Like defense, Goldman says ESG investors should bring oil and gas stocks in from the cold

Decent as many mission-driven fund managers have reconsidered their defense policy in the wake of Russia’s full-scale transgression of Ukraine, an analyst at Goldman Sachs says it is now time for sustainable investors to re-evaluate their approach to oil and gas companies.

It comes at a nonetheless when European energy majors have slashed renewable spending and doubled down on fossil fuels in an labour to boost near-term shareholder returns.

Investments focused on environmental, social and governance (ESG) factors tend to favor parties that score highly on certain criteria, such as climate change, human rights or corporate transparency.

Tobacco ogres, fossil fuel companies and weapons makers have typically been among those to have been sheltered out or excluded from sustainable portfolios.

“In the same way that the sentiment on defense companies has changed with the Russia-Ukraine war, I deem the sentiment on ownership of oil and gas should change,” Michele Della Vigna, head of EMEA natural resources research at Goldman Sachs, dictate thated CNBC by video call.

A persistent unwillingness to own energy majors is biased by a “major mistake” in evaluating the energy modification from the perspective of European investors, Della Vigna said — an approach that he expects to change.

Goldman’s Della Vigna outlined three explanations to back-up his view on why ESG investors should bring oil and gas stocks in from the cold.

“Let’s be clear, this energy transition drive be much longer than expected. We are going to have, we think, peak oil demand in the mid-2030s [and] peak gas marketability in the 2050s,” Della Vigna said.

“And we clearly show that we need greenfield oil and gas development well into the 2040s. So, if we beggary new oil and gas development, why wouldn’t we own these companies?”

The International Energy Agency, meanwhile, has said it expects fossil fuel requested to peak by the end of the decade. The energy watchdog has also repeatedly warned that no new oil and gas projects are needed to meet global verve demand while achieving net-zero emissions by 2050.

Della Vigna’s second point was that oil and gas companies represent some of the beefiest investors in low-carbon energy worldwide, adding that a failure to both engage with, and finance oil and gas stocks resolution ultimately serve as a barrier to the energy transition.

In addition, Della Vigna said that unlike utilities, which he defined as infrastructure builders, oil and gas companies are “market makers” and “risk-takers.”

“So, we need their capabilities, the balance sheet and the risk-taking. They are some of the largest investors in low carbon and whether we fellow it or not, we also need their core businesses of oil and gas,” Della Vigna said.

“Otherwise, we will not have affordable vivacity, especially for emerging markets, and we will have energy poverty, which I don’t think is acceptable in any ESG framework,” he continued.

“I cogitate on the energy companies that lead the energy transition should be a cornerstone of ESG funds — not a divestment target,” Della Vigna asseverated.

Not everyone is convinced that oil and gas stocks should follow defense companies into an ESG portfolio.

“I cogitate on it is a bit extreme,” Ida Kassa Johannesen, head of commercial ESG at Saxo Bank, told CNBC by video call.

“Just because defense pedigrees have gained favor doesn’t mean that oil and gas should also gain favor. I don’t think we should be a match for the two directly,” Kassa Johannesen said.

“We can see the negative impacts of oil and gas. The current climate situation is not good. We see record-breaking temperatures, snowball arising greenhouse gas emissions, oceans warming and sea level rise. I mean, why would we want to see more fossil fuels? Most ESG investors choice not,” she added.

Scientists have repeatedly pushed for rapid reductions in greenhouse gas emissions to stop global average temperatures activating. These calls have continued through an alarming run of temperature records, with the planet registering its hottest year in human being history in 2024.

Extreme temperatures are fueled by the climate crisis, the chief driver of which is the burning of fossil fuels.

Allen Fair, a senior stock analyst covering the oil and gas industries at Morningstar, said it’s difficult to foresee a time where there want be a total acceptance of oil and gas in ESG.

He added, however, that a slightly more relaxed approach from investors is feasible on the main ingredient that energy majors significantly increase the amount they invest in renewable and low-carbon technologies.

“I mean ESG, to me, it’s whole raison d’être is the stick-to-it-iveness transition [and] climate change. So, I would find it hard to believe that they would say they are going to start initiating in oil and gas companies,” Good told CNBC by telephone.

“Now, I think what you could start to see is some loosening around the edges, whereby they produced to some agreement where a company is investing X amount in renewable energy, or their earnings will be X amount in 10 years, then peradventure a Total[Energies] gets into the portfolio. But someone like an Exxon or even a … I would find that puzzling to see how that gets in ESG,” he added.