Investor Column | Sustainable investing helps indirectly with gains in oil and gas market
One of the most notable trends in investing these days comes from environmental, social, and governance funds. Those funds focus on companies that reflect priorities that consider the impacts of their business on those three specific areas.
On the other hand, the oil and gas market has commonly been looked at as an industry that represents a lack of care for the environment. Over the past 10 years the oil industry has unsuccessfully shaken off the reputation enhanced by the Deepwater Horizon oil spill and concerns for the environmental impact of fracking.
So how might ESG investing allow for valuations to increase in a market sector that has been looked upon as the poster child for an unsustainable business? Well, basically there are two reasons.
The first reason is that there is much less capital available due to retail investors and fund managers desire to only award their investment funds to clean energy companies. So, due to less investment in the oil and gas industry, the market is becoming less elastic to changes in demand. When we hit new oil usage peaks this summer due to the reopening of our economy, the companies that in the past were constantly bringing additional wells online in the last decade are now going to be less likely to be able to fulfill the need for additional oil due to lack of new wells. Reduced oil supply when needed will raise the price of oil which in turn raises the profitability of oil companies.
The second reason is that as popular as electric vehicles are becoming in America, our country has not adopted EVs at the same pace as Europe and China. That means that the US will need plenty of fossil fuels in the future. According to the International Energy Agency’s report “Global EV Outlook 2021,” electric vehicles in China represent 50% of all electric vehicles in the world, Europe has over 30% of the world’s EVs, and the US has just less than 20% of the worlds EVs. In the US, EVs represent just 2% of the new cars being sold. The number of people wanting EVs appears to be adjusting higher this year according to recent polling by Pew Research Center.
Since oil and gas will still be with us for many decades into the future, companies need to lean into the most sustainable and least environmental impactful ways to operate their businesses. To aid in this extreme makeover, a private equity firm in 2020 created a white paper that charts a path for oil and gas companies to achieve a net zero emissions strategy. According to their article, if oil and gas companies can create a manageable and verifiable business plan to cut emissions, those companies will be rewarded with additional capital from sustainable funds to continue building a profitable and responsible company.
Danny Wood is a principal and founder of SeaCoast Financial Partners. To learn more visit MySeaCoastFinancial.com. The opinions expressed in this material do not necessarily reflect the views of LPL Financial.