- Major energy companies, like ConocoPhillips (COP), Chevron (CVX), and ExxonMobil (XOM), are integral to meeting ESG investing goals.
- Bullish on ESG ETFs that invest in energy companies, such as BlackRock’s ESGU and State Street’s EFIV.
- Oil and natural gas companies are developing the cutting-edge clean technology that will both reward investors and power our energy transition.
- Frivolous climate lawsuits undermine ESG investment opportunities and investor confidence.
Investing using environmental, social, and governance metrics has undoubtedly grown in popularity – and profitability. What is often overlooked, however, is how energy companies fit into the ESG mix. While some believe that investing in ESG funds means shunning conventional energy companies (i.e., oil and natural gas), that exclusionary mindset misses the mark in two ways. One, ESG funds do in fact invest in these energy companies, and for good reason. Two, there is no way to achieve major ESG goals, such as reducing carbon emissions and transitioning to a cleaner energy blend, without the technology, capital, and experience oil and gas companies possess. Investors should factor in both concepts when evaluating their impact investing strategies.
As the Wall Street Journal has noted, eight of the 10 largest sustainable funds in the U.S. are invested in oil and gas companies. The Financial Times points out that a third of climate funds sold in the UK are invested in oil and gas companies. Why is this? The managers of these funds know that not only will these companies continue to perform well, but also they are needed to help us cross the bridge to a greener future. A third, more strategic reason is offered in a quotation further down the page. This potential mismatch – between green investor expectations and reality – is something the savvy investor will appreciate.
For ESG investing, I like two funds in particular. The first is BlackRock’s iShares ESG Aware MSCI USA ETF (NASDAQ:ESGU). The fund currently has a one-year total return of 35.21%. Its three-year return registers a solid 15.79%. As alluded to above, it should not surprise investors that this ETF holds ConocoPhillips (NYSE:COP), Chevron (NYSE:CVX), and ExxonMobil (NYSE:XOM), as well as oil field operators Schlumberger (NYSE:SLB) and Baker Hughes (NYSE:BKR). ESGU holds a combined stake in these five companies (as of March 22) worth $269,588,770.
The second that I believe is poised for sustained performance is State Street’s SPDR S&P 500 ESG ETF (NYSEARCA:EFIV). As the chart below demonstrates, EFIV has performed well over the past six months, up 17.65%.
Unsurprisingly, EFIV also counts 12 conventional energy companies among its holdings. It has stakes in the same oil producers ESGU does, namely COP, CVX, and XOM. And the fund also is invested in midstream (OKE), pipelines (KMI), and oil field services (HAL). In sum, my view here when it comes to ESG funds is well summarized by Dustyn Lanz, CEO of the Responsible Investment Association. He writes in Investment Executive, “From an investment perspective, a fund manager may take the view that there is a higher probability of generating positive environmental impacts by taking a stake in a leading energy company and engaging with its management to reduce emissions and improve its environmental practices more broadly.”
On to the theme of meeting ESG goals, energy companies are investing heavily in cutting-edge technologies. While battery start-ups and solar farms are very much needed, it is major oil and gas firms who bring the commercial know-how, significant financial resources, and engineering expertise on the scale we need to address our climate challenges. A few examples are worth noting for investors in the energy sector. COP’s Technology Exploitation group is both advancing new technologies and finding ways to deploy existing technologies in new and better ways. The group also “manages direct investment and provides business development expertise to small, external startups,” which, as an investor in small and medium enterprises, resonates with me. COP does this through Energy Technology Ventures, a joint venture it has with General Electric (NYSE:GE) and NRG Energy (NYSE:NRG).
For its part, CVX is making waves in renewable natural gas (RNG). The company signed an agreement with Waste Management (NYSE:WM) to purchase gas produced by WM and ensure supply to WM’s trucks. RNG produced from processed landfill gas powers more than 33% of the company’s natural gas trucks. Randy Beck, senior director of renewable energy at WM, stated, “Chevron is a legacy supporter of our renewable natural gas program and recently increased that support by partnering with WM Renewable Energy to purchase the RNG produced at our American landfills.”
Finally, over the past 40 years, XOM’s climate efforts have resulted in close to 300 patents for cutting-edge technological advances in emissions reductions and other applications. After establishing itself years ago as a global leader in advanced biofuels with groundbreaking algae applications, the company is now focused on second generation biofuels. These are defined as “those produced from non-edible crops, crop residues or biologically generated gas and therefore do not take away from the total food or fresh water supply.” These biofuels have 50% lower life cycle greenhouse gas emissions than fuel derived from oil.
Unfortunately, frivolous climate change litigation threatens ESG investing initiatives, as well as the industry’s technological breakthroughs. These lawsuits, launched by states and localities, are material considerations for investors. Pursuing action in the nation’s courts is counterproductive to meeting environmental goals, and it disparages and undermines the investment opportunities mentioned above. One such example is BP P.L.C. v. Mayor and City Council of Baltimore, in which the Maryland city sued 26 oil and gas companies, claiming they are partly responsible for climate change. The case made it all the way to the U.S. Supreme Court for oral arguments back in January. It is not worth discussing the case here, as it has no merit in my mind. But it is worth noting that, according to a nationwide poll conducted by the Manufacturers’ Accountability Project, 50% of those surveyed strongly agree that we need innovative solutions to climate change, not blaming one industry for a problem to which all have contributed.
MarketWatch columnist Debbie Carlson perhaps put it best with her January headline, “If you support green energy, you should buy utilities and oil stocks.” It is hoped that more ESG funds take an inclusionary, not exclusionary, position on energy companies. Their shareholders will thank them in the long-term. More importantly, if we are to take seriously the extraordinarily complex environmental issues we are facing, than the breakthrough technologies being developed by energy companies cannot be discounted. Investors, moreover, cannot afford to ignore this reality.
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