ESG Moment of Truth Turns Tables for Big Oil

• Deutsche Bank: Big Oil stocks should be included in ESG offerings because investors want them.
• WSJ: investors were leaving these funds at such a pace that fund managers were changing the names of the funds, removing terms like "ESG" and "sustainable.".
• Oil and gas appear to remain essential for meeting the world's energy needs, which in turn renders producers one again more attractive for investors who disillusioned with alternative energy investments dubbed environmentally responsible.

This week saw the release of the latest report from the International Energy Agency, which called for a fast reduction in oil and gas investments and production, embracing alternative energy sources instead to help advance the transition.

Also this week, media picked up another story that makes the ground for the IEA report a bit shaky. The story came from Deutsche Bank and took the form of a statement by a senior executive involved in the lender's ESG business. The statement: Big Oil stocks should be included in ESG offerings because investors want them.

The IEA's Fatih Birol called the present day a moment of truth for the oil and gas industry. In fact, transition-related industries are facing their own moment of truth, and investors are aware of it.

"When we think about clean energy, these are business models which are quite new and sensitive to interest rates," Deutsche Bank's Markus Mueller, chief investment officer ESG, told Reuters. "Investors are looking for traditional [energy] companies that have capex in renewables... They prefer the transition than to exclusions," he explained.

Investors also appear to prefer larger rather than smaller profits, even if they come from what are commonly called renewable sources of energy, such as wind and solar farms. The Wall Street Journal addressed a substantial outflow from ESG funds in a recent article, which noted that investors were leaving these funds at such a pace that fund managers were changing the names of the funds, removing terms like "ESG" and "sustainable." Related: OPEC+ Nearing Compromise in Spat with African Oil Producers Over Quotas

Meanwhile, the IEA has told the oil and gas industry to forget about carbon capture as a way of continuing to produce the same amounts of oil and gas that it is producing now.

"The industry needs to commit to genuinely helping the world meet its energy needs and climate goals – which means letting go of the illusion that implausibly large amounts of carbon capture are the solution," Birol said in the news release of the report.

However, based on investor behavior and stock performance in oil and gas, and wind and solar, it seems meeting the world's energy needs still depends on hydrocarbons rather than devices capturing the energy generated by the sun and the wind. After all, the IEA itself said in its latest Oil Market Report that demand for the fuel is set to grow by 2.4 million bpd this year.

The end result, then, is that oil and gas appear to remain essential for meeting the world's energy needs, which in turn renders producers once again more attractive for investors who are disillusioned with alternative energy investments dubbed environmentally responsible. The recent tremors in the carbon offsets market likely contributed to this disappointment and redirection of attention.

Perhaps this return of investor attention to oil and gas is spurring stronger pressure on the industry. A recent report by the Financial Times, for instance, cited S&P Global Ratings as saying oil and gas companies faced "virtually no extra borrowing costs compared with less polluting companies" despite a push by the UN and other entities to make them pay more than other industries.

In any other context, calls for essentially penalizing an industry for being what it is would smack of discrimination. Only in the context of the energy transition, which is trying to force higher borrowing costs on an industry, is this considered a perfectly acceptable and even highly desirable way to mitigate the risks that IPCC scientists say originated from the oil and gas industry.

"Environmental concerns seem to be far from the most important factor for funding oil and gas companies," S&P Global Ratings analysts said, with one of the new report's authors commenting that "It shows lenders are not really baking in premiums for [environmental, social and governance]-related factors."

Indeed, they are not baking in such premiums. That's probably for the same reason as the one investors away from ESG funds and into oil and gas: oil and gas are making money. They are making money because the world needs them, including the loudest cheerleaders of the transition, such as the UK and Germany, not to mention China, which is simultaneously the biggest investor in wind and solar and the biggest investor in coal.

The ESG investment movement has had a moment of truth, and things are changing fast. Investors are falling back on the certainty of oil and gas, even with the extra volatility, as OPEC grapples with economic growth worries that have substantially undermined its price control efforts.

This has worried the leaders of the transition because it means less money for transition industries—governments can't shoulder the whole financial burden of total electrification. Confidence appears to be on the way in some parts of the transition world, and it would take time to restore it, risking a wider divide between Paris Agreement targets and actual developments. That was only to be expected. It's what you get when you try to play government plans against the market.

By Irina Slav for Oilprice.com

More Top Reads From Oilprice.com:

• European Natural Gas Prices Seesaw as Cold Snap Arrives
• Top Semiconductor Companies Control 98% of Global Market
• Brazil Eyes Major Oil Output Boost Despite Environmental Concerns