Oil-and-gas holdings are a topic of debate in the responsible investing space.
Some funds exclude the fossil-fuel sector, and many investors avoid it, typically citing concerns about climate change. On the flip side, industry players have been making progress toward becoming more sustainable, and shareholders are often in a position to hold them accountable, which appeals to some investors.
“ESG (environmental, social and governance) investment is a mindset that will eventually make the world a better place,” says Alex Nayyar, vice-president and portfolio manager with Toronto-based Treegrove Investment Management Inc. “There is no doubt that the transition to a sustainable future will take time, and investors will play a critical role in ensuring that companies strive to meet their carbon emission targets.”
Fossil-fuel companies are among the largest emitters of greenhouse gases and they are often shut out of responsible investing portfolios. A landmark report from the Climate Accountability Institute and the Carbon Disclosure Project found that just 100 active fossil-fuel producers were linked to 71 per cent of industrial GHG emissions since 1988.
However, a November, 2022 survey by S&P Global Commodity Insights found that two-thirds of the world’s largest oil-and-gas companies now have net-zero emissions targets.
When it comes to investment decisions, the issue isn’t black and white. GHG emissions are just one of many factors that investors and fund managers assess around ESG performance, alongside such things as labour practices and board diversity. Through shareholder engagement, investors can use their voices to influence better emission and other ESG practices.
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Mr. Nayyar says he believes he has a fiduciary responsibility to invest in companies, primarily large cap, that have a good return on investment. He recognizes that many of these companies have ESG mandates too. For some investors, that might be enough. If others have particular concerns about emissions or other aspects of performance, “we will carve out customized portfolios which meets their objectives.”
Robert Duncan, senior vice-president, portfolio manager and lead ESG officer with Toronto-based Forstrong Global Asset Management Inc., adheres to a strict ESG investment policy, but he says he cautions investors who want to omit a sector.
“By restricting certain asset classes, they might be subject to a sub-optimal portfolio that doesn’t deliver the highest risk/adjusted return. Some clients might be willing to accept the trade-off, as they believe it’s their contribution to make a difference,” he explains.
Investors do not necessarily have to make a financial sacrifice if they abandon the oil-and-gas sector, or if they focus on ESG generally. Companies with higher ESG ratings usually have a higher shareholder return, notes Benoit Gervais, senior vice-president, portfolio manager and head of the Mackenzie Investments resource team in Toronto. He adds that the cost of capital can be higher for companies with lower ESG scores.
Oil-and-gas companies face that risk, and they need to stay ahead of investor expectations regarding sustainability and ahead of the regulatory curve. As part of Mr. Gervais’ investment process for any sector, “we engage with companies to discuss their plans for decarbonization, go through their plans seriously and scientifically, and make comparisons to find best-in-class companies.”
In a recent post, the United Nations Development Programme stated that “we cannot address the climate crisis without looking at the true cost of our addiction to oil, coal and gas.” Societies and many investors are taking heed. While renewable energy may be the future, “breaking up with fossil fuels,” as the UNDP titled its post, will take time.
Given the pace of the energy transition, some investors don’t want to lose out on this sector, especially one that’s a hallmark of a diversified Canadian portfolio. As they make plans to reach net-zero emissions by 2050, many oil-and-gas companies are being seen in a more positive light.
Investors of all sorts, including responsible investors, will come to different conclusions about reducing or restricting a given sector. But when investing in fossil fuel or any other companies, “the only way to generate profits is to insert an ESG lens based on a set of universal values,” Mr. Gervais says.