

But Cheryl and her colleagues found a way to peak behind the curtain. They looked at data collected by a company called hazel Tree Data. Hedge funds had shared anonymously about positions they'd taken.

So using hazel Trees data, we looked into like four hundred stocks across the energy transition space to understand how this extremely money minded group of investors was betting on specific stocks and sectors.

Cheryl couldn't see what individual hedge funds were doing, but she and her colleagues were able to spot trends, so we.

Would know, for example, five percent of all these hedge funds net long in a specific stock, and maybe it person a net shot in debt stop. And then we also averaged it out across companies to get a sector average.

And that information gave Cheryl 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, Cheryl 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.

You had more funds long fossil fuels than were shotting oil and gas and cool.

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 hedgehund managers say to you about why they are long on fossil fuels?

In particular, the hedgehund 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.

But there were other factors that led to bigger bets on fossil fuels. First and foremost conflict in Europe, which sent shock waves through the global energy market.

We had a Russia Ukraine war, and then there was a boon for fossil fuel stocks instead because it was worsening supply constraints. You had Russia, which is one of the world's largest oil and gas producers, and the conflict led to those sanctions on Russian energy exports. So they 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.

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 the planet? That's next Bloomberg. Cheryl Lee and her team did an extensive analysis of data for more than five hundred hedge funds and discovered that more of those funds are now betting against the future of the green economy than are betting on it. I know you've talked to hedge fund managers.

So they're shotting greenstocks for a couple of reasons. Performance hasn't been very good, so momentum has been negative for green stocks for the past couple of years. We had the unwinding of COVID traits and higher interest rates and supply chain issues, so many investors left the sector.

And Cheryl 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 companies un Run and Tesla.

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 for but Cheryl says.

Hedge fund managers are also worried about politics, and especially about the upcoming election in the United States.

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 through all these hedge fund managers that we interviewed, is geopolitical risks between US and China. So they feel obstacles such as tariff wars between the two countries will directly hit green products like ebs and solar, So that's why they're unwilling to invest in these classic green beds.

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 hedgpoon managers say just about the prospect of what would happen if those tariffs were to be put in place, so those kind of extreme punitive tariffs.

So if those terrants are put in place, they see greater fallout because what that would result in is higher prices and inflation across the bot so that would hurt these green sectors even more so. If Donald Trump regains the White House, then he has already had his plans to take back and spend climate funding and raise duties on Chinese made goods to sixty percent or more. So the outcome of the US elections is also something that the hedge fire managers are watching very closely.

What kind of a difference would it make I Kamala Harris were to be elected.

When they contrasted Kamala Harris versus Donald Trump presidency, they feel Kamala Harris would be more favorable towards the green sectors, so that none of them have expressed views as to

I asked Eryl 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.

I think it's a window to a moment in time. What one part of the financial sector sy is how the transition is going. Hitch funds 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

Could be Cheryl, Thank you very much.

Thanks a lot, David.

This is the Big Take from Bloomberg News. I'm David Gura. This episode was produced by David Fox. It was edited by Aaron Edwards and Tim Quinson. It was mixed by Alex Sagura and fact checked by Adriana Tapia. Our senior producer is Naomi Shaven. Our senior editor is Elizabeth Ponso. Our executive producer is Nicole Beemster. Board Sage Bauman is Bloomberg's head of podcasts. If you liked this episode, make sure to subscribe and review The Big Take wherever you