Goldman Sachs: Excluding Big Oil from ESG Portfolios is a Mistake

Previously, we reported that the ESG investing boom of yesteryears has gone bust. Environmental, social and governance (ESG) investing spiked in 2020 and 2021 amid the COVID-19 pandemic with low oil prices driving more investments beyond fossil fuels, while fund managers tried to appear more climate-conscious. However, the oil price boom of 2022/2023, political backlash against ESG led by Republican politicians as well as claims about greenwashing have made ESG investing lose plenty of luster.

To wit, Texas has barred state entities, including pensions, from investing in roughly 350 funds that oppose fossil fuel investing while other firms have been blacklisted for opposing firearms.

Meanwhile, Big Oil has scaled back its ESG and clean energy ambitions. Last year, British oil and gas giant, BP Plc (NYSE:BP), unveiled a new decarbonization strategy that entails a slower decline in upstream investments and scrapped former plans to shrink refining.

Last December, Shell Plc (NYSE:SHEL) announced plans to cease new offshore wind investments and said it will split its power division as CEO Wael Sawan looks to boost the company’s profitability. Shell has been systematically scaling back its clean energy investments: earlier in the year, the company ditched plans to build a low-carbon hydrogen plant on Norway's west coast due to a lack of demand.

"We haven't seen the market for blue hydrogen materialize and decided not to progress the project," a Shell spokesperson told Reuters.

Similarly, Norwegian state-owned multinational energy company, Equinor ASA (NYSE:EQNR), announced that it will not move forward with plans to build a pipeline to carry hydrogen from Norway to Germany with partner RWE (OTCPK:RWEOY), citing a lack of customers as well as an inadequate regulatory framework. Equinor was to build hydrogen plants that would enable Norway to send up to 10 gigawatts per annum of blue hydrogen to Germany.

And now Wall Street says oil and gas companies should be part of ESG investing, thanks to their considerable clean energy investments.

According to Michele Della Vigna, head of EMEA natural resources research at Goldman Sachs, excluding Big Oil stocks from ESG portfolios is based on a “major mistake” in evaluating the energy transition from the perspective of European investors. Della Vigna says that unlike utilities, which are primarily infrastructure builders, oil and gas companies are “risk-takers” and “market makers”. Della Vigna says the energy transition will likely be much longer than expected, “So, we need their capabilities, the balance sheet and the risk-taking. They are some of the largest investors in low carbon and whether we like it or not, we also need their core businesses of oil and gas,” he told CNBC.

U.S. Big Oil firms appear to concur with Della Vigna’s sentiment. According to Exxon Mobil (NYSE:XOM) Darren Woods, Europe should borrow a leaf from the U.S.’ approach to climate policy, adding that the continent risks driving companies away by over-regulating. Woods told Bloomberg that various carbon capture technologies under development in the U.S. will play a key role in the global decarbonization drive.

Back in April 2023, Woods touted Exxon’s burgeoning Low Carbon business, saying it has the potential to generate hundreds of billions in revenues and even outperform its legacy oil and gas business in the coming decades. According to Woods, the business could grow to generate tens of billions of dollars in revenue after the initial 10-year ramp-up.

"This business is going to look quite a bit different from the base business of Exxon Mobil. It is going to have a much more stable, or less cyclical, profile," Dan Ammann, president of Exxon's two-year-old Low Carbon Business Solutions unit, vowed.

In the same year, Exxon Mobil signed a long-term contract with industrial gas company Linde Plc. (NYSE:LIN) involving offtake of carbon dioxide associated with Linde’s planned clean hydrogen project in Beaumont, Texas. Through the contract, Exxon will transport and permanently store as much as 2.2M metric tons/year of CO2 from Linde’s plant.

Exxon is hardly alone in ambitious CCS plans.

Last February, oil field services giant Schlumberger Ltd (NYSE:SLB) discussed its newly carved SLB New Energy unit which will focus on niches such as carbon solutions, hydrogen, energy storage, geothermal/ geoenergy and critical minerals each with a minimum addressable market of $10 billion, as reported by Bloomberg NEF.

Meanwhile, last year, Saudi Aramco (ARMCO), the world’s biggest oil and gas company, unveiled plans to reach net-zero by 2050 without sacrificing oil and gas production. During a rare two-day visit by Fortune in early May, Aramco lifted the curtain on dozens of research project, including CCS, underway at its headquarters in Dhahran, in eastern Saudi Arabia, which the company believes will help it tackle climate change, even while pumping a mammoth 9 million barrels or so of oil a day. Aramco claims its tech breakthroughs have the potential to cut carbon emissions from each barrel of oil it produces by 15% by 2035, equivalent to 51.1 million tons of carbon a year.

That said, including Big Oil stocks in ESG portfolios is likely to be met with stiff resistance thanks to their outsized role in greenhouse gas emissions. According to the Carbon Majors database, Saudi Aramco, Coal India, China's CHN Energy and Jinneng Group, and National Iranian Oil accounted for nearly 18% of global C02 emissions in 2023. On the other hand, ExxonMobil, Chevron Corp. (NYSE:CVX), Shell, TotalEnergies (NYSE:TTE), and BP accounted for ~5% of global emissions in the same year.

By Alex Kimani for Oilprice.com