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Asset Manager: ESG Trend Raises Borrowing Costs For Oil Firms

The environmental, social and governance trend, and investor concerns about company ESG performance have led to a spike in borrowing costs for oil companies as investors are increasingly pressured to cut exposure to fossil fuels, Aegon Asset Management says.

Investors are steering clear of oil firms despite the currently solid credit fundamentals and attractive coupons, Eleanor Price, Senior Credit Analyst at Aegon Asset Management, said, as carried by Institutional Asset Manager.

Investors are under pressure from clients to follow stricter ESG criteria in investing, while banks are also pressured to show ESG responsibility and cut or eliminate exposure to the oil and gas sector.

“Despite the world’s ongoing need for significant supplies of oil for several decades, the sector is left scratching its head about how to finance its operations,” Price said.

“If this trend of investor aversion continues, you have to ask - how will some of these bonds eventually be refinanced?,” she added.

Earlier this year, North America’s oil sector started to look at ways to attract those investors who have been shunning fossil fuels by default. This spring, two Canadian firms became the first North American oil companies to link their credit facilities to sustainability targets, willingly signing up for potentially higher borrowing costs if they miss those targets.

“ESG is a cost of capital issue,” Haynes Boone and EnerCom said in their

Oil & Gas ESG Tracker report this month. The mid-year review of 30 U.S.-listed middle market onshore oil and gas producers showed that most companies, 83 percent, had announced and implemented comprehensive ESG programs as of July 15, 2021.

ESG disclosures could create competitive advantages for oil companies, including a lower cost of capital and a broader and more stable investor base, according to the report. Companies looking to raise equity or debt find that investors expect some ESG disclosure, Haynes Boone and EnerCom say.

“Disclosures also mitigate regulatory costs and open doors to alternative sources of capital,” the noted in the report.  

By Tsvetana Paraskova for Oilprice.com

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