Is the rocketing oil price making it difficult for ESG investors to stay away from fossil fuels?


With oil prices at multi-year highs, one may wonder whether any investors out there regret their exit from fossil fuels investments.

Brent has been changing hands for over US$82 per barrel since mid-October, while world leaders have begun discussing how to tackle climate change at COP26 in Glasgow.

READ: How newbie investors can sort out their ESG, according to Barclays Bank expert

The hydrocarbon sector is battling to stay relevant as most governments worldwide agree that we need to decarbonise our energy systems, but several stocks are enjoying a renaissance after years of underperformance.

BP PLC (LSE:BP.) and Royal Dutch Shell Plc, for example, have climbed 32% and 25% in the year to date, even if their recent trading updates have caused debate on their progress towards decarbonising activities.

Proactive has questioned experts across the board, showing that the situation is more nuanced than it might seem.

For example, while some ESG-focused investors refuse to hold stocks that don’t match their values (known as exclusions), others look at it as an opportunity to enforce change from the inside.

“Exclusions are counterproductive from an ESG perspective and that divestment campaigns have often achieved the exact opposite of what they are supposed to do. By divesting from fossil fuel companies, investors are not pushing the share price of these companies down, and the management of these companies has no longer an incentive to become more environmentally friendly, because the remaining investors don’t care about that,” Joachim Klement, analyst at Liberum, told Proactive.

“It is far better to invest in these companies and engage with management to change course like Engine No. 1 has done with Exxon, for example. That leads to actual change.”

However, he doesn’t think that ESG investors will find a renewed interest in the oil and gas sector as he deems the current price spike temporary, so buying at a high price now may result in a loss later.

With this global move to decarbonisation, investors may focus on projects that are expected to keep growing, such as renewables, battery storage, electric vehicles and green hydrogen.

“The recent volatility and nervousness in the oil and gas market only underscores the long-term benefit of sustainable investing and a move away from fossil fuels towards renewables and other low-carbon solutions,” commented Ray Dhirani, WWF’s head of sustainable finance.

According to Gabriela Herculano, chief executive and co-founder at iClima Earth (part of the HANetf funds), doing that would be the smart move as many oil and gas companies may find themselves with stranded assets in the near future.

“The oil and gas industry has not been investing into new fields. There is pressure on the industry not digging for more crude, natural gas or coal! That leads to shocks between supply and demand,” she said.

“The rotation to value this year was prompted by investors realizing that the fossil fuel names can generate cash flow out of the assets… Do you want to own Marathon Oil for the next ten years or do you want to own Tesla?”.

But there’s not just one type of ESG investor, noted Hargreaves Lansdown analyst Laura Hoy.

“For those who are impact investors, meaning they’re more concerned about making a difference than just earning a return, the oil and gas sector is likely off their radar regardless of oil prices,” she told Proactive.

“However, that’s not to say that all ESG-focused investors will shun the sector completely. Many may take a ‘best in class’ approach. This could vary depending on the criteria deemed most important, but it means investors will be looking for companies with a focus on sustainability within the sector.”

“It could be decades before our reliance on fossil fuels will be completely erased. That means there will always be a temptation to hold oil and gas stocks when oil prices are rising. But investors can look to companies’ sustainability initiatives to help them make more responsible choices, if that’s what’s important to them.”

For Youssef Darwich, co-founder at the parents investing app Hapi Plan, profit isn’t all for ESG investors, so they might resist the temptation to jump on a short-term trend that clashes with their values – such as rising oil prices.

“Non-ESG investors without a strong thesis may be tempted by this, or people trying to make quick gains,” he added.

“Traditional ‘investors’ tend to have longer timeframes and some investment criteria or thesis which they wouldn’t change that easily based on short-term market trends”.

Overall, it seems that sustainability-focused investors may be unlikely to jump on the bandwagon, unless they are planning to use their shareholder votes to enforce change.

With COP26 underway, the case for fossil fuels seems increasingly hard to make.


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