By Irana Slav, a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. Originally published at 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 demands through that journey.”
This is what BlackRock’s chief executive, Larry Fink, wrote in this year’s annual letter to shareholders. For such a fervent supporter of the energy transition, Fink’s admission of the vital role that oil and gas would continue to play in the world’s functioning may have been surprising at any other time.
Yet it came amid a wave of changing sentiment in the investment world. And this change is seeing investors rush back from ESG stocks to oil and gas.
Last year, BlackRock’s peer Vanguard quit a net-zero banking alliance—the Net Zero Asset Managers initiative—claiming it needed more clarity and independence concerning its environmental, social, and governance commitments to clients.
Also last year, global lenders including JP Morgan, Bank of America, and Morgan Stanley warned they would leave a UN-backed net-zero initiative for the financial sector—the Glasgow Financial Alliance for Net Zero—because their membership in it could end up violating U.S. antitrust legislation.
In fairness, the latter warning came as a result of a political pushback against ESG investing in the US. Conservative states targeted asset managers and banks that were making loud proclamations about their ESG plans that, by definition, would include reducing their exposure to oil and gas. Since for many of these states oil and gas are vital revenue contributors, the idea of such reduced exposure did not sit well.
Yet it’s not just a political pushback. Investors themselves are beginning to be in two minds about their dedication to ESG investments. Because while Larry Fink and his peers continue to reiterate their commitment to net zero and the transition, they are seeing very well where oil and gas stocks have moved over the past two years.
Energy stocks gained a total of 135 percent over 2021 and 2022 and are on track to add another 22 percent this year, according to analysts cited by Bloomberg. This surge compares with a not-so-impressive 5-percent gain for the S&P 500 over the two-year period.
With such a gap between energy stock performance and the broader market, it is not really surprising that investors previously committed exclusively to what is being advertised pretty much as the only ethical, responsible form of investment are now changing their attitudes.
Rockefeller Capital Management, Bloomberg reported this week, has a 6-percent energy weighting despite its dedication to ESG investing. The firm’s energy weighting is larger than the S&P 500’s, where energy stocks represent 4.8 percent of the total, the report notes.
Clients at Rockefeller’s wealth management unit, meanwhile, have boosted their combined holdings in the oil and gas industry, buying stocks in Exxon, Chevron, Petrobras, Diamond Energy, and all other public oil and gas companies regardless of size.
It’s self-evident that the excellent performance of oil and gas stocks during the last two years was one big reason why investors are once again paying attention to them. Another reason is the emergence of doubts and misgivings about the profitability of ESG investments.
Returns have been called into question, as have the green credentials of companies advertising as ESG-friendly. Not everyone is convinced that ESG investing is the only true path to the future world of profits. Not everyone appears to even be sure what ESG actually is amid the heated debate about ESG investing in the U.S. And this may lead to lawsuits.
According to this report in Responsible Investor, the debate could unleash a wave of litigation as investors seek clarity about the nature of ESG or seek to get compensation for unprofitable decisions made by their financial advisers on ESG grounds.
Such a development would likely compromise ESG as a concept further—financial advisers are not fans of litigation and might begin to think twice before advertising this or that investment as both ESG and profitable when it isn’t, as pointed out by critics.
“I think that our industry is going through a time where the consumers of these products could benefit from additional clarification,” the chief marketing officer of Parnassus Investments told Bloomberg. The firm has no oil and gas holdings, but pressure on the industry to reconsider has been growing.
“ESG funds pay a higher expense ratio. If you start showing a negative tracking error because you don’t hold energy, you’re going to close down the fund at some point,” accounting and auditing professor Shivaram Rajgopal from the Columbia Business School told Bloomberg.
In other words, if you’re only delivering on half of the promise—sustainable investment—but not on the other half—profits—the most natural thing for investors would be to insist on changes that rectify the situation. Because investing is not charity. It is an activity seeking a profit.
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“Are Oil Stocks Too Good For ESG Investors To Pass Up?”
Absolutely not.
“In other words, if you’re only delivering on half of the promise—sustainable investment—but not on the other half—profits—the most natural thing for investors would be to insist on changes that rectify the situation. Because investing is not charity. It is an activity seeking a profit.”
So make a profit while moving away from fossil fuels.
Fossil fuels only appear cheap because their environmental damage is not reflected in the price. So pass a Carbon Tax to internalize that externality, as California has done.
https://www.c2es.org/content/california-cap-and-trade/
Market prices are not gods.
Cap and Trade is not a tax. It is financialization of emissions within an exchange to monetize emission credits. No doubt the likely suspects are players in the emissions credit scheme. In other words, a state sanctioned CO2 casino.
The c2es.org link states “allowance auctions have generated $12.5 billion in revenues since the start of the program” [2015-2019, 2020 report] which is unimpressive over 5 years, to say the least. It says “In total, about 450 businesses that are responsible for around 85 percent of California’s total greenhouse gas emissions must comply”, but is contradicted by the 25,000 ton CO2 emissions by a business to be included in the system. The pie chart graph makes clear the largest component of CO2 is transport and obviously the vast majority is (28%) private automobiles and 6% for residences.
Directly taxing emissions is a whole other matter and creates different incentives. Doubling or tripling gasoline prices would change behaviors, but that aint gonna happen. But, as Yves pointed out in a recent post, CO2 taxation is not enough to reduce emissions before a tipping point.
