Investors shun oil and gas stocks due to underperformance
A survey finds the energy sector has fallen out of favour because of poor performance, but BlackRock expects a terminal decline
Investors have retreated from oil and gas stocks, although not for the reason one might think, a survey by global intelligence provider IHS Markit has found.
Even though environmentalists and investors alike are increasingly calling on companies to be more accountable for their environmental footprints, it would appear the oil and gas sector has fallen out of favour with investors, largely for economic reasons.
IHS Markit conducted in-depth interviews with institutional and private equity investors that have a collective $98bn in energy assets under management. The results conclude that economic performance is still significantly more important than environmental, social and governance (ESG) considerations.
Investors identify commodity price volatility, low return on invested capital, and long-term, supply-demand imbalances as the main factors that lead to investment underperformance historically.
“While the stock market has boomed, energy stocks have not. Indeed, they have been the worst-performing sector over the past decade,” said IHS Markit vice-chair Daniel Yergin and senior vice-president Carlos Pascual. “Moreover, energy has dropped from 15% in 1990 to only 5% of the S&P 500 sector weightings in 2019.”
The survey found that 63% of respondents agree that the oil and gas sector is currently undervalued and 67% of respondents believe there is potential for the oil and gas industry to experience a cyclical reversion in the stock market and to come back into favour with equity investors.
The survey does, however, find that ESG and climate considerations are weighing on overall investment attractiveness of the energy sector and will continue to grow in importance.
On Tuesday, BlackRock, the largest money-management firm in the world, released its annual letter to CEOs, penned by BlackRock chair and CEO Larry Fink, on the subject of how sustainability and climate change is reshaping finance and investing.
In the letter, Fink said that although markets have so far been slow to respond to climate change concerns, the world is now on the brink of a significant reallocation of capital.
“Over the 40 years of my career in finance, I have witnessed a number of financial crises and challenges — the inflation spikes of the 1970s and early 1980s, the Asian currency crisis in 1997, the dot-com bubble, and the global financial crisis. Even when these episodes lasted for many years, they were all, in the broad scheme of things, short-term in nature. Climate change is different,” said Fink. “Even if only a fraction of the projected impacts is realised, this is a much more structural, long-term crisis. Companies, investors, and governments must prepare for a significant reallocation of capital.”
And BlackRock, it seems, will be leading the charge. In a letter to clients on Tuesday, the firm announced a number of initiatives to place sustainability at the centre of its investment approach. This includes making sustainability integral to portfolio construction and risk management; exiting investments that present a high sustainability-related risk, such as thermal coal producers; and launching new investment products that screen fossil fuels.