The financial environment for ESG enthusiasts has got more difficult this year. For example, the share price performance of oil majors such as Shell and ExxonMobil have surged since the start of 2022.

A report by US-based AllianceBernstein, the asset management house, said ESG investing can deliver superior returns despite headwinds of surging energy prices and stories about large banks “quietly quitting” the decarbonisation movement.

Performance figures bolster the evidence that investments which use ESG ratings and metrics to select securities and structure portfolios can deliver competitive returns, AllianceBernstein said in a statement. 

“Between 2017 and 2021, 88 of the 110 Morningstar ESG indices with five-year histories outperformed their non-ESG equivalents. Meanwhile, the S&P 500 ESG Index rose 32 per cent in US dollar terms in 2021, beating the S&P 500’s 27 per cent gain,” the firm said.

Surging natural gas and oil prices earlier this year, intensified by Russia’s attack on Ukraine, supply bottlenecks because of the pandemic and even the impact of central bank money printing, have made the fossil fuel sector look more attractive to investors this year. That’s an embarrassing development for investment houses under fiduciary requirements to deliver the highest possible returns for their shareholders. Achieving this obligation while going against fossil fuels is proving uncomfortable. Share prices of oil majors such as ExxonMobil and Shell have surged this year. In the case of ExxonMobil, for example, it started at $63.54 per share, standing at $99.19 last Friday; for Shell, it started at £1,722 pence ($19.4) per share at the start of January, and fetched £2,304 pence per share last Friday.

A Bloomberg article, entitled Banks try quiet quitting on Net Zero as global fossil fuel investment booms, takes its theme from the idea of people “quitting” the workforce not so much by walking away from the job but by restricting how hard they want to work. And the article said that “some big banks seem worried they jumped on the [decarbonisation] bandwagon too soon, especially as oil and gas companies have experienced a market resurgence.”

“The revived fortunes of fossil fuels, especially coal, may explain some of the weakened resolve for decarbonisation. Global bank lending to fossil fuel companies is up 15 per cent, to over $300 billion, in the first nine months of this year, from the same period in 2021,” the news agency said, citing its own figures. 

Earlier this year, a senior figure who had worked with HSBC was fired for bluntly challenging some assumptions on how climate change will damage future economic growth. That episode raised questions about whether challenging ESG ideas is a career-ending move.

In the US, the Securities and Exchange Commission has also taken the step of forcing companies to disclose their ESG exposures – a step which prompted political pushback from legislators who said the SEC was exceeding its brief. In the European Union, fund managers must disclose the ESG impacts of their products. Turning to Asia, the Singapore Exchange, to give one example, published the Sustainability Reporting Guide in 2016. This requires every listed issuer to prepare an annual sustainability report on a comply-or-explain basis.

ESG can deliver
The AllianceBernstein report insisted that ESG investment approaches remain important and benefit end clients. 

According to the firm’s latest ESG engagement campaign in 2021, its 107 investment analysts across 23 teams engaged with 432 unique issuers on carbon emissions, executive compensation and modern slavery. 

“Engagement results were encouraging. On climate goals and disclosures, for example, about half of the 213 issuers – 46 per cent – had some climate targets or disclosures, and almost all of the issuers that did not have climate goals or disclosures were receptive to adopting them.”

“Regarding issues such as modern slavery, which can be a sensitive topic of discussion to some issuers, AB found that 82 per cent of companies were receptive or very receptive to the conversations focused on reducing modern slavery risks in their supply chains. While most companies engaged during that period were based in North America (50 per cent), Asia including Japan closed in at the second spot, with 28 per cent of all the engagements…These figures mark an increase from 2020, when 92 investment analysts engaged with 358 unique issuers, while the percentage of companies engaged in North America and Asia, including Japan, stood at 48 per cent and 22 per cent, respectively.”

“Our net zero strategy is a result of years of collaboration with peers, clients, issuers and industry leaders,” Michelle Dunstan, chief responsibility officer at AllianceBernstein, said. “Research has continually informed our approach, while policy has helped shape our strategy and how we engage on behalf of our clients. AB’s net zero journey is well under way, and we’re excited for its next stage – translating our strategy into a systematic approach to fulfilling our commitment.”

WealthBriefing and its sister news service will also hold its Second Annual Wealth for Good Awards 2023, giving industry the opportunity to demonstrate its commitment to ESG, impact, diversity and inclusion. Find out more here.