Fossil fuel companies play a major role in the energy transition

A great deal of sustainable investing is focused on the energy transition: the shift away from fossil fuels and toward renewable energy sources. The motivation is spurred by the global priority of reducing carbon emissions, but it is also rooted in sound economics. As prices for renewable energy become more competitive with traditional sources, fossil fuels face a fundamental business challenge that directly impacts their market position. In short, their models must change for them to remain leaders for the long term.

That may be in part why some Big Oil companies are entering the renewables sector. Consider BP’s strategic partnership with Japanese company Marubani focused on offshore wind; and Shell’s ambitious plan to be a net zero energy company by 2050. Certainly, there is skepticism about the authenticity of these commitments, however the opportunity for these energy giants to make a difference is undeniable.

The scenario presents a new option for sustainable investors seeking to find value in the energy transition. Historically, there have been frequent calls to divest from fossil fuels altogether in an effort to make a statement and “starve” the industry of capital. But more “midway” alternatives are emerging, through which investors choose to keep Big Oil in their portfolios in an effort to support those with substantial initiatives directed at renewables.

Jefferies Financial Group found its 2022 ESG Investor Survey that there is more interest in all facets of the energy transition than there is in “pure” renewables investments. Key takeaways include:

– Investors are less interested in pure play green stories of today.

– Renewable energy investments are at the forefront of investors’ minds.

– Climate remains the number one focus of ESG Investors globally.

In a related article, Barron’s noted that “ESG investors are shifting their focus from green companies to carbon-intensive companies that are embracing renewable energy and have credible transition plans.”

For client-facing material on this topic, subscribe and take a look at our content package on fossil fuels and the energy transition.