A Contrarian Look At Petroleum And ESG Investing

Being a contrarian (think skeptic on steroids, or skeptic with analysis), I always shake my head when I see that a new investment fashion gaining traction, such as this Financial Times headline, “Petroleum group sets up ESG centre as financing dries up in shift from fossil fuels”. https://www.ft.com/content/bbfa4f16-a0fd-4c9d-864b-ccddd23c5af1?shareType=nongift

But there is a huge difference between fads like “power ties,” where your sartorial choice was thought to indicate your managerial ability, and waves of sentiment about investment decisions, which have real consequences. And I don’t mean just the latest political movement on campuses: Think of the money that poured into the U.S. shale production, because shale was ‘where it’s at’ and investors (and some companies) were worried about being left behind in the ‘next big thing.’

Some years ago, I published an article titled (if memory serves) “Fashion is for Madison Avenue, not Wall Street,” making the argument that many in the investment community are too often swayed by short-term fads and fashions, pressuring corporations to adopt the flavor of the month, as it were. I particularly noted (many times, including my book The Peak Oil Scare and the Coming Oil Flood #shameless self-promotion) the way the oil industry was pressured in the 1980s to diversify away from a ‘sunset’ industry (petroleum) into ‘sunrise’ industries, such as photovoltaics. (Not sure how Mobil’s purchase of a department store fit into that binary choice.)

The vast majority of such investments went badly, usually written off after a few years, and Wall Street then decided that ‘core business’ was the best strategy, also known as ‘stick to your knitting.’ When oil prices soared in the early 2000s, some oil industry CEOs applied the lesson of the 1970s and argued that a price cycle was under way, not a secular change in the market environment and they resisted raising investment levels to avoid driving up costs (as happened in the 1970s). That stance largely crumbled under the pressure of the investment community, pundits and others who, in their best ‘this time for sure’ thinking argued that oil had changed, the easy oil was gone, peak oil was looming and the floor price was $100 a barrel. (For those who haven’t seen it before, it was suggested in 2012 that I might be an idiot for thinking the oil price could go below $100 a barrel for any length of time; it is about an hour along in this video.)

The latest fad is to pressure pension funds, investment banks, and others to insist that companies adhere to ESG guidelines, that is, Environmental, Social and Corporate Governance. In theory, this would preclude investments in fossil fuels (companies or projects), but the reality is that one investor’s prohibition is another’s opportunity. So, it is not clear that this will be either lasting or significant enough to affect the industry’s access to capital.

Ethical capitalism is nothing new, even if it seems as if it hasn’t been popular of late. (See the movie “Wall Street.”) Elizabeth Heyrick’s new book, Not Made by Slaves, Ethical Capitalism in the Age of Abolition cited an 1824 abolitionist pamphlet saying, “We are all guilty…of supporting and perpetuating slavery…because we furnish the stimulant to all this injustice, rapacity and cruelty by PURCHASING ITS PRODUCE.” Essentially, the same attitude informs the idea that fossil fuels should be eschewed by consumers or at least investors, although few would suggest slavery and greenhouse gas emissions are comparable evils.

But how to separate flash-in-the-pan fads from underlying social trends? In the first place, there is a huge difference between ideas like ‘quality circles’ and ‘ethical investing’. The former, although it refers to an important aspect of business (quality), saw a spike in attention because books and consultants promoted the idea specifically for a while. The latter is in theory a constant of corporate behavior, but in practice, the emphasis is often elsewhere (profits/returns).

The figure below shows a number of ideas or theories that experienced a brief surge of attention (using Google Trends, which begins tracking in early 2004) before fading. Some, like ‘virtual company,’ were just ideas that people found attractive for a time but ultimately lost interest in (although some might still practice any given approach). Other trends, such as ‘peak oil’ and ‘resource nationalism’ spiked with high oil prices and faded afterwards, showing the causal connection.

But some ideas might be more lasting than just a brief fad. The graphs below shows Google trends for ‘divestment,’ ‘stakeholder,’ and ‘ESG investing.’ The persistence of attention on the concept ‘stakeholder’ versus ‘shareholder’ interests makes sense, since it reflects a long-standing split between workers and investors, to describe it simplistically. Stakeholders will not go away and the rise in interest in the subject reflects the growing inequality in many societies; it could fade (see the 1950s) but will never disappear.

So, does the rise of interest in ‘ESG investing’ represent a fad or a secular trend? It would seem to be mixed, at least in relation to fossil fuels. It appears highly unlikely that the global climate will cool in the next few years, turning the public’s attention away from climate change, the way anti-nuclear sentiment came and went in the 1980s. On the other hand, it is conceivable that the huge pandemic-related debt overhang will discourage investment in more expensive fuels and technologies, most especially electric vehicles.

Rather like the concept of ‘quality,’ companies should always strive to behave ethically even if ‘ESG investing,’ fades in the public mind (or at least for investors). But it hardly seems likely that ESG investment principles will limit capital for all fossil fuels any more than organic farming ended conventional farming. And as Professor Heyrick notes, the 19^th century movement attempting to boycott goods made by slaves had a minimal affect on that practice. The question for the analogy is, what constitutes a Civil War-level effort to solve the problem of climate change