Staking Energy and ESG Positions

What’s driving ESG investment?

Graphic of man balancing symbols for oil and gas in one hand and renewable energy in the other
Source: Getty Images.

When Total announced that it was joining Shell and European counterparts BP, Eni, Equinor, and Repsol in setting ambitious climate targets and mid-century greenhouse gas emissions goals despite a drop in profits brought on by COVID-19’s decimation of fuel demand, the company’s shares immediately rose 6%—almost three times the gain in France’s benchmark index.

Conversely, at its 2020 annual shareholders’ meeting on 27 May, ExxonMobil dismissed the idea of setting a date by which it will sharply reduce its contributions to climate change, with Darren Woods, the company’s chairman and chief executive, telling investors that it is up to consumers and elected officials rather than individual corporations to set target dates for cutting greenhouse gas emissions. On the same day, Chevron, the second-largest US oil company, was compelled by its investors to issue a report on its climate lobbying in a vote that was cited as a win by shareholders who have long argued for more transparency from the company. Yet, other shareholder proposals calling for greater accountability and transparency from both companies were defeated.

ExxonMobil’s position—and, to a lesser extent, that of Chevron, which has not set a date by which it will cut emissions but has tied executive and employee pay to reducing methane and excess gas burned by 2023—prompted negative comparisons with European majors and rebukes from investors, including Black Rock, the world’s second-largest asset manager and one of Exxon’s biggest shareholders.    

Black Rock cast votes during the 27 May meeting in favor of splitting the CEO and chairman roles and against the reelection of members of the board of directors because of how the company manages the risks of climate change.

“Our approach to investment stewardship is grounded in an expectation that the board will oversee and advise management, influencing management’s approach to key business issues,” Black Rock’s investment stewardship group wrote in a voting bulletin.the bulletin stated.

“When effective corporate governance is lacking, we believe that voting against the re-election of the responsible directors is often the most impactful action a shareholder can take. The directors in the boardroom, the independence of their voices, and the value of their collective experience are meaningful determinants of their ability to provide direction and leadership to management and to oversee and drive management’s performance,” the firm wrote.

ESG and the Delicate Balance of Value and Values

The recent announcements by oil and gas majors in the US and Europe, and the reactions to them, highlight the growing pressures to back investments that not only provide financial value but also reflect investors’ human values. This is the concept behind environmental, social, and governance (ESG) investing. ESG is based on the notion that ESG issues such as climate change, human rights, and executive compensation can affect the performance of investment portfolios and should be considered alongside more traditional financial factors in making investment decisions.

Companies with higher ESG ratings are presumed to be better prepared to deal with both anticipated and unexpected large-scale risks, according to Bloomberg, who said that proper governance should have some impact on how well a company might cope with disruptions.

Investment firms in the US, EU, and other markets now offer exchange-traded funds and other financial products that follow ESG criteria. Financial services companies track performance and publish annual reports that provide extensive reviews of their ESG approaches and bottom-line results.

Commodities traders are accelerating their funding of renewable energy projects as demand pivots from fossil fuels toward cleaner sources of sustainable power. Trafigura Group, the world’s second-largest independent oil trader, is planning an increase in renewable energy investments over the next half-decade. The group wants to add 2 GW of renewable energy assets to its portfolio by 2027, up from about 350 MW now, according to a brochure published by the Singapore-based trading house. Trafigura took an equity stake last year in Hy2gen AG, a German startup working on green hydrogen production. Pash Global, a renewables investment vehicle majority owned by Trafigura, bought a 49.9% stake in a solar farm project in Mali in January. Vitol Group, the largest independent energy trader, is also investing in renewables projects including wind farms, solar, and a carbon capture project linked to a power plant it controls in the UK.

What Lies Ahead?

  • “The latest front in the war against drilling for oil in Alaska’s rugged wildlife refuge isn’t Washington—it’s Wall Street,” said Bloomberg in a recent article that described how activists trying to keep rigs out of the Arctic National Wildlife Refuge are now focused on choking off the flow of money needed to exploit the reserve.
  • Amid talks of a fourth stimulus package to support markets affected by the coronavirus pandemic, global research company Morning Consult asked registered US voters whether they would support the federal government bailing out renewable energy and the oil and gas sectors.
    • 38% of voters supported a bailout for the oil and gas industry.
    • 54% backed for a renewables industry bailout.
    • Republicans were nearly as supportive of a renewables bailout (49%) as they were of an oil and gas bailout (51%).
  • “Develop a workforce strategy that leverages [the above] into restoring oil and gas as an attractive destination for younger talent concerned about the ESG footprint and stranded asset risk of the industry,” suggested McKinsey.

BlackRock’s Larry Fink may have summarized the situation best. “Most investors are not going to abandon hydrocarbons, but they want a portfolio that will be more persistent in a more sustainable way. If it’s possible to score how every company is doing, investors are going to look to us to be actively investing and searching for a better portfolio composition with higher sustainability or ESG scores.”