In the wake of geopolitical shifts, particularly following Russia’s extensive invasion of Ukraine, many fund managers who prioritize missions are reassessing their strategies. A recent commentary from an analyst at Goldman Sachs indicates that it’s time for investors focused on sustainability to reconsider their stance on oil and gas firms. This reassessment comes as major European energy corporations have reduced their investments in renewable energy and instead concentrated on fossil fuel ventures to enhance immediate returns for shareholders.
Investments that emphasize environmental, social, and governance (ESG) factors typically favor companies that excel in various criteria, including those related to climate change, human rights, and corporate accountability. Traditionally, industries such as tobacco, fossil fuels, and arms manufacturing have been excluded from these sustainable investment portfolios.
Shifting Perspectives on Oil and Gas
Michele Della Vigna, who leads EMEA natural resources research at Goldman Sachs, shared insights via a video call with CNBC, suggesting that the changing attitudes towards defense companies due to the ongoing conflict in Ukraine should similarly apply to oil and gas ownership. He pointed out that the reluctance to invest in energy majors stems from a “significant error” in how European investors perceive the energy transition—a viewpoint he anticipates will evolve.
Della Vigna highlighted the urgent environmental challenges we face, such as unprecedented heat levels, increasing greenhouse gas emissions, and rising sea levels, questioning the wisdom of further reliance on fossil fuels. He noted that most ESG investors would likely oppose such a direction.
Rethinking the Energy Transition Timeline
The Goldman analyst presented three key arguments for why ESG investors might need to reconsider their exclusion of oil and gas stocks. First, he emphasized that the transition to sustainable energy sources will take longer than many expect, projecting peak oil demand to occur in the mid-2030s and peak gas demand in the 2050s. He asserted that new oil and gas projects will still be necessary into the 2040s. If new developments are essential, he questioned why investors would shy away from these companies.
Meanwhile, the International Energy Agency projects that fossil fuel demand will peak by the end of this decade, cautioning that new oil and gas projects are unnecessary to meet global energy needs while achieving net-zero emissions by 2050.
Investment in Low-Carbon Energy
Della Vigna’s second point emphasized that oil and gas companies are leading investors in low-carbon energy initiatives globally. He argued that disengaging from these stocks would hinder the progress of the energy transition. Unlike utility companies, which he described as infrastructure-oriented, oil and gas firms play critical roles as “market makers” and “risk-takers.” He pointed out that their financial strength and willingness to take risks are vital for the transition to affordable energy, especially in developing markets, where energy poverty remains an unacceptable outcome in any ESG framework.
He concluded by asserting that energy firms that are at the forefront of the transition should be integral to ESG funds rather than being targets for divestment.
Divided Opinions on Oil and Gas in ESG Portfolios
Not everyone is on board with the idea of including oil and gas stocks within ESG-focused portfolios. Ida Kassa Johannesen, head of commercial ESG at Saxo Bank, expressed skepticism during her video call with CNBC, arguing that the comparison between defense stocks and oil and gas is overly simplistic. She highlighted the negative consequences associated with fossil fuel use, noting the current climate crisis marked by record temperatures and rising greenhouse gas emissions, questioning the rationale behind increasing fossil fuel reliance.
Scientific consensus emphasizes the need for urgent reductions in greenhouse gas emissions to prevent further temperature increases, especially as 2024 has already been recorded as the hottest year in human history. The climate emergency, primarily driven by fossil fuel combustion, underscores the urgency of transitioning to renewable energy sources.
Allen Good, a senior stock analyst at Morningstar focusing on the oil and gas sector, noted the challenges in achieving widespread acceptance of oil and gas within ESG frameworks. However, he acknowledged a potential for a more lenient stance from investors if energy companies significantly ramp up their investments in renewable and low-carbon technologies.
Good articulated that the essence of ESG investments revolves around climate change and energy transitions. While he sees the possibility of a gradual acceptance of companies that commit to investing in renewable energy, he remains doubtful about major players like Exxon or Chevron gaining entry into ESG portfolios anytime soon.
