Big Oil’s bid to woo ESG investors fails to impress

A COP28 pledge by energy majors to reduce their emissions is not enough to convince many sustainable fund managers to include the companies in their portfolios because it omits pollution from the use of oil and gas, six interviews with Reuters show.

The pledge by 50 of the biggest oil and gas companies at the UN climate talks in Dubai commits to reaching near-zero methane emissions by 2030 as well as net-zero carbon emissions in their energy use and production by 2050.

Those Scope 1 and 2 emissions from the companies’ own operations account for about 15% of the total associated with the companies. The pledge does not address Scope 3 emissions caused by the use of the fuels the companies produce that account for 85%.

Although some of the energy companies had already made promises ahead of the COP28 announcement, several state-owned firms have newly joined in.

Investors in socially responsible, often known as ESG (environmental, social and governance), funds, said the commitments were overdue and not enough.

Asset manager Candriam said it would stick to excluding major oil and gas companies from its socially responsible funds because none was aligned with their preferred scenario for meeting the objectives of the Paris Agreement on climate change. The agreement calls for limiting global warming to within 2 degrees Celsius (3.6 Fahrenheit), and aims for a 1.5C limit.

Meeting that goal requires cutting global emissions by 43% by 2030 and to net-zero by 2050.

“The transition to a low-carbon world does not mean producing the same volume of oil and gas in a more carbon efficient manner. It means shifting away from fossil fuels as the main energy source towards low-carbon energy,” Alix Chosson, lead ESG analyst at Candriam, said.

The COP28 talks, hosted by OPEC-member the United Arab Emirates, have attracted a record attendance from the oil and gas industry while delegates are divided over wording on the future of fossil fuels.

ESG funds have long wrestled with how to approach conventional energy producers.

Some exclude them out of scientific principle. Others say divesting has no impact and it is better to try and persuade them to pollute less, which means making them responsible for Scope 3 emissions.

Kamal Bhatia, global head of investments at Principal Asset Management, said fossil fuel companies without energy transition strategies do not “environmentally 100% meet the definition” to be included in pure ESG funds.

At an industry dinner in Dubai last week, Leon Kamhi, head of responsibility at asset manager Federated Hermes, said the companies’ pledge announced at the talks was a “big step forward”, but not enough.

Only one – Italy’s Eni – of the 25 biggest oil and gas companies is aligned with the Paris Agreement, according to Carbon Tracker’s assessment.

As war in Ukraine sent fossil fuel prices soaring, ESG fund holdings in the sector increased. At the same time, a cost of living crisis in many parts of the world shifted the focus away from sustainable investment and back towards the most easily achieved shareholder returns.

The proportion of US-domiciled sustainable open-ended funds and exchange traded funds that owned oil and gas stocks hit 49% in September, against 43% three years earlier, Morningstar data show. Among conventional funds, the share with oil and gas holdings rose to 68% from 45% over the same period.

But as energy prices weaken, funds’ exposure to oil and gas is also shrinking.—Reuters