Midway through the 1990s, John Browne, Baron Browne of Madingley, former chief executive of BP (BP.), became the first head of an oil major to link the burning of fossil fuels with a rise in global temperatures, a highly significant moment for environmental campaigners. The group was promptly rebranded under the slogan 'Beyond Petroleum', but the push towards the sunlit uplands was overshadowed by subsequent events. Any meaningful initiatives undertaken during his tenure would probably have been overlooked following the Deepwater Horizon disaster, but his Lordship did recognise that institutional investors would increasingly need to factor environmental, social and governance (ESG) risks into their investment strategies. And there is growing evidence to suggest that the business case for ESG investing is well founded.
The Journal of Sustainable Finance & Investment conducted a review of more than 2,000 empirical studies undertaken since the 1970s on ESG investing and corporate financial performance. Around 90 per cent of the studies point to positive outcomes, with some studies suggesting that companies with robust ESG practices displayed a lower cost of capital and lower levels of volatility.
Studies have also shown that millennial retail investors – and those just entering the equity market – are likely to take greater account of the extent to which ESG principles are bound up with the corporate governance policies of individual companies and nominee accounts – and it’s having a real impact globally.
Mutual funds that base their investment decisions on ESG criteria passed the $1 trillion mark during the fourth quarter of 2018, while a report by the US Forum for Sustainable and Responsible Investment suggests that almost a quarter of professionally managed assets in the US fall under that category. And since its founding in 2006, the United Nations Principles for Responsible Investing (PRI) has attracted support from more than 1,800 signatories representing over $68 trillion in assets under management as of April 2017. Meanwhile, plans are in place which would allow managers of the £1.5 trillion invested in the UK’s workplace pension schemes to be given new powers to divest their holdings in fossil fuel companies in favour of long-term investment in renewable technologies.
But if capital support is being gradually withdrawn from conventional energy markets, then you might question the rationale for Chevron’s (US:CVX) recent $33bn offer for Anadarko Petroleum (US:APC). The offer, pitched at a 39 per cent premium to Anadarko's closing price on the day prior to the announcement, has already faced opposition from some ESG investors, who have questioned the approach given the apparent transition away from fossil fuels – the ‘stranded assets’ argument – but it's essentially driven by rationalisation and the pursuit of scale benefits.
Chevron’s approach was certainly timely, given that shares in Anadarko hit the skids in February after its earnings came in below expectations. Anadarko holds a strong shale position in the Permian basin of West Texas. So the connection of existing production assets would effectively create a 75-mile-wide corridor, enhancing the ability to drill lateral lengths in horizontal wells. This promises to improve well economics and productivity, put daily production on a par with that of ExxonMobil (US:XOM) and Royal Dutch Shell (TDSB) and improve access to the combined group’s refining assets in the Gulf of Mexico.
Environmentalists may be aghast that Chevron appears to be doubling down on shale drilling, particularly given the oil major’s long-running dispute with the Ecuadorian government over claims that its operations were responsible for polluting the Amazon between 1964 and 1992.
No surprises there – it’s a dirty business, after all. At least the fossil fuel companies now have an ally on Capitol Hill. A recent executive order from President Trump aims to prevent states from blocking pipelines and other energy infrastructure assets under the terms of the Clean Water Act. It also directs the US Department of Labor to examine how pensions that use ESG criteria deploy them with their energy investments, presumably with a view to reversing the trend towards disinvestment.
