Are oil stocks too good for ESG investors to pass up?
Iran Slav, an author for Oilprice.com with over a decade of experience in the oil and gas industry. Originally posted on Oilprice.com.
“We know that the transition will not be a straight line. Different countries and industries will move at different speeds, and oil and gas will play a vital role in meeting global energy needs along the way.”
This was announced by BlackRock CEO Larry Fink. wrote in the annual letter to shareholders for that year. For such an ardent supporter of the energy transition, Fink’s recognition of the vital role that oil and gas will continue to play in the functioning of the world might at any other time be surprising.
However, this came amid a wave of changing sentiment in the investment world. And this change is driving investors back from ESG stocks to oil and gas.
Last year, Vanguard, a BlackRock colleague, withdrew from its zero-balance banking alliance — the Net Zero Asset Managers initiative — saying it needed more clarity and independence about its environmental, social and governance commitments to customers.
Also last year, global lenders including JP Morgan, Bank of America and Morgan Stanley warned they would leave the UN-backed zero net profit initiative for the financial sector – the Glasgow Net Zero Financial Alliance – because their membership may end. violation of US antitrust laws.
To be fair, the latest warning comes as a result of political opposition to ESG investments in the US. Conservative states have targeted asset managers and banks that have been vocal about their ESG plans, which, by definition, would include reducing their exposure to oil and gas. Since oil and gas are vital sources of income for many of these states, the idea of such risk reduction did not sit well.
However, this is not just a political protest. Investors themselves are starting to question their commitment to investing in ESG. Because while Larry Fink and his colleagues continue to reaffirm their commitment to zero balance and transition, they see very well how oil and gas reserves have changed over the past two years.
Energy stocks are up a total of 135 percent over 2021 and 2022, analysts say, and could rise another 22 percent this year. quoted from Bloomberg. This spike compares to the not-so-impressive 5% gain in the S&P 500 over a two-year period.
With such a gap between the returns of energy stocks and the wider market, it is not surprising that investors, previously committed exclusively to what is advertised as the only ethical and responsible form of investment, are now changing their attitude.
As Bloomberg reported this week, Rockefeller Capital Management has a 6 percent energy weight despite its commitment to investing in ESG. The report notes that the company’s energy weight is higher than that of the S&P 500, where energy stocks make up 4.8% of the total.
Meanwhile, Rockefeller Asset Management clients have increased their total oil and gas holdings by buying shares in Exxon, Chevron, Petrobras, Diamond Energy and every other public oil and gas company, regardless of size.
It goes without saying that the excellent performance of oil and gas stocks over the past two years has been one of the main reasons investors are turning their attention back to them. Another reason is emergency doubts and concerns about the profitability of investments in ESG.
Refunds have been questioned, as have the sustainability of companies touting ESG-friendliness. Not everyone is convinced that investing in ESG is the only sure way to a future world of profit. Not everyone seems even sure what ESG really is amid a heated debate about ESG investments in the US. And that can lead to lawsuits.
According to this report in the Responsible Investor, the debate could spark a wave of litigation as investors seek to clarify the nature of ESG or seek compensation for bad decisions made by their financial advisors based on ESG.
This development is likely to further compromise the concept of ESG – financial advisors are not fans of litigation and may start to think twice before advertising certain investments as ESG and as profitable when they are not. indicated To critics.
“I think our industry is going through a period where consumers of these products can benefit from more clarification,” Chief Marketing Officer of Parnassus Investments told Bloomberg. The firm has no oil and gas holdings, but pressure is mounting on the industry to rethink its decision.
“ESG funds pay a higher expense ratio. If you start showing a negative tracking error because you don’t have energy, you will close the fund at some point,” accounting and auditing professor Shivaram Rajgopal of Columbia Business School told Bloomberg.
In other words, if you are only delivering half of what you promised (sustainable investment) but not delivering the other half (profit), the most natural thing for investors to do would be to push for changes that will fix the situation. Because investing is not charity. This is an activity aimed at making a profit.