Climate change and energy transition are top of mind for our clients, and we are continuously thinking about how these global issues are evolving and their impact on our organization, our clients, and the industries we serve.
IHS Markit report on ESG & the energy industry
In late 2019, we had the opportunity to combine the industry expertise of our Energy and Natural Resources team with our Perception Research team’s ability to garner insight from capital markets to complete a unique study analyzing the impact of ESG (Environmental, Social, Governance) issues facing the energy industry.
IHS Markit Vice Chairman Daniel Yergin and Carlos Pascual, Senior Vice President, Global Energy, were instrumental in highlighting the most pressing topics for the oil and gas industry and the resulting findings shed light on how investor behavior has trended, where sentiment stands, and what this means for corporate citizenship going forward.
Fiduciary duty to clients remains #1 priority; ESG increasingly a factor
Our research pointed to several factors impacting energy investor decisions. Not surprisingly, investors’ number one priority is their fiduciary duty to clients. Therefore, the historical underperformance of the energy sector relative to the S&P 500 over the last decade is largely due to three factors: 1) commodity prices, 2) poor returns on capital, and 3) value-destructive capital allocation. More recently of course, the global COVID-19 crisis, near-term prospects of weak oil demand, and subsequent collapse of oil prices has upended the capital markets.
Broadly through the research, investors indicated that ESG factors including climate concerns and general investor apathy have also played a role in diminishing investment appetite historically.
However, not all energy companies are equal in investors’ eyes. For example, oil and gas majors are among the subsectors that remain appealing to investors as a result of their flexibility, diversification, and the scale and resources they can employ toward adapting to the energy transition.
ESG is relevant for all industries
Investors recognize that over the long term, the sustainability of an energy business is interrelated with its positioning for climate change. This begs the question – could a similar statement hold true for ANY company that operates in the global landscape today?
For the institutional investors and private equity funds interviewed, ESG is increasingly seen as central to directly reducing regulatory risk and addressing the public pressures that create regulatory risk. Growing scrutiny on governments, financial institutions, and corporates to be more environmentally conscious may result in less access to capital. To put it into perspective, EAUM of ESG funds has tripled over the last decade, leaving the oil and gas sector among others, behind. This has created a new paradigm for companies to not only demonstrate fundamental appeal, but to also actively contribute to the climate narrative and ensure that their businesses are aligned to environmental issues at the heart of consumers and the general public.
To IHS Markit experts discussing the research in depth, click here to watch the full video interview.
Energy transition and climate change are topics that transcend the oil and gas industry. The impact is felt globally by consumers, corporates, and society at large. It is a pressing issue that is becoming increasingly intertwined with capital flows, making for interesting case studies on evolving investor perspectives and one which our own Brian Matt discussed late last year on a podcast with Brookly McLaughlin from ICE and has been covered in an in-depth piece published in January 2020.