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To invest or not to invest

Companies are struggling to secure financial support, the story goes, with politicians and the youth turning against carbon emitters.

While there is some truth to this perspective, it is also somewhat blinkered. Oil and gas companies have provided a rollercoaster ride for those investing over the last 10 years, both in the UK and North America.

Russia’s invasion of Ukraine drove up energy prices, benefiting energy producers. In 2023, though, prices fell and so did returns.

The S&P 500 energy index was negative in 2023, while the broader sector grew more than 26%. The US has long offered a more supportive environment for oil and gas stocks.

Gloucestershire County Council recently issued a report on its exposure to fossil fuels. It has investments in four funds, of which three have lost money. Selling off these assets would crystallise losses of more than £3.8mn.

However, it noted that if it had invested this cash in its “greener” funds, returns would be lower.

The US lacks any federal carbon controls and the question of energy transition – and climate impact – is highly political.

Kroll managing director in the Office of Professional Practice Carla Nunes carried out a study of returns based on MSCI’s ESG ratings. “Globally, we found companies with better ESG ratings outperformed those with the worst. The US energy sector was the opposite, the worst-rated companies outperformed the better rated companies. That was not true in Europe.”

Exclusionary plans

Nunes suggested two reasons why this might be the case. “In the US, there’s a lot of exclusionary strategies where you can exclude companies on certain criteria, such as carbon emissions. That creates an opportunity for others to come in, where companies are priced low, that’s one possibility.”

Excluding companies from investment is “not the way of making change”, she continued. Driving a share price down only makes it more attractive to other investors, who may not be as focused on emissions.

“The way to drive change is to invest and say ‘you have to be part of the solution’. You have to invest in renewables etc.”

Another factor that may have driven the disconnect in the US’ ESG ratings to performance could have been that prices were already low. In 2014-16, oil prices collapsed, as US production grew and companies appeared to focus on barrels over returns.

Nunes predicted there would be a drive to investing in companies to improve their environmental performance. “That will also take off some of the political element,” she noted. Some US states have opted to exclude certain fund managers from operating because of concerns over blacklisting energy stocks.  

For instance, in March, the Texas State Board of Education pulled $8.5 billion from BlackRock’s management, citing concerns around ESG overreach. BlackRock has noted, in return, that the decision would likely see fees increase and that the company holds more than $320bn in global energy investments.

Credit: Photo by Global Warming Images/Shutterstock (1994504a)

Part of the solution

There is an appeal to investing in companies to decarbonise, but it is more complicated than it seems.

Major investors have talked up the opportunity. Carlyle Group, for instance, carried out an analysis of its portfolio oil and gas companies in 2021. It found that it could reduce operational emissions by 50%, “which would outpace reduction targets of most major international O&G companies”.

Carlyle is in a position where it can follow through with its decarbonisation plans. For instance, it supported one of its companies to cut gas flares at mature assets acquired from Shell.

Not all investors are welcome, though, in their engagement with company management. ExxonMobil has taken two activist investors to court in an attempt to halt their calls for progress.

Follow This and Arjuna Capital dropped their requests, but Exxon continues to pursue Arjuna in a Texas court. Calpers and Norges Bank Investment Management (NBIM), major investors in the oil company, have threatened to vote against directors in retaliation for the court case.

Inevitably, the row has become embroiled in a political dispute. A Louisiana state official has said Calpers’ move sets a “dangerous precedent”. John Fleming went on to say shareholder activism “must be geared towards maximising shareholder returns, not destroying the target company for political purposes”.

Exxon is not the only company facing activist pressure, although the pugnacious way in which it has responded stands out.

On the move

Follow This also filed a resolution with Shell, ahead of its AGM. The resolution mustered only around 20% of shareholders’ support, with 80% against. Meanwhile, Shell’s own resolution on its transition strategy effectively reversed this, with 80% in favour and 20% against.

SheIl has noticeably shifted away from its earlier support for decarbonisation. The company has cut investments in its Low Carbon Solutions unit, with a number of high-profile executives leaving.

There was talk earlier this year of Shell, and other European companies, relocating to the US. These companies complain of trading at a discount because of their European listings. TotalEnergies’ Patrick Pouyanné attributed some of this to ESG pressures.

The talk of the European supermajors shifting to the US has died down, following AGMs.

Not all companies can move to the US and there are still those interested in investing in the oil and gas space. Some banks have signed up to decarbonise, but there remains some capacity to fund.

Finding an investing audience

Norway, for instance, continues to be interested in investment opportunities, including through debt issuance. DNO, last week, raised $400 million via five-year unsecured bonds.

Within the UK, the market is challenged, but possible. EnergyPathways’ CEO Ben Clube took his company public in December 2023.

“This is the challenge of the space,” he told E-FWD. “It’s the rules of engagement in the space. Pure gas plays are not a vote winner. And without demonstration of how to decarbonise, they will be a struggle” to finance. “Whether it’s a sensible act on behalf of the consumer, that’s another matter.”

The AIM-listed company is working on a marginal gas field offshore the UK. Clube noted the Marram gas field was “way better” than imported LNG and more cost effective. LNG would emit 15 times more than gas from Marram. UK average gas production is also higher than Marram, emitting four times more.

Gas-fired generation with carbon capture and storage (CCS) is “going to be cheaper” than LNG or floating wind.

The energy transition space if all about partnerships, but one is limited if a project is just about gas. What we’re doing is low emission UK energy supply,” he said. Marram will receive electricity from nearby wind farms and can function as a gas storage site, with the installation of compression.

Focusing on this narrative means EnergyPathways can “attract a new array of financial capability and government incentives”.

EnergyPathways celebrates its IPO at the London Stock Exchange
EnergyPathways celebrates its IPO at the London Stock Exchange

Picking winners

The question of investing – or not – in carbon-producing companies remains complex. Small companies can stake out their positions and with a small number of projects highlight environmental benefits.

Larger companies face greater challenges. One area where they can drive change is investing in new technologies.

Kroll’s Nunes noted deals in the venture capital world were suffering, with higher interest rates and fewer IPOs.

“Some of these new technologies could become real targets for M&A. We could see larger companies picking up those companies in new areas,” she said. Exxon, for instance, has shown interest in lithium production, while Chevron has invested in CCS.

“The need for electrification is huge,” Nunes continued. “We don’t have the capacity for the amount of electricity we need, even if we’re not getting rid of fossil fuels anytime soon.”

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