Nibbling at the margins with $2B in emission auction revenue is worse than pathetic.
Our former party’s mandate to rebuild their collapsed FRACKING, cracking & bitumen pyramid, by cutting competition (Rooski gas pipelines & tankers), forever wars, coups & a bunch of methane spewing “bridge fuel” BS, at home (eg: conversion of NYC apartment boilers to fracked PA gas) seemed as pressing as killing off Bernie’s M4A, $15/hr, BLM programs & crushing Asian & EU AGW mitigation for their multinational oilgarch pals?
ESG is rubbish. Elite virtue signaling which has taken on the characteristics of religion. Greta Tunberg as the little saint who receives a vision.
CO2 is plant food. The real problem is plastics and chemicals which are unraveling the very fabric of our living planet.
My basic rule is that if something is being promoted by the NY Times, it is dangerous rubbish that is designed to enrich the elites and impoverish the citizenry. Or kill them off…..the common people are expendable to the overlords, who if they do not hate them, hold them in utter contempt.
My book includes O&G – why not? I drive a car, how can I do otherwise? The rot is systematic. The empire is in decline. Humanity will survive but it would be interesting to see what humans look like in 200 generations…..
Oil won’t perform well in recession nor will green energy without massive subsidized revenue. If Tesla sells a million cars at 7500 dollar credit that is 7.5 billion. Hell the post office only cost us 2.98 billion last year for some comparison. Bonus Tesla gets a 50 times multiple on that 7.5 billion in equity valuation. Good grief this countries financial system is a joke. And you wonder why banks are failing.
It’s the value system. The value system is at odds with itself. There should be no question with the value of ESG investments. There is nothing more valuable. But we are stuck in a crazy irrational mindset that prevents natural value from being realized. If our sovereign currency – the token we use as a promise to pay – were anchored in the obvious values of environmental, social and government accomplishments, then profits would reflect it and the entire system would function by constructive activity instead of all the ill-gotten private profits – still symbolized by our sovereign currency – which are invested to make more profits at the expense of the society and the environment. Does anybody else see this as a fundamental disconnect? There is no free lunch in existence – the entire buffet is from dear old Mother Earth.
The article does a weird thing – likely knowing that almost all (including Net Zero Alliance signatories) FI’s have investments in fossils, don’t have explicit policies to divest, few have announced such, can’t for reasons, and also that the Net Zero initiative isn’t explicitly about divestment (yet), it points to a handful of companies with ESG policies that have boosted rather than divested from fossils as an argument that ESG has failed because profitmongering, or perhaps capitalism?
Yeah, capitalism is bad but I don’t recall Blackrock ever saying they intend to divest from fossils? Didn’t they do quite the opposite, emphasize they will NOT divest? Did they perhaps instead have policies in place to assess and manage these risky investments? Is the author confusing ESG as risk management with commitment to divest from fossils?
And that there is some greenwashing and virtue signalling is not a proper argument against ESG, it’s an argument against greenwashing and virtue signalling.
To assess ESG, assess what is the concise goal and methodology behind a given ESG policy, what does it purport to measure, why, is it a good measure, does it achieve the purpose? And what is the precise goal and methodology for each company since each company has devised their own? And if you want to get even more granular, how does a company with ESG strategy operationalize it and has that been effective against the stated goals?
Companies adopting ESG policies don’t (usually) declare the purpose of such is to divest from fossils. For all sorts of reasons they can’t, are prevented.
From what I’ve seen, the E for most translates into strategy and policy as “how do we as a financial institution or corporation measure and protect ourselves against the risks inherent in negative environmental impact.” Unfortunately, I think the public doesn’t have the inside discussion, policy and operational view, only sees the vague positive sounding public statements on company websites, the greenwashing, the PR spin.
Higher risk and negative impact is a dominant and unavoidable aspect of the oil, gas, coal, tarsands and chemical industries, more so than most industries. Given this, how do you evaluate, measure and protect against financing that risk? That has been the question for most companies trying to forumlate the E in ESG.
These sectors eventually *will* need to be drawn down and divested from. At this very moment, however, divestment is NOT what the ESG tool is about, not what it’s intended for.
And at this point if a company did not have ESG policies in place they wouldn’t be in my go long porfolio, and this without even considering the divestment question. Companies have ESG in place *because* investors and clients demand it, they can’t not have it, and not because of Greta or wokeness, rather because environmental concerns are valid.
The number one target for the ESG crowd should be US and their proxy’s wars. All the greenhouse gas pumped from the MIC in so many countries happens for only one reason: Profit for MIC and its banksters.
I’m not sure how the market is going to be the driver of a transition from petroleum. The only thing that affects that kind of change is direct state intervention and investment. But that goes against our religion so it can’t be done.
it’s a little late for anyone to be getting into oil…the time to buy was when Exxon’s dividends were yielding 12% because everyone thought the end was near..
I invest because I think it is more ethical to make more money with your own money than it is to just let the bank loan it out while it is parked in your account. That being said, this entire system is evil because it forces good people to do bad things for a living. You should just give up on ethical investing. If the company has a stock ticker it does evil shit. Don’t hate the player. Hate the game.