Over the past decade, green and socially-responsible investments, aka ESG (Environmental, Social, and Governance) investing, have emerged as one of the biggest investment megatrends in modern times. For years, trillions of dollars in new global funds flowed into the market each year, with UBS predicting that carbon-reducing tech would hit $60 trillion of investment by 2040 in the U.S.
Unfortunately, the ESG boom now appears to be languishing in investment purgatory. After peaking at $17.1 trillion in 2020, ESG assets in the United States dropped sharply to just $8.4 trillion in 2022, and the bleeding continues. In the current year, no less than four ESG funds have been liquidated: SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND), SPDR Bloomberg SASB Emerging Markets ESG Select ETF (REMG), SPDR Bloomberg SASB Developed Markets Ex US ESG Select ETF (RDMX) and the Invesco US Large Cap Core ESG ETF (IVLC).
Meanwhile, their surviving peers continue to record large capital outflows: In the first five months of the year, seven popular ESG focused funds have cumulatively recorded outflows to the tune of $8.35B.
iShares ESG MSCI USA ETF (NASDAQ:ESGU) -$7.24B
iShares MSCI USA ESG Select ETF (NYSEARCA:SUSA) -$287.16M
iShares Global Clean Energy ETF (NASDAQ:ICLN) -$417.97M
First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) -$115.69M
Invesco Solar ETF (TAN) -$243.94M
Vanguard ESG U.S. Stock ETF (ESGV) -$30.32M
iShares ESG Aware MSCI EAFE ETF (ESGD) -$14.34M.
Talking points around ESG have also dwindled markedly: According to FactSet, just 74 companies in the S&P 500 cited the term “ESG” during their latest earnings conference call transcripts, less than half the 156 times the term was cited in 2021 Q4 earnings conference calls.A similar trend has also been observed across the rest of the world, including in Europe where ESG standards are much stricter.
Shifting Sentiment
The year 2021 proved to be a watershed moment for oil and gas companies in the global transition to clean energy, with Big Oil losing a series of boardroom and courtroom battles in the hands of hardline climate activists.
In May 2021, ExxonMobil lost three board seats to Engine No. 1, an activist hedge, in a stunning proxy campaign. Engine No. 1 demanded that Exxon needs to cut fossil fuel production for the company to position itself for long-term success. “What we’re saying is, plan for a world where maybe the world doesn’t need your barrels,” Engine No.1 leader Charlie Penner told the Financial Times. Engine No. 1 enjoyed a stunning victory thanks to support from BlackRock Inc. (NYSE: BLK), Vanguard and State Street who all voted against Exxon’s leadership.
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Next was its close peer Chevron Corp. (NYSE:CVX) with no less than 61% of Chevron shareholders voting to further cut emissions at the company’s annual investor meeting and rebuffing the company’s board which had urged shareholders to reject it.
Finally, a Dutch court ordered Shell Plc (NYSE:SHEL) to cut its greenhouse gas emissions harder and faster than it had previously planned. Never mind the fact that Shell had already pledged to cut GHG emissions by 20% by 2030 and to net-zero by 2050. The court in The Hague determined that wasn’t good enough and demanded a 45% cut by 2030 compared to 2019 levels. The past two years have been especially challenging for Shell shareholders after the company announced a major dividend cut with the quarterly dividend falling to 16 cents from 47 cents, the first dividend cut since WW11. Meanwhile, the company’s debt had ballooned massively from $1bn in 2005 to $73bn in 2020.
Luckily for these oil and gas supermajors, last year, investor sentiment shifted in their favor.
In May 2022, Exxon recorded a major victory after its shareholders supported the company’s energy transition strategy at the annual general meeting. Only 28% of the participants backed a resolution filed by the Follow This activist group urging faster action to battle climate change; a proposal calling for a report on low carbon business planning received just 10.5% support while a report on plastic production garnered a 37% favorable vote.
Following in the footsteps of its larger peer, in June, Chevron shareholders voted against a resolution asking the company to adopt greenhouse gas emissions reductions targets, indicating support for the steps the company already has taken to address climate change.
Just 33% of shareholders voted in favor of the proposal, according to preliminary figures disclosed by the company, a sharp turnaround from last year when 61% of shareholders voted to support a similar proposal.
Last week, CEO Darren Woods urged regulators to stop focusing on certain energy sources, such as renewable energy, to save the climate, warning that it would be a “huge mistake to be picking winners and losers and focusing on specific technologies”. Instead, “we need to look more broadly and let the markets figure out which solutions deliver the most emissions reductions at the lowest cost,” Woods told Nicolai Tangen, the CEO of Norway’s Wealth Fund, one of the largest mutual funds in the world, on his podcast. An attempt to move away from oil and gas immediately, with unchanged global demand, could be disastrous for clean energy, Woods suggested, adding that if we produce less LNG, for example, something else-like coal-would have to step in to fill the demand gap.
According to Woods, Europe should follow the U.S. approach to climate policy, arguing that the continent risks driving companies away by regulating too hard. Woods told Bloomberg that one of the most important things the Americans (and ExxonMobil) are doing is developing technologies to capture and store carbon
Overall, it appears that overcoming carbon-lock is proving to be a much more formidable task than earlier thought.
