If you support green energy, you should buy utilities and oil stocks – here’s why

The fossil fuel divestiture move grabbed headlines in December when the New York State Comptroller said the $ 226 billion New York State pension fund, planned to cut many of its fossil fuel stocks over the next five years and sell stocks in other companies that contribute to global warming. .

The fund has stakes in large oil companies – stocks like Exxon Mobil XOM,
+ 3.68%
and Chevron CVX,
as of Sept. 30, according to Holdings Channel – and avoiding investing in fossil fuels has been a hallmark of long-standing socially responsible mutual funds. Many of these funds outperformed last year when traditional energy prices collapsed.

But dumping those stocks means investors aren’t buying the companies that are fueling the green energy transition and impacting the environment. This is one of the reasons some ESG fund managers say the divestiture doesn’t work.

“There is a fundamental mythology in the divest movement that when you divest yourself you are fundamentally hurting that business, and that’s just not how the markets work. When we sell, someone else is buying, ”says Mark Regier, vice president of stewardship at Praxis Mutual Funds, the mutual fund family of Everence Financial, a Christian, socially responsible financial services organization.

Granted, some people have moral reasons for not wanting to own stocks in certain sectors, but for those who wish to have an impact with their climate change investments, one solution is to look for companies and funds that are pushing for a change. better behavior.

Advocacy works in a way divestiture doesn’t, says Chris Meyer, manager of investment in stewardship research and advocacy at Praxis. The family of funds targets their advocacy by engaging with specific companies to influence their transition to greener energy. Praxis owns shares or green bonds of companies such as ConocoPhilips COP,
+ 2.04%,
The South South Company,
and NiSource NI,
advocate for the reduction of greenhouse gases and the phasing out of coal-fired power plants.

A strategic change at NiSource

A recent success for Praxis has been with NiSource, a natural gas utility with a market value of around $ 8.6 billion.

In 2017, Praxis began engaging with NiSource about its subsidiary Northern Indiana Public Service Company, which now derives 50% of its electricity from coal-fired power plants. By 2018, NiSource has not only pledged to phase out coal completely by 2028, but has said it will avoid the use of natural gas, a common step in the green energy transition, and instead plans to use wind and solar power generation. This will effectively double the amount of renewable energy capacity installed in Indiana and reduce overall greenhouse gas emissions by 90%, Meyer says.

Pressure from other community groups and market forces – coal has become less economically viable and the cost of renewables has fallen – also drove NiSource’s decision, he adds.

Another step was to encourage NiSource to offer jobs to workers at coal-fired power plants, which the company has done so far. Meyer says this is part of a “just transition”, ensuring that people’s livelihoods are factored into the green transition.

The divestiture of NiSource shares would not have achieved any of these goals, he adds, noting that NiSource was open to many suggestions from advocates. NiSource said in a September 2018 press release that increasing the withdrawal of all its coal plans in 10 years and replacing it with lower-cost renewable energy sources was “the most viable option for customers. “. He did not mention shareholder advocates.

Peter McNally, global head of industry, materials and energy at Third Bridge Group, says energy and utilities companies take shareholder advocacy seriously, especially in Europe, where this kind of he engagement has lasted much longer than in the United States. see also the strong financial performance of the Danish wind energy company Vestas VWS,

and the electricity company Orsted ORSTED,
+ 2.47%,
they therefore pay more attention to alternative energies, he adds.

Where to have the greatest impact

With 30% of global greenhouse gas emissions coming from power plants, the utilities sector is a ripe area for the transition to green energy, Meyer says.

Also, utilities have proven they can make renewables work on a large scale, McNally says, and they all invest in renewables in one way or another.

NextEra Energy NEE,
is the star child of this transition as this company, with a market capitalization of $ 162.2 billion, develops its renewable portfolio of wind and solar energy. But because it still derives energy from fossil fuels, some ESG funds don’t hold it.

McNally and Meyer caution that there are different regulatory regimes in the United States for utilities, some at different stages of the energy transition.

A number of utilities are still messy from an ESG standpoint, such as Southern Co., which has the only nuclear power plant under construction in the United States. But the company has issued green bonds to fund its transition to renewable energy, which Praxis owns, and Praxis is considering strong corporate governance to continue its transition.

ESG assessors are noticing the improvements. MSCI upgraded its ESG rating on Southern Co. from BBB in December 2016 to AA in December 2018, and considers it a leader in the utilities sector. It has also improved Duke Energy DUK,
to an A rating in August as Duke expands renewable energy production and withdraws coal-fired power plants. MSCI’s best rating is AAA.

Read: Here’s how you can add sustainable investments to your 401 (k) holdings even if your plan doesn’t include ESG funds.

What to doep in mind

Oil companies are behind public services, but some big European oil companies like Total FR: FP,
Royal Dutch Shell RDSB,
+ 0.16%


+ 2.71%
and BP BP,

+ 2.76%
are pushing towards a greener transition. But McNally and Meyer say that instead of becoming completely free from fossil fuels, they could become integrated energy companies. Even so, advocates can pressure oil companies to decarbonize, such as fixing methane leaks, or abandon costly projects like drilling in the Arctic.

Investors interested in keeping utilities at the forefront of the green transition could look to a utilities ETF. One is Virtus Reaves Utilities ETF UTES,
which has an MSCI ESG fund rating of AAA. However, many index funds are considered ESG lightweight, which means they are not shareholder advocates.

However, that is starting to change as big fund providers like BlackRock and State Street Global Advisors say they become more active at shareholder meetings.

Read: Your ESG investment may be a ‘light’ fund and not as green as you think

Investors also shouldn’t expect the kind of quick results Praxis has achieved with NiSource. Shareholder engagement takes time, but is more successful than divestiture. While many proponents of divestment point to the success of the end of South African apartheid in 1994, anti-apartheid activism began in the 1960s, and there was also a lot of shareholder engagement.

Greg Wait, an advisor at Riverwater Partners, specializing in ESG, says investors who buy advocacy mutual funds or companies transitioning to green energy should ensure there is clear evidence that the transition is underway, for example by building more renewable energy or removing coal-fired power stations to avoid greenwashing. And be patient.

“All of this positive change takes years. You can’t just tell if we own a bunch of big mutual funds… there will be an automatic change. That’s not how it works, ”he says.

Debbie Carlson is a MarketWatch columnist. Follow her on twitter @ DebbieCarlson1.

Read also : Rockefeller Foundation, Built on Fossil Fuel Fortune, Becomes Greatest Philanthropist to Avoid Oil Investments

And: Asset managers with $ 9 trillion on watch launch net zero emissions plan – and US funds stay on the sidelines

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Felix J. Dixon