Oil and gas stocks – which were beaten early in the pandemic and increasingly avoided by eco-conscious investors – have obscured the stock markets’ in-vogue environmental, social and management-oriented companies this year.
On Dec. 29, U.S. giants Exxon and Chevron added 48 percent and 40 percent, respectively, in 2021. The two have helped global energy equity funds surpass many of the hundreds of US and European sustainable funds as defined by Morningstar, a data provider.
The iShares MSCI Global Energy Producers Exchange Traded Fund rose 37 percent to December 29, outperforming the largest U.S. ESG fund – the $ 31.8 billion Parnassus Core Equity Fund – which is 28 percent higher. The largest iShares ESG fund managed by giant fund manager BlackRock also rose 30 percent.
This points to a sharp change from 2020, with the more lukewarm performance leading to early signs that investor enthusiasm for ESG funds has cooled as investor inflows into the fund class slowed at the beginning of the year from their icy pace.
“Cyclics tend to be dirty stocks,” says Pierre-Yves Gauthier, head of strategy at AlphaValue, a Paris-based independent research firm. “The streak for cyclical stocks came very early in 2021 and never stopped,” he added. “It came at the expense of the very expensive green stocks, which led the show in 2020. It was a busy trade last year.”
The Invesco Solar ETF and the iShares Global Clean Energy ETF have fallen more than a quarter this year. In contrast, these funds’ share prices tripled and doubled in 2020, respectively, when Exxon fell 41 percent and Chevron fell 30 percent.
Danish power group Orsted “was the darling” for ESG funds in 2020, Gauthier said. But Orsted and wind turbine manufacturer Vestas warned against challenging conditions in renewable energy after projects in Europe hit low wind speeds and higher cost manufacturers.
Orsted and Vestas fell by about a third in 2021. Iberdrola, the Spanish utility company that also prioritized renewable electricity, declined about a tenth this year.
Meanwhile, despite volatility in the oil price following the rise of the Omicron coronavirus variant last month, Brent crude oil and the US benchmark WTI both rose by more than half in 2021.
Global demand for oil is on track to exceed 2019 levels by March 2022 and is projected to continue its rise in 2023, according to JPMorgan.
“We’re seeing the first energy crisis of the decarbonization era,” said Joyce Chang, chair of global research at JPMorgan. “ESG outperformed because natural energy underperformed in 2020.”
ESG funds have benefited in the past by typically taking exorbitant positions on high-flying technology interests, such as Microsoft, which according to Bank of America is the most held stake in US ESG funds and this year by more than half has risen. . At the same time, ESG funds are typically underweight energy names – if they are included at all. But energy was the top-performing S&P 500 sector this year, marking a 50 percent increase in 2021.
ESG investment also attracted unprecedented research in 2021. Tariq Fancy, BlackRock’s former Global Head of Sustainable Investment, observed this ESG has offered asset managers a way to sell products at higher fees with little, if any, environmental benefit.
Performance this year may have dampened investors ‘interest in sustainable vehicles, with European ESG funds’ inflows slowing to $ 108 billion in the third quarter – down from $ 149 billion in the first three months of 2021 – according to data from Morningstar Direct. In the US, ESG fund flows peaked at $ 22.6 billion in the first quarter, but fell to $ 15.7 billion in the third quarter.
The slowdown in fund flow hit as asset managers invested in new ESG products. A record 38 U.S. sustainability funds launched in the third quarter of 2021, above the 30 funds unveiled in the third quarter of 2020, Morningstar said.
Some analysts remain optimistic about ESG, noting that the Thrift Savings Plan, the largest U.S. retirement plan with $ 760 billion in assets, said it would offer ESG funds in 2022. And the Labor Department is expected to finalize a rule that will open the door for companies to offer ESG funds in retirement plans.
ESG funds “did not have the dramatic performance they had in 2020,” but “we are likely to see continued emphasis on ESG funds and ESG integration going into 2022,” said Michelle Dunstan, chief executive officer at AllianceBernstein. “We see it as a long-term secular trend.”
“It has cost oil and gas, which have outperformed ESG this year, for investors to understand. [ESG] is a much more nuanced space than they initially thought it was, ”said Aniket Shah, global head of ESG research at Jefferies, a US investment bank.