ESG is dead, or if not strictly speaking deceased, at least mutating into something unrecognisable from the investment philosophy it was at its peak sometime in 2021.

The presidency of Donald Trump has likely put the final nail in the ESG coffin, but in truth the concept was on its last legs anyway, ever since it became caught up in the US’ culture wars and became a source of embarrassment— indeed legal jeopardy—for its advocates.

Mainly Republican states in the US took action against big financial institutions that espoused ESG principles on the grounds they were acting against the interests of their clients, shareholders and energy consumers by pushing a green agenda ahead of financial returns and energy security.

Since the US election in November, the sight of American financial institutions running for the ESG exit has been remarkable

A federal judge recently ruled it was a violation of fiduciary duty for an investment manager to consider ESG factors in making investment decisions. So, not only dead, but illegal too, though subject to superior court review.

Since the US election in November, the sight of American financial institutions running for the ESG exit has been remarkable. Just a few weeks ago, the cream of Wall Street—Citi, Bank of America, Goldman Sachs, BlackRock, Morgan Stanley and JP Morgan—all pulled out of the Net Zero Banking Alliance they joined at COP26 in 2021.

They had committed their banks and asset managers to “transition the operational and attributable greenhouse gas emissions from their lending and investment portfolios to align with pathways to net zero by 2050 or sooner”.

Back then, this was interpreted and celebrated by environmentalists as the first step towards pulling the global investment plug on the hydrocarbon industry. The goal of protest group Just Stop Oil seemed a lot closer.

Not anymore. What some observers are calling the ‘greenlash’ reaction against ESG is well and truly under way.

The E in ESG

President Trump is committed to a resurgence of the US oil and gas industry, targeting an addition of much as 3m boe/d to reach 16m boe/d, making the US the biggest producer in the world and self-sufficient in affordable energy. Trump says he wants global energy “dominance”.

The US regulatory framework will be freed up to allow exploration and production in previously forbidden areas, such as some federal lands and offshore sites, the laying of new pipelines, and construction of export terminals to drive the boom in shipments to the world, and especially energy-poor Europe—which is sticking to most ESG principles.

Does this mean the hydrocarbons sector—for many years shunned by investors because of the E in ESG—is set to undergo a renaissance of financial and investment growth? Is ‘big oil’ back?

Of course, it never really went away as an asset class. Trillions of investment dollars have been tied up in hydrocarbons for many decades. While the proportion of the S&P 500 attributable to energy fell significantly to small single-digit percentages— especially as the ‘big tech’ surge gathered pace—companies such as ExxonMobil, Chevron and the rest still had multibillion-dollar market capitalisations and were regarded as an essential driver of the global economy.

Significant investment in oil, as opposed to oil companies, continued throughout, even if at a slower rate. From a peak of $887b in 2014, upstream investment came to $580b last year —although consultancy Rystad Energy noted recently that this apparent decline had been more than offset by increased efficiency.

But at the sharp end of investment analysis—the big banks’ research recommendations—'buy’ or ‘overweight’ verdicts are in the majority for the big oil companies.

There are solid investment reasons for this. Energy stocks historically tend to come with big and dependable dividends attached, which executives try to maintain even in bad times. The majors—ExxonMobil, Chevron, Shell, BP and TotalEnergies—have a history of generous dividend payouts, and the dividend cuts forced on them in response to Covid are a matter of history. The same is true of share buy-backs, which investors love and which have been a feature of ‘big oil’ investor relations post-Covid.

According to comparative figures from London Stock Exchange Group, over the past five years, the majors underperformed the S&P500 during the intense Covid years of 2020 and 2021 but jumped back after the Russian invasion of Ukraine to outperform equities in general, before slipping late last year as the tech stocks—mainly the unstoppable Nvidia—came roaring back.

Merger potential

There is even the potential for some M&A premium in the energy sector again, with serious speculation about the possibility of a merger or takeover of BP, the marginal laggard of the major group. A link-up with European rival Shell, or a deal with a Middle East NOC such as ADNOC or Saudi Aramco, has been suggested by some observers.

This is not to say that big oil will enjoy an effortless rise, regardless of Trump’s wishes. It will still be subject to the vagaries of global oil markets, with profits—and therefore share performance—inextricably linked to unpredictable global crude markets.

And while ESG is receding as an investment impediment, the reality of the energy transition still hangs over the hydrocarbons sector. The US might slow down the global trend towards renewables such as wind and solar, as well as alternatives such as hydrogen and nuclear, but the two other great power blocs, Europe and China, seem committed to non-oil fuel sources in many of their economic sectors. Chinese oil giant Sinopec believes peak Chinese oil consumption will come in 2027.

But regardless of these long-term trends, investment analysts are now talking about ‘window of opportunity’ for investors to earn decent returns once more from the hydrocarbons sector of at least four years—the term of the Trump presidency, if not beyond.

---

Author: Frank Kane