The investment bubble that has already burst

 

Concerns over AI stocks are widespread – but we rarely describe net zero in these terms

Simon Edelsten

This article was originally published in the Financial Times

Despite being barely four weeks old, 2026 has been a topsy-turvy year. Donald Trump threatened, then withdrew, trade tariffs connected to his designs on Greenland, and the gold price went through the roof. One thing is constant, though: fears that AI stocks are caught in a bubble.

At Davos last weekend, Demis Hassabis, chief executive of Google DeepMind, became the latest tech leader to express concerns over market exuberance, describing parts of the industry as looking increasingly “bubble-like”.

Will it all go “pop” this year? Who can say. But it makes me wonder why we hardly ever talk in the same terms about a different market bubble that clearly has burst in the past five years: net zero investing.

Bubbles tend to have certain things in common: questionable valuations, rampant debt financing, greed, the sudden arrival of a range of expert pundits (many with doubtful credentials) and lots of turning a blind eye to contrary evidence.

Does this apply to AI? Perhaps. It certainly applies to net zero investing.

My first brush with the topic came in the early 1970s. When I was studying for my O-levels, my school suggested I take an extra exam to further reduce the amount of free time I had to cause trouble. It was a new topic, Science in Society, which required me to answer questions based on a 1971 report entitled Limits to Growth.

This report predicted, among other things, that the world would run out of oil within 10 years. Later, in my first job as a stockbroker, I analysed oil exploration companies and learned they weren’t worried about oil wells running dry — they just didn’t waste money on production projections beyond a decade.

While this made me sceptical of “we’re all going to die tomorrow” scientists, I’ve never been a climate-change denier. I could see for myself global warming happening 15 years ago, when spoonbills began nesting in Norfolk.

A decade ago, the case for governments to support renewable energy sources was clear. Fossil fuels were bad for the environment and depleting, they were often sourced from countries with dubious governments and had prices that were prone to sharp fluctuations.

So my funds invested in wind farm operators such as Denmark’s Ørsted and solar companies such as First Solar, in the US. Between 2016 and 2020 these stocks performed excellently.

At COP26 the Glasgow Financial Alliance for Net Zero was launched, with Mark Carney as its co-chair. How things change. It’s hard to find a better illustration of the demise of net zero than seeing Carney a few months ago, as prime minister of Canada, supporting the Canadian oil-sands industry.

Fund management houses have made a similar about-turn, as share prices in the sector’s poster-child investments have generally collapsed. Ørsted shares peaked at DKr720 five years ago and are DKr118 today; sustainable energy rival Vestas has fallen from DKr298 to DKr170 over a similar period.

Claims by fund managers that their investment decisions would make a meaningful difference to atmospheric carbon levels were always exaggerated (there was a lot of “every little helps” going on). Furthermore, the rate at which fossil fuels are substituted depends rather more on their price than government edicts — and the current low oil price means there is no commercial rush to build more renewables.

But at its height, net zero bore all the classic bubble hallmarks: the wild over-investment and the all-pervading fear of missing out (the oil majors throwing money at offshore wind licences marked the top) as well as rising debt finance (Ørsted debt trebled in five years).

Net zero was a political project and never a way to construct a portfolio, but this doesn’t mean the investment case for net zero companies is dead.

While many governments and investment firms try to bury overblown past statements, the climate continues to evolve. The UK had its hottest year on record last year and the world continued a run of high temperatures — though we now move into a La Niña period of cooling ocean temperatures.

So where does that leave investors? If Carney was right when he spoke at Davos last week, and countries have to become more self-sufficient, cost-effective renewables will be promoted. Expect energy sources that pollute to see higher charges and fines. This means environmental factors should remain part of your fundamental analysis of stock risk. Governance too — in which governments respect shareholder rights. China is edging up from a low and the US declining from its peak.

The main wreckage from the net zero bubble bursting was in the wind sector and I don’t see it enjoying a renaissance. The windiest spots are arguably already being farmed in many places, so growth opportunities are limited.

Solar is different. The efficiency of solar panels continues to improve. First Solar shares bucked the trend of the net zero retreat, rising from around $100 five years ago to $243 today. The company manufactures within the US, so it’s protected by US tariffs on Chinese panels. The efficiency of its panels has risen from the mid-teens a decade ago to 20 per cent today, and last year it unveiled a panel — based on new copper indium gallium selenide technology — with 23.6 per cent efficiency. At these efficiency levels, solar is cheaper than grid electricity in many locations. The UK government’s Warm Homes initiative, which aims to offer low-income households free solar panels, makes sense in this light.

We do not invest in First Solar at the moment as it was a major beneficiary of Biden era tax relief for renewable companies, which made valuation tricky.

We do, however, invest in the companies that benefit from ever-rising demands on the electricity grid. We hold electrical engineers Schneider and Siemens, which are involved in energy generation, storage, transmission and efficiency.

The political priority may now be ensuring secure energy supply rather than reducing atmospheric carbon, but there is some good news on that front. When the net zero investing bubble peaked, China was not aligned with the COP timetable, which made western efforts to reduce emissions seem futile. In recent years, Beijing has accelerated its own plans; also India launches its internal emission trading market this year.

None of these initiatives will satisfy the carbon scientists and it is likely that both atmospheric carbon and average temperatures will continue to rise over the next few years. Doubtless the doomsters will continue to predict doom. I’ll expect to see more bee-eaters in Norfolk, maybe even the odd hoopoe.

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