Clean Technology

High Gas Prices and Global Conflict Spur Reevaluation of Oil and Gas in ESG

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The oil and gas industry have been experiencing a downward trend as ESG considerations and underperformance have caused many investors to underweight oil and gas stocks in their portfolios. Yet with the energy sector feeling the strain of global conflict and supply chain issues and consumers asking why gas prices are high, investors may be reassessing this sector.

Surging Prices

The Russia-Ukraine conflict has become an influential factor in the rise of gas prices. In January 2022, Brent Crude Oil futures had risen past pre-COVID levels of $66 per barrel to $91 per barrel, after a significant drop in price as COVID-19 led countries to shut down their economies in April 2020. After Russia’s invasion of Ukraine in February, Brent Oil Futures shot up to $123 per barrel by mid-June 2022—an 86% gain since the beginning of 2020.

The increase is even more spectacular for natural gas: the Henry Hub Natural Gas price jumped from $2.5 to $8.7 per million British thermal units over the period, marking a 250% rise. Even as a growing number of countries have shunned Russian oil and gas exports as the war continues, Russia saw record revenues for oil and gas in the first 100 days of the invasion.

Against this backdrop, shares from oil and gas majors generally stand much taller compared with their pre-COVID levels. ExxonMobil, Chevron, and ConocoPhillips are up 44%, 47%, and 80% respectively over the same period. Meanwhile, smaller fossil fuel players have also benefited. For instance, natural gas producer Range Resources recently succeeded in dramatically reducing its financing costs given investors’ sudden enthusiasm.

Pushback from climate advocates and investment managers stresses how the conflict illustrates the pressing need to wean the world off of oil and gas.

Temporary Setbacks

This is all bad news for many equity funds that use ESG criteria. ESG funds that deploy negative screening will typically have no exposure at all to oil and gas stocks on environmental grounds, which means their relative investment performance appears diminished. Although ESG funds that use positive screening are more likely to selectively own oil and gas stocks, they still tend to underweight the sector using broader equity benchmarks. This has already unearthed signs of a slowdown in ESG equity funds’ inflows. In fact, they registered a 60% decline in the same month Russia began its invasion.

On top of this, climate change regulations and policies regarding the oil and gas industry have loosened since the Russia-Ukraine war began. For example, the European Commission has raised the amount of coal the EU can use over the next five to 10 years by 5% as Europe looks for rapid ways to wean itself off Russian energy imports.

Long-Term Dominance

Despite the setbacks in the short term, policymakers’ strategic environmental agenda remains largely intact for now, and climate change goals are still in place. Pushback from climate advocates and investment managers stresses how the conflict illustrates the pressing need to wean the world off of oil and gas.

Investing in clean energy also offers the hope of avoiding sudden future spikes in energy prices by dramatically lowering reliance on fossil fuels in favor of clean energy. Ongoing high fossil fuel prices may make renewables more economically attractive at the community and individual levels, as well, meaning that clean energy still appears on course to dominate in the long term.

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