ESG stocks underperform oil and gas in 2021

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Oil and gas stocks – hit early in the pandemic and increasingly rejected by environmentally conscious investors – have eclipsed the popular environmental, social and governance companies in the stock markets this year.

As of December 29, US giants Exxon and Chevron had added 48% and 40% respectively in 2021. The duo have helped fuel global energy equity funds beyond several of the hundreds of US and European sustainable funds as defined. by Morningstar, a data provider organization.

The iShares MSCI exchange-traded fund for global energy producers is up 37% as of December 29, outperforming the largest US ESG fund – the $ 31.8 billion Parnassus Core Equity fund – which is up 28%. The largest iShares ESG fund managed by giant fund manager BlackRock is also lagging behind, up 30%.

It marks a radical departure from 2020, with lukewarm performance leading to early signs that investor enthusiasm for ESG funds has cooled, as inflows of investors into the fund category slowed. compared to their frantic pace at the start of the year.

“Cyclical stocks tend to be dirty stocks,” said Pierre-Yves Gauthier, chief strategy officer at AlphaValue, a Paris-based independent research firm. “The cyclical race arrived very early in 2021 and has never stopped,” he added. “It was done at the cost of very expensive green stocks, which were leading the show in 2020. It was crowded trade last year.”

The Invesco Solar ETF and the iShares Global Clean Energy ETF are down more than a quarter this year. In contrast, the share prices of these funds tripled and doubled, respectively, in 2020, when Exxon fell 41% and Chevron fell 30%.

Danish energy group Orsted “was the darling” of ESG funds in 2020, Gauthier said. But Orsted and wind turbine maker Vestas have warned of tough conditions in renewables after projects in Europe suffered from low wind speeds and higher costs hit manufacturers.

Orsted and Vestas fell by around a third in 2021. Iberdrola, Spain’s utility which has also prioritized renewable electricity, is down by around a tenth this year.

Meanwhile, despite the volatility in the price of oil following the emergence of the Omicron coronavirus variant last month, Brent crude and the U.S. benchmark WTI are both up more than half in 2021.

Global oil demand is on track to exceed 2019 levels by March 2022 and is expected to continue rising in 2023, according to JPMorgan.

“We are witnessing the first energy crisis of the era of decarbonization,” said Joyce Chang, president of global research at JPMorgan. “ESG outperformed because natural energy underperformed in 2020.”

ESG funds have benefited in the past by typically taking outsized positions in high-end tech holdings such as Microsoft, which is the most widely held stock in US ESG funds, according to Bank of America, and is up more than half this year. . At the same time, ESG funds are generally underweight energy stocks, if at all. But energy has been the best performing sector in the S&P 500 this year, marking a 50% increase in 2021.

ESG investing has also come under unprecedented scrutiny in 2021. Tariq Fancy, former BlackRock Global Investment Director for Sustainable Investing, observed that ESG offered asset managers a way to sell products at higher costs with little or no environmental benefit.

This year’s performance may have dampened investor interest in sustainable vehicles, as inflows of European ESG funds slowed to $ 108 billion in the third quarter from $ 149 billion in the first three months of 2021 , according to Morningstar Direct data. In the United States, ESG fund flows peaked at $ 22.6 billion in the first quarter, but fell to $ 15.7 billion in the third quarter.

The slowdown in fund flows was felt as asset managers invested in new ESG products. A record 38 U.S. sustainability funds launched in the third quarter of 2021, surpassing the 30 funds unveiled in the third quarter of 2020, Morningstar said.

Some analysts remain bullish on ESG, noting that the Thrift Savings Plan, the largest US pension plan with $ 760 billion in assets, has said it will offer ESG funds in 2022. And the Department of Labor should finalize a rule that would open the door for companies to offer ESG funds in pension plans.

ESG funds “did not have the spectacular outperformance they had in 2020”, but “we will likely see a continued focus on ESG funds and ESG integration until 2022,” said Michelle Dunstan , Director of Responsibility at AllianceBernstein. “We see this as a long-term secular trend. “

“It took oil and gas to outperform ESGs this year for investors to understand that this [ESG] is a much more nuanced space than they initially thought, ”said Aniket Shah, global head of ESG research at Jefferies, a US investment bank.


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