“We know 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 along this journey.”
So wrote BlackRock chief executive Larry Fink in this year’s annual letter to shareholders. For such a strong supporter of the energy transition, Fink’s admission of the vital role that oil and gas would continue to play in the functioning of the world might have come as a surprise at any other time.
Yet it came amid a wave of shifting sentiment in the investment world. And this change sees investors rushing from ESG stocks to oil and gas.
Last year, BlackRock’s counterpart Vanguard left a net zero banking alliance – the Net Zero Asset Managers initiative – saying it needed more clarity and independence about its environmental, social and governance towards its 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 could end up violating US antitrust laws.
In fairness, this latest warning came in the wake of a political pushback against ESG investing in the US. Conservative states have targeted asset managers and banks that loudly proclaim their ESG plans which, by definition, would include reducing their exposure to oil and gas. Since for many of these states, oil and gas are essential sources of revenue, the idea of such reduced exposure has not been well received.
Yet this is not just a political setback. Investors themselves are beginning to be divided about their commitment to ESG investing. Because if Larry Fink and his peers continue to reiterate their commitment to net zero and the transition, they see very well where oil and gas stocks have evolved over the past two years.
Energy stocks have gained a total of 135% over 2021 and 2022 and are on track to add another 22% this year, according to analysts cited by Bloomberg. This surge compares to a not-so-impressive 5% gain for the S&P 500 over the two-year period.
With such a gap between the performance of energy stocks and the broader market, it’s hardly surprising that investors who previously focused exclusively on what is being touted as pretty much the only form of ethical and responsible investing are now changing their attitude.
Rockefeller Capital Management, Bloomberg reported this week, has a 6% energy weighting despite its dedication to ESG investing. The company’s energy weighting is higher than that of the S&P 500, where energy stocks make up 4.8% of the total, the report noted.
Clients of Rockefeller’s wealth management unit, meanwhile, increased their combined holdings in the oil and gas industry, buying shares of Exxon, Chevron, Petrobras, Diamond Energy and all the other companies public oil and gas companies, regardless of their size.
It stands to reason that the excellent performance of oil and gas stocks over the past two years has been one of the main reasons why investors are paying attention to them again. Another reason is the emergence of doubts and apprehensions about the profitability of ESG investments.
Returns have been questioned, as have the green credentials of companies that present themselves as ESG-friendly. Not everyone is convinced that ESG investing is the only real path to the future world of profits. Not everyone even seems sure what ESG really is amid the heated debate over ESG investing in the United States. And that can lead to lawsuits.
According to this report published in Responsible Investor, the debate could trigger a wave of litigation as investors seek to clarify the nature of ESG or seek compensation for unprofitable decisions made by their financial advisers on ESG grounds.
Such a development would likely undermine ESG as one more concept – financial advisers are not fans of litigation and might start to think twice before announcing such and such an investment as both ESG and profitable when it is not, as critics have pointed out.
“I think our industry is going through a period where consumers of these products could benefit from further clarification,” the chief marketing officer of Parnassus Investments told Bloomberg. The company has no oil and gas holdings, but pressure on the industry to reconsider has grown.
“ESG funds pay a higher expense ratio. If you start showing negative tracking error because you don’t hold energy, you’re going to close the fund at some point,” said the accounting professor and Shivaram Rajgopal of Columbia Business School. told Bloomberg.
In other words, if you are only realizing half of the promise of sustainable investing, but not half of the benefits, the most natural thing for investors would be to insist on changes that rectify the situation. Because investing is not charity. It is a for-profit activity.
By Irina Slav for Oilprice.com
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