The International Energy Agency (IEA) recently released a report advocating for a swift decrease in oil and gas investments and production, urging a shift towards alternative energy sources.
However, this week also saw a statement from a senior executive at Deutsche Bank that could undermine the IEA’s stance.
The executive, involved in the bank’s ESG business, stated that Big Oil stocks should be included in ESG offerings due to investor demand. Fatih Birol of the IEA has dubbed the current era a “moment of truth” for the oil and gas industry.
Yet, it seems that industries related to the energy transition are facing their own moment of truth, and investors are cognizant of this.
“Investors are looking for traditional [energy] companies that have capex in renewables… They prefer the transition than to exclusions,” explained Markus Mueller, Deutsche Bank’s chief investment officer ESG.
Investors also seem to favor larger profits, even if they originate from renewable energy sources like wind and solar farms. The Wall Street Journal recently reported a significant outflow from ESG funds, with fund managers even changing fund names to remove terms like “ESG” and “sustainable.”
The IEA has advised the oil and gas industry to abandon carbon capture as a means of maintaining current production levels.
“The industry needs to commit to genuinely helping the world meet its energy needs and climate goals – which means letting go of the illusion that implausibly large amounts of carbon capture are the solution,” Birol stated.
However, investor behavior and stock performance in oil and gas, and wind and solar, suggest that meeting global energy needs still relies on hydrocarbons rather than sun and wind energy capture devices. The IEA’s latest Oil Market Report even predicts a growth in fuel demand by 2.4 million bpd this year.
Consequently, oil and gas remain crucial for meeting global energy needs, making producers increasingly attractive to investors disillusioned with environmentally responsible alternative energy investments. The recent instability in the carbon offsets market likely contributed to this shift in investor focus.
This renewed investor interest in oil and gas may be intensifying pressure on the industry. A recent Financial Times report cited S&P Global Ratings stating that oil and gas companies faced “virtually no extra borrowing costs compared with less polluting companies” despite efforts by the UN and others to impose higher costs on them.
In any other context, such calls to penalize an industry for its nature would be seen as discriminatory. Yet, in the context of the energy transition, forcing higher borrowing costs on an industry is deemed acceptable and even desirable to mitigate risks that IPCC scientists attribute to the oil and gas industry.
“Environmental concerns seem to be far from the most important factor for funding oil and gas companies,” S&P Global Ratings analysts noted. This is likely due to the same reason investors are moving away from ESG funds and towards oil and gas: these industries are profitable because the world needs them.
Final Thoughts
The ESG investment movement is experiencing a moment of truth, with investors returning to the certainty of oil and gas, despite the added volatility. This shift has concerned transition leaders as it means less funding for transition industries.
Governments cannot bear the entire financial burden of total electrification. Confidence in some parts of the transition world appears to be waning, risking a wider gap between Paris Agreement targets and actual developments.
This was to be expected when government plans are pitted against the market.
Let us know what you think, please share your thoughts in the comments below.
