Cover story – Energy
segment of the market; companies that extract oil and gas, have been profiting a lot more from higher energy prices while downstream companies, especially those with a large retail segment, are profiting less,” he says.
This is due to price caps in the retail market putting down- stream margins under pressure, leaving energy companies like Octopus to book losses. Meanwhile, those with an upstream operation, like Shell, BP and Centrica, have benefited from ris- ing wholesale prices of gas and oil. And in the short run, this has been profitable for institutional investors who continue to maintain exposure to the fossil fuel industry. Gustave Loriot-Boserup, who is responsible invest- ment manager at London CIV, explains why the local govern- ment pension pool continues to invest in fossil fuels, despite pursuing a net-zero agenda. “Historically, ESG funds were constructed on the basis of low carbon indices, so you can easily reduce your carbon footprint by losing your exposure to these sectors. But lately, there has been a much clearer understanding that you are not going to build a net-zero economy by investing in healthcare and IT companies,” he adds. “You need to maintain exposure to the companies that contribute on a material basis to these green- house gas emissions.”
This has also been embedded in the criteria for becoming aligned to other metrics, Loriot-Boserup explains. “Paris- aligned funds need to maintain exposure to high-climate impact revenue streams, which is a requirement by the EU Paris-Aligned benchmark regulation,” he adds. But energy companies with big retail operations are also facing growing pressure from windfall taxes and political interven- tion. France, for example, has decided to nationalise energy provider EDF, while in the UK energy firms could face a con- sumer boycott. The Times reports that up to 1.7 million British households will not pay their energy bills in October, although this was written before the energy cap was announced. Cam- paign group Don’t Pay UK estimates that if people feel the cap does not go far enough then a boycott could cost energy firms more than £2bn. These political factors are key risks for inves- tors to consider, warns Fulop.
This view is shared by his colleague, Allen Good, who is an energy strategist at Morningstar. “If you look at oil companies, for the past 10 to 15 years over-investment and a lack of capital discipline was an issue. If you then get into a situation where you are being coerced into investing in lower returning renew- ables, that is certainly going to raise investor concerns,” he says, adding that US firms don’t face similar pressures. But there is also the hope that energy firms could utilise the windfall profits to invest in the transition towards renewable energy, says Jon Cunliffe, managing director of investments at B&CE, the company behind The People’s Pension. The master
20 | portfolio institutional | October 2022 | Issue 117
trust has outsourced its shareholder engagement to the asset managers running its funds. Nevertheless, he has a view on how the extra money should be spent. “While we have not been directly engaging with the companies, we would hope that the increased profits they have seen this year as a result of supply issues is used in a way that helps to meet the targets they have set in terms of decarbonising and aligning themselves with a transition to a net-zero economy.” But, for the time being, there is little evidence that they will do so. For example, while BP has booked record profits it has only invested £300m in renewable energy – 2.5% of its profits. Yet it has invested more than 10 times as much in new oil and gas projects, a Channel 4 report shows. Moreover, its expenses on share buybacks and dividend payments far exceed the invest- ments in renewable energy. But for Joel Moreland, principal consultant at Social & Environ- mental Finance, buybacks might not be a bad thing. “There are a lot of people who have hoped for a decade or two that oil and gas companies will transition. But what is the evidence that they will? “Actually, the best thing that they can do is to do share buy- backs and pay dividends because investors are much more likely to invest in renewable energy than they are,” he says.
Impact on ESG exclusion funds Meanwhile, the effects of rising energy prices have been far from straightforward for ESG-compliant funds. For the first time in years, European ESG funds booked €5bn (£4.3bn) of outflows in the first half of 2022, according to ESMA, the European securities market regulator.
This is in part due to equity funds excluding fossil fuels failing to capitalise on the record profits earned in the oil and gas sec- tor, but also being more heavily invested in tech companies, which have performed poorly.
Climate change represents a systemic risk, and companies with high carbon emissions
will ultimately pay the price. Gustave Loriot-Boserup, London CIV
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52
