ESG investments face backlash like boomerangs against oil

Environmental, Social and Governance (ESG) investing has been touted as the mainstream investment style of the future – a future that is more responsible, but no less profitable. The promotion, however, went a little too far, sparking an equal and opposite backlash, aided by the fact that ESG investing did not turn out to be as profitable as it promised.

ESG funds saw exits for the first time in their history last year, and the trend has extended this year. This was hardly surprising given the performance of most ESG industries, i.e. wind and solar. Somewhat ironically, European investors have turned to defense stocks as an ESG investment despite the industry’s negative environmental impact. The argument put forward by governments promoting defense stocks is that defense producers are socially positive.

However, the most controversial issue in ESG investing has always been the traditional energy industry, also known as oil and gas. The backlash from ESG advocates is that oil and gas has no place in an ESG fund or ESG investment strategy. According to some, however, this complete denial of oil and gas was the single worst thing those advocates could do – for their own hopes and ambitions.

“There were all these idiots just saying, if somebody makes hydrocarbons, we’re going to make it available to them to do business or get capital,” hedge fund veteran Kyle Bass told Bloomberg this week. Apparently not one to mince words, Bass also said, “And so Texas stepped back and said, if you want to make somebody who produces hydrocarbons, we’re not going to do business with you either.” .

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This is a very simple illustration of how Newton’s third law works. The pressure on institutional investors to divest from oil and gas holdings has been strong indeed – and it’s coming from other institutional investors with a transition-centric agenda. That was the action. The reaction, as demonstrated by the Texas authorities, was only a matter of time; as well as an ongoing reconsideration of investment objectives.

Earlier this year, consultancy Alvarez & Marsal reported that activist investors were less likely to get involved in ESG campaigns this year after they proved to be significantly less profitable than campaigns that focused on achieving operational or strategic change.

“As investors focus more firmly on returns in 2024 in a challenging market, we expect to see a decline in ESG campaigns and a renewed focus on metrics such as margin growth, cash generation and return on capital,” CEO Alvarez & Marshal. Andre Medeiros said at the time.

There are others, too. Late last year, Deutsche Bank’s ESG director Markus Mueller said oil stocks should be included in ESG funds. “When we think about clean energy, these are fairly new business models and sensitive to interest rates,” Mueller told Reuters. “Investors are looking for traditional (energy) companies that have investments in renewables … They prefer transitions to exclusions.”

So investors are waking up from their ESG dream and back to real life—and a collision course with climate activists who, according to Bass, “think we can just turn off hydrocarbons and turn on alternative energy. But they have no idea how the network works, and they have no idea how the business works.”

Indeed, it is worth noting that even such a champion of the transition as the International Energy Agency, a few years ago, called for more oil and gas exploration and higher production to meet the growing demand for energy , recognizing how vital hydrocarbons are to the functioning of modern civilization. Like-minded activists and governments, however, tend to overlook such facts as they focus on catastrophic predictions that often enough fail to materialize to encourage more investment in so-called transition technology.

As Mueller and Bass’ statements suggest, however, activists can pick and choose their facts all they want, but bankers don’t have that luxury. It was no coincidence that a number of high-profile banks and other financial institutions have, in recent months, left various net-zero associations with the aim of encouraging/forcing their members to put their money where their mouth is on reducing emissions.

“Going beyond hydrocarbons is like bringing politics into investing,” Bass told Bloomberg this week. “If you’re willing to give up profits for it, then so be it. But I think that’s naive and it’s a breach of fiduciary duty.”

Indeed, investment firms have a fiduciary duty to their clients and should be able to override it because their managers are concerned about the amount of carbon dioxide in the atmosphere. Yet this is exactly what some mutual funds are doing – and getting sued. In Texas, of course, they are blacklisted, as they are in other states that take the third law seriously. The backlash against ESG investing that overlooks physical reality is likely to continue as long as that denial of reality continues among ESG advocates.

By Irina Slav for Oilprice.com

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