The cleanup

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  By Guest Blogger Doug Rowat

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It was a mess.

When the oil tanker Exxon Valdez ran aground in Alaska in March 1989 it spilled almost 11 million gallons of crude oil into the pristine waters off Prince William Sound, contaminating almost 1,300 miles of shoreline. It reigned supreme as the worst oil spill in US history until the Deep Water Horizon disaster overtook it in 2010.

Despite Exxon being found negligent on several counts and spending several billion in cleanup costs; from an investor perspective, environmental disaster or not, it was simply the cost of doing business. No major shareholders demanded significant change, individual employees were scapegoated, the company remained enormously profitable and the Valdez itself, with its flawed single-hull design, was even patched up and put back into service.

But such indifferent attitudes towards the environment have shifted. The Economist recently highlighted the changing oil & gas investor landscape:

For many years the bosses of Europe’s oil and gas firms have been forced to appease the green lobby. In contrast, until very recently, America’s supermajors were unrepentant climate-change deniers.

No more. Activist investors are taking America’s energy giants to task over carbon emissions. At ExxonMobil’s shareholder meeting…a coalition of investors will try to put four green-tinged directors on its board to promote a lower-carbon strategy of the sort espoused by European rivals. On the same day Chevron, America’s second biggest oil producer, will face proposals for stiffer climate targets at its annual meeting.

The activists have enlisted powerful allies, including CalPERS and CalSTRS, public sector pension funds worth $700bn combined.

Also add powerhouses BlackRock, State Street and Vanguard to the list of investors demanding reform at ExxonMobil. These three have enormous clout—collectively owning 21% of ExxonMobil shares. How times have changed.

But these shifting attitudes involve more than just environmental concerns. A comprehensive environmental, social and governance (ESG) approach to investing is gaining massive traction. Investors are demanding that all of these criteria be examined so that they have confidence that a company’s prioritizing not just environmental sustainability, but also fair labour practices, worker safety, consumer protection, rational executive compensation, conflict-free director appointments, financial transparency, diversity, inclusion and so on.

How do we know these factors are important to investors? Follow the money. According to TrackInsight, global ESG ETF assets grew 223% in 2020 to reach a new AUM record of US$190 billion. And the momentum from last year has continued. Currently, global ESG ETF AUM sits at more than US$260 billion. In Europe, 50% of net ETF inflows are now in ESG ETFs. All of this, of course, is the logical extension of the massive amounts being spent globally in ESG areas. Fidelity reports, for example, that there has been US$3.7 trillion in new pledged ‘green’ stimulus just since the start of Covid and nearly US$7 trillion will be required annually in clean energy infrastructure spending to meet the Paris Agreement decarbonization goals.

Global growth of ESG ETFs

Source: TrackInsight

Now, you can be socially ‘woke’ and hug all the trees you want, but if a focus on ESG doesn’t make you more money then what’s the point? However, evidence is building that an ESG-focussed portfolio will do just that: outperform. Credit Suisse, for instance, examined the ESG equity space based on MSCI’s ESG ratings—the ESG gold-standard scorecard at the moment—and concluded that “over the past 5 years, high ESG companies have outperformed across regions, size, styles, and sectors, 3.9% annually in the S&P 500 and 4.9% for EAFE.”

And if you think that the outperformance was all due to an underweight in fossil-fuel producers, which have, of course, lagged over the past five years, think again. The biggest driver of the outperformance was actually the “S” in ESG:

Relative ESG returns by theme – S&P 500

Source: Credit Suisse

Consumers and investors both care passionately about the “S”. Is it any wonder then that S&P Global Market Intelligence recently reported that when Walmart announced last year after several mass shootings that it would restrict the types of firearm ammunition it sells that “people were more likely to shop at Walmart, on average, after the change was announced.” And with a President Biden appointment now running the Securities and Exchange Commission (SEC) it should also come as no surprise that the SEC is planning new rules that will force publicly traded companies to disclose more workforce data including workforce diversity, part-time versus full-time workers and employee turnover.

Simply put, ESG isn’t a fad. It’s here to stay.

And if you need more proof, Pope Francis this week launched a Vatican ecology initiative urging Catholics, and Catholic groups and businesses (numbering about 1.3 billion people globally) to reduce their carbon footprint and build sustainable enterprises over the next seven years. The Vatican itself has nearly eliminated single-use plastics and recycles almost all of its trash. As Pope Francis said this week, nothing “authorizes us to make irresponsible use of the goods God has given us.”

The world has come a long way since its figurative shoulder-shrug following the Exxon Valdez oil spill. And when it comes to ESG investing, the world may literally now be, to quote Elwood Blues, “on a mission from God.”

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.