Even ESG funds are now buying big oil stocks

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After years of shunning and demonizing the oil and gas industry as the main culprit of rising global temperatures, some investors are now turning to the sector as they realize that international majors will have a role to play in the energy transition . Years of underinvestment in new supplies, the energy crisis and the Russian invasion of Ukraine have highlighted energy security and accessibility. As Europe strives to avoid gas and energy rationing in three months, some investors have realized that oil and gas companies that invest in clean energy technologies should not be immediately dismissed as unsuitable for their environmental, social and governance (ESG) criteria and portfolios.

Recent analysis suggests that some ESG funds are now including traditional energy stocks in their portfolios, something unimaginable just two years ago.

But over the past two years, international oil and gas majors have pledged to become net-zero energy companies by 2050 and have spurred investment and participation in numerous wind, solar, hydrogen projects. , carbon capture and offshore electric vehicle charging.

Of course, environmental zealots continue to accuse Big Oil of greenwashing as usual.

Yet it is Big Oil, with its deep pockets, lofty credit ratings and record cash flow this year, that could be the difference in an orderly energy transition, in which the growth of clean energy sources is not does not prevent the supply of oil and gas which the world needs now.

Energy greatly outperforms the market

Due to high oil and gas prices following the Russian invasion of Ukraine and growing concerns about energy security, energy has been the best performing sector in the S&P 500 index since the beginning of the year. Not only is energy the biggest winner, but it’s also the only sector with gains so far this year, according to market data compiled by Yardeni Research. The S&P 500 energy sector had gained 26.5% year-to-date through July 18. By comparison, the S&P 500 is down 19.6%, and all other sectors have also lost ground since January.

Within the energy sector, the integrated oil and gas subsector has jumped 34.4% year-to-date, and oil and gas refining and marketing has jumped 29.4%. %.

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Meanwhile, U.S. ESG-focused mutual funds saw the first net fund outflows since December 2018 in May, according to Morningstar. to researchdue to deteriorating equity market conditions amid growing recession fears.

“We happen to have had a very nice five-year period for investors who have focused on sustainability. But in the last six months we have been in a period where that is not the case,” said Paul Arnold, portfolio manager and co-head of asset allocation strategies at Morningstar Investment Management. the morning starcommenting on a tough quarter for sustainable investing.

European ESG funds now own shares of oil majors

In Europe, ESG-focused funds have slowly started to favor traditional energy stocks, fund managers say. FinancialTimes.

Investors have found that many majors are seriously considering investing in clean energy technologies.

“Sentiment is definitely shifting in favor of energy companies, even among investors who thought they would never want to be involved in the sector,” Mark Lacey, senior head of ISF Global Energy and Energy Transition strategies at Schroders, told FT.

A Bank of America analysis recently showed that 6% of Europe’s 1,200 active and passive ESG funds currently hold shares in supermajor Shell. At the end of 2021, this percentage was zero. ESG-focused European funds have also slightly increased their holdings in other European energy companies such as Repsol, Galp, Neste and Aker BP, according to BofA data cited by FT.

“Energy was the most underweight sector by ESG [environmental/social/governance] funds since last year, due to its [supposedly] ‘bad’ ESG profile,” BofA analysts said last month, as reported by The street. US supermajor Chevron, for example, is on a BofA list of energy stocks with high “buy” ratings and BofA ESG Meter scores, but underweight ESG funds.

The ESG trend is here to stay – investors will never stop demanding accountability and reduced greenhouse gas emissions. But they might start to accept that the energy transition will take decades and that “Big Bad Oil” is doing some things right in that transition. For example, meeting today’s acute needs for oil and gas amid soaring energy prices and growing concerns about energy security in places few thought would have to resort to energy rationing. Germany, Europe’s largest economy, could be one of those countries three months from now.

International oil and gas majors are also increasingly investing in cleaner energy solutions. In the past month alone, Shell said it would start building Europe’s largest renewable hydrogen plant, while BP announcement it would become the operator of one of the world’s largest renewable energy and green hydrogen centers, based in Western Australia.

By Tsvetana Paraskova for Oilprice.com

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