PART 3: DOES ESG INVESTING RESEMBLE PAST FINANCIAL BUBBLES?

 

This week, we’ll look at whether ESG resembles past financial bubbles, and what the differences are.

According to Quinn & Turner’s Bubble Triangle, bubbles emerge when three factors come together, which are analogous to oxygen, fuel, and heat in a fire.

Let’s compare ESG to the Dot-Com Bubble of 1995-2000 using this framework.

1.        💨Marketability (Oxygen):

• Dot-Com: 371 tech initial public offerings (IPOs) were made possible by deregulation in 1999. Marketability increased as a result.
• ESG: As covered in Week 1, index inclusion and required disclosures are driving ESG's growth. EU Taxonomy and SEC oversight curb speculation.

2.        🤑Money and Credit (Fuel) :

• Dot-Com: Speculative inflows caused the NASDAQ turnover to increase from 86% in 1990 to 221% in 1999.
• ESG: As mentioned in Week 1, low-rate environments pushed capital toward ESG funds, but lower capital costs reflect risk-reduction benefits.

3.        🔥Speculation (Heat):

• Dot-Com: 54% of investors intentionally held overvalued stocks, expecting further gains.
• ESG: Greenwashing scandals have exposed weaker ESG funds, even though some trade at high P/E ratios. Despite concerns, ESG differs from past bubbles due to its regulatory foundation and alignment with long-term risks. Though speculative inflows and valuation concerns remain.

🎇The spark - a result of government regulations or technical advancements – is what       ignites the bubble:

• Dot-Com: Investor hype was spurred by technological innovation.
• ESG: The spark is policy-driven, which we discussed in week 2. 500+ responsible investment regulations (PRI database) provide structural backing, not speculative mania. However, questions do remain about regulatory effectiveness in curbing mislabelling and speculative inflows.

Source: Quinn & Turner 💣

It’s true that some ESG assets can be overpriced, but institutional support, risk integration, and regulatory support all point to a structural change rather than a bubble. Speculative elements and mispricing concerns remain, but ESG is governed by regulatory frameworks and long-term risk assessments which makes collapse unlikely, contrasting with Dot-Com’s deregulation-driven boom.

This being said, ESG’s future remains uncertain – it is still evolving. What we do know is that if ESG investing thrives, it could permanently reshape financial markets and corporate accountability. But in failure – well, the consequences could be far-reaching.

For our grand finale, we explore both outcomes.