Profiting from Power

The last quarter has been exceptionally good for oil companies. The UK’s giants, Shell and BP, reported massive increases in profits as a result of the sharp rise in the price of oil and gas and the government has started to think about imposing a windfall tax on the companies.

This throws up some interesting issues for ESG (Environmental, Social and Governance) investors. Should you own shares in these companies – either directly or indirectly?

The gut reaction of many ESG investors is that BP and Shell are fossil fuel companies and they are the root of our environmental problems. After all, they are the ones taking the oil out of the ground and selling it to us. But there may still be strong arguments for holding their shares.

If you don’t have shares in the companies, you have very little influence over their behaviour. It’s interesting to see the extent to which BP and Shell are keen to set out how they are changing. BP wants to be an integrated energy company, building a low carbon energy business, whilst Shell has ambitious plans to decarbonise. As a shareholder, you have greater ability to hold the board to account and to influence their behaviour, making sure that the statements they make are not just “greenwash”. If you exclude the shares from your portfolio, you can only watch on the sidelines. Fewer potential buyers of oil companies’ shares might make it difficult for them to grow, but a lack of access to finance may even persuade them to take the easy option – continuing to drill, instead of investing in the potential of hydrogen or other sources of energy.

In essence, this is the difference between two styles of ethical investing – you can exclude or engage with companies who don’t have the same morals as you. We find that investors who are seeking a non-financial, ethical return from their investments make use of both methods of investing. At one end of the scale, investors tend to exclude tobacco companies, whilst, at the other end, investors will be happy to hold shares in technology companies, whilst persuading them to act responsibly.

Culture has a big influence – we see that many US-based companies will include armaments companies in their ethical funds, excluding only companies involved with “controversial weapons”, like landmines. The attitude to weapons in the US is quite different to the typical person in the UK and this is an example of why it is important to look beyond the label on ethical, responsible and sustainable funds.

Coming back to the big oil companies, it’s important to decide whether you might feel happier having some influence by investing, directly or indirectly, or whether you feel that they are beyond redemption, so it is best to simply avoid holding their shares (and to invest in their more sustainable competitors). As we’ve said before, ESG investing involves some thought and can be complicated.

Most people invest using a fund, and, before investing, it can be good to know what the approach of the fund manager will be. If the fund manager is going to hold shares in Shell or BP, how are they going to exert influence on your behalf? That’s why we think it’s important to invest in funds managed by companies who have made a real commitment to responsible investing; this will mean that they have genuinely dedicated significant resources to ESG investing, and, preferably, they will have a track record which you can interrogate. Some companies seem to view responsible investment as the latest fad to increase funds under management, whilst others have made a genuine commitment.

If you would like help deciding which approach you would like to take, or would just like to have a chat about responsible investing, please get in touch.

Oliver Wise

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
Past performance is not a reliable indicator of future performance. 

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