Oil, Gas Outperform ESG as Sustainable Investing Peaks

By Andrew Moran
Andrew Moran
Andrew Moran
Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
January 5, 2022Updated: January 6, 2022

Oil and gas stocks outperformed fashionable environmental, social, and governance (ESG) companies in 2021.

Despite getting hammered in the early days of the COVID-19 pandemic, energy businesses have returned to prominence over the past year.

ExxonMobil’s stock price climbed by about 50 percent, Chevron advanced by roughly 40 percent, ConocoPhillips soared by 70 percent, and Suncor surged by 42 percent. But it has been Exxon and Chevron that have allowed many global energy equity funds to surpass a plethora of U.S. and European sustainable funds.

Many ESG energy exchange-traded funds (ETF) underperformed the more conventional energy ETFs.

The Parnassus Core Equity fund, which owns close to $23 billion in assets, saw its stock increase by 29 percent in 2021. The iShares ESG Aware MSCI USA ETF enjoyed a 26.2 percent gain in 2021. In comparison, the Energy Select Sector SPDR ETF soared by nearly 40 percent, while the Vanguard Energy ETF swelled by more than 42 percent.

logo of Chevron
The logo of Chevron is seen in Los Angeles on April 12, 2016. (Lucy Nicholson/Reuters)

Market analysts have noted two trends unfolding: global oil demand is forecasted to continue its upward ascent in 2022 and 2023, and ESG fund inflows have potentially peaked.

Some of the latest projections suggest that it could be another bullish year for oil and gas stocks.

The Organization of Petroleum Exporting Countries (OPEC) is anticipating crude demand to be 4.2 million barrels per day in 2022, with the 13-member cartel dismissing the severity of the Omicron coronavirus variant at its latest meeting.

“Indeed, some of the recovery previously expected in 4Q21 is now shifted to 1Q22, followed by a more steady recovery throughout 2H22,” OPEC stated in its December Monthly Oil Market Report. “The impact of the new Omicron variant is expected to be mild and short-lived, as the world becomes better equipped to manage COVID-19 and its related challenges. This is in addition to a steady economic outlook in both the advanced and emerging economies.”

Banks’ pricing forecasts over the next year vary. Morgan Stanley is predicting prices at $85 per barrel amid an under-supplied market, but JPMorgan Chase is projecting crude oil to reach $125 per barrel in 2022.

Other financial institutions, such as Barclays, are bracing for tighter global inventories in 2022, supporting prices at their best levels since 2014.

Abhishek Deshpande, JP Morgan’s head of Oil Market Research and Strategy, is also monitoring several key events in 2022 that could affect prices, including renewed sanctions on Iran and increased domestic output.

Sustainable Investing Under Scrutiny

New data from Morningstar Direct show that U.S. and European ESG fund inflows might have peaked in the first quarter of 2021.

During the January-to-March period, U.S. ESG fund flows totaled $22.6 billion, falling to $15.7 billion by the third quarter. European ESG fund flows reached $149 billion in the first three months of 2021 before dropping to $108 billion in the July-to-September span.

The diminished inflows came as the industry launched a record 38 ESG equity funds in the third quarter of 2021, surpassing the previous record of 30 in the third quarter of 2020.

A growing number of banks and investors are scrutinizing sustainable investment opportunities.

Upon further inspection, Bank of America noted that many ESG funds had elevated their holdings in top technology companies, such as Alphabet and Google. At the same time, these ESG funds are underweight energy companies.

Tariq Fancy, BlackRock’s former chief investment officer for sustainable investing, has become a premier critic of the green investing bandwagon since leaving the Wall Street titan in 2019. He has noted that the various probes, particularly by Bloomberg Businessweek, have nudged the financial sector to become more careful of sustainable funds and the broader ESG movement.

Fancy said these funds only benefit Wall Street, rather than environmentally and socially conscious organizations and investors.

“There’s no reason to believe it achieves anything beyond sort of giving them more fees, and my concern, obviously, is it would be creating a placebo on top of that,” he told Bloomberg.

Greenwashing has been one of the most notable concerns in the industry. This is the practice of disseminating misinformation on a corporation’s environmental impact.

Asset management firms have been accused of misrepresenting their ESG investments so that they can sell higher-fee financial products with minimal environmental benefit.

The unscrupulous behavior has triggered consternation among institutional investors. This past summer, a Schroders Institutional Investor Study discovered that more than half of the surveyed institutional investors identified greenwashing as a significant challenge when choosing ESG securities.

Is enthusiasm dissipating? Experts say that it might depend on public policymaking pursuits at the federal and state levels.

“Despite mounting catalysts with the U.S. infrastructure plan and E.U. taxonomy requirements, the clean-energy sector may remain exposed to uncertainty linked to government support such as stimulus delays or incentives-cuts announcements, the most recent being in California,” Adeline Diab, head of ESG research for EMEA and the Asia-Pacific region at Bloomberg Intelligence, wrote in December.

But if institutions and investors are indifferent to the “dubious” components of ESG funds and integration, then perhaps oil and gas outperforming this realm will be the catalyst to waning interest.

Still, the overall sustainable market had a stellar year. ESG-related ETFs garnered $130 billion in 2021, up from $75 billion in 2020. The issuance of sustainable bonds and loans ballooned to $1.5 trillion. Early-stage investment for climate-focused technology firms flirted with the $50 billion mark.

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