Oil and gas stocks should be the bedrock of sustainable investment

Just as many mission-led fund managers rethink their defense policy after Russia’s full-scale Ukrainian invasion, Goldman Sachs Now, it’s time for sustainable investors to reevaluate their approach to oil and gas companies.

That comes when European energy majors have doubled fossil fuels to reduce renewable spending and boost short-term shareholder profits.

Investments focused on environmental, social and governance (ESG) factors tend to support companies that score highly on certain criteria, such as climate change, human rights, and corporate transparency.

Tobacco giants, fossil fuel companies, and arms makers are usually one of those screened or excluded from their sustainable portfolios.

“I think the feelings about oil and gas ownership should change just as the Russian-Ukraine war has changed.”

Dela Vigna is an approach that he expects to change as his reluctance to not own an energy major is biased towards a “big mistake” in assessing the energy transition from the perspective of European investors.

Goldman’s Della Vigna outlined three reasons to support his views on why ESG investors bring in oil and gas stocks from the cold.

“Let’s be clear: this energy transition will be much longer than expected. I think there will be a peak oil demand for the mid-2030s (and peak gas demand in the 2050s,” Della Vigna said.

“And it clearly shows that the 2040s requires the development of greenfield oil and gas. So, if new oil and gas development is needed, why don’t you own these companies?”

Meanwhile, the International Energy Agency says it expects demand for fossil fuels to peak by the end of the decade. Energy Watchdog has also repeatedly warned that new oil and gas projects will be needed to meet global energy needs while achieving net-zero emissions by 2050.

The second point of Della Vigna is that oil and gas companies represent some of the biggest investors in low carbon energy around the world, adding that oil and gas inventory will fail to ultimately serve as a barrier to the energy transition.

Furthermore, Della Vigna said that unlike the utilities it described as infrastructure builders, oil and gas companies are “market makers” and “risk takers.”

“So we need their capabilities, their balance sheets, their risk-taking. They are some of the biggest low-carbon investors and we also need the core oil and gas business, whether we like it or not,” Della Vigna said.

“If not, there is no affordable energy, especially for emerging markets, and there is energy poverty that we don’t think is acceptable in the ESG framework,” he continued.

“I think that energy companies leading the energy transition should be the basis for ESG funds. This is not a divestiture target,” Della Vigna said.

Not everyone is convinced that oil and gas stocks should chase defense companies into their ESG portfolios.

“I think it’s a bit extreme,” Ida Kassa Johannesen, director of commercial ESG at Saxo Bank, told CNBC over a video call.

“Just because defense stocks have gained favor doesn’t mean that oil and gas should also get favors. I don’t think the two should be directly compared,” said Cassa Johannesen.

“We can see the negative impacts of oil and gas. The current climate is not good. We see record temperatures, rising greenhouse gas emissions, ocean warming, sea level rise. So do you want to see more fossil fuels?

Scientists have repeatedly pushed for rapid reductions in greenhouse gas emissions to stop global average temperatures from rising. These calls continue through an astonishing temperature record, registering the hottest year in human history of 2024.

Extreme temperatures are driven by the climate crisis, and the main factor is the burning of fossil fuels.

Allengood, a senior stock analyst covering the oil and gas industry at Morningstar, said it would be difficult to foresee a time when there will be a full acceptance of oil and gas at ESG.

However, he added that a slightly more relaxed approach from investors is feasible based on a significant increase in the amount of energy majors investing in renewable and low-carbon technologies.

“I mean ESG, for me, that’s a complete raison d’être. It’s energy transition (and) climate change. So you’d think it would be hard to say they start investing in oil and gas companies,” Good told CNBC over the phone.

“Now I think all you can see is some looseness around the edges. total(Energy) enters the portfolio. But someone like someone Exxon Or a Chevron …I think it’s going to be difficult to see how it comes in ESG,” he added.