"ESG" Is Changing How Major Investors Play the Energy Sector

“ESG” Is Changing How Major Investors Play the Energy Sector

by | published January 17th, 2020

In the last Oil and Energy Investor I discussed how major energy sector investors have been revising their priorities. Crude oil, natural gas, and even coal are still in the mix. But these more traditional money moves are more frequently becoming regional plays, as investors assess demand requirements in expanding areas like Asia.

Then there are the longer-term prospects of advances in technology and methodology. In addition to multi-year R&D efforts that are not expected to result in revenue flow for some time, the ongoing pursuit of breakthroughs in the battery and storage sector continues to draw funding, while developments in kinetic energy (generating power from motion) and inversion (transferring DC to AC) are also on the list.

The latter remains a main element in further reducing the cost of generating electricity from solar and wind. In these sources, electricity is harvested as direct current (DC) but must be transferred to alternating current (AC) to move onto the power grid. That transition usually means a loss of energy.

Reducing the inversion loss is the key element in hurdling the last major cost consideration in a larger transition to renewable sourcing. It will be a primary catalyst to reduce further the fossil fuel imprint in the overall global energy balance.

Oil, natural gas, and coal figure to remain the three main sources of worldwide energy for several decades to come. But the advance of renewables remains the single biggest change in the energy mix.

This has already been reflected in how large energy investors prioritize where the money goes. Despite personal preferences and political/cultural bias, the heavy hitters need to see profitable return. Renewables have now demonstrated the bottom-line shine.

And that has resulted in billions moving into solar, wind, and other sources (biofuel, geothermal, chemical) that have a more positive impact.

Serious Investors Are Changing Focus Fast

That has set the stage for the kind of changes in attitude I have been witnessing in my periodic meetings with some serious international energy investors. As I noted last time, the most recent exchanges began on a boat in the eastern Caribbean and ran through subsequent conference calls last weekend.

The latest variations have revealed the search for profits in two areas: energy efficiency and sustainability. Both targets mark more expansive departures from where investment priorities had been only 18 months ago. The reason is simple.

Each of these provides rising rates of return. After all, while these guys may also want to make communities more livable, they are mainly in this to make money.

In the last OE,I I discussed a corollary concern in how I use the info obtained. As I said then, it is an ongoing matter of disagreement in my circles over whether the intel we exchange can be construed as inside information. If the move is on a private entity, my guys believe there is no inside impact (since there is no effect on the trading of any equity).

Moreover, if the company of interest is public there are some in the group believe it is still not insider trading if the company does not know the outside investment (i.e., theirs) is coming.

I have always taken a very conservative view. I regard all intel generated from these sessions as potentially being insider in nature. Therefore, I have refrained from using any particular elements from our discussions until related information emerges publicly from other sources providing a reason for recommending a play.

After all, even though the impending investment may not be in a traded company it may still affect publicly available stock.

Here’s the Best Way to Play This Rapidly Unfolding Trend

Despite such restrictions, I am still free to comment on the trends in what they are thinking. That resulted in my discussion about sustainability and efficiency. I also indicated at the very end of the last OEI that his time around there would be some recommendations on what you can act on without knowing any specifics about where mega investors are going.

In addition, there are occasions when a move can be recommended without identifying specific conclusions drawn from the assembled investors. This happens to be the case this time around.

Sustainability has been accelerating as an objective. It reflects an increasing interest in less evasive energy sources (mainly renewables) and a broadening accountability to other social stakeholders.

Charles, the Prince of Wales, will be chairing a session on sustainability at the Word Economic Forum meeting in Davis, Switzerland beginning on Tuesday. That is likely to extend to my next major meeting – the annual Energy Consultation always held the first weekend of March at Windsor Castle outside London while the royal family is in residence.

The sustainability debate in several sectors of the market has now focused on “ESG” – environmental, social, and governance. Investment has recently been emphasizing ESG weighted factors more than into any other single direction. Yet remember, the folks I talk to are also moving in that direction for one simple reason. There are profits to be made there.

Therefore, without naming particular plays coming from the conversations, there are still direct ways to invest in the targeted sector. It involves using exchange traded funds (ETFs) designed to track the kinds of ESG applications that are increasing in interest.

iShares ESG MSCI USA ETF (NASDAQ: ESGU) is a $1.46 billion fund that tracks the MSCI Extended ESG Focus Index. ESGU invests about 90 percent of its funds in the US securities that comprise the index with the remainder used to buy futures, options, swaps and other derivatives of those securities. It is up 13.8% since the beginning of last October with most of that rise taking place more recently.

The other initial play in the ESG space is from the other end of the spectrum and focuses upon emerging market trends, where ESG has taken off even more so than in developed markets.

Nuveen ESG Emerging Markets Equity ETF (NUEM) is a very small ($62 million market cap) fund tracking the TIAA ESG Emerging Markets Equity Index. NUEM is up 15.5% since October 1, once again with most of that rise occurring more recently.

Now the statement this week from BlackRock, the world’s largest asset manager, that they were focusing on sustainability has prompted trading volume heavier than normal in the sustainability/ESG ETFs. Such funds are simply the easiest way to play the trend.

As a result, there may be more volatility than normal in these selections. For that reason, I have recommended you use a hard stop to put a floor on risk.

Both ESGU and NUEM utilize indices that include targets identified by my investment groups (along with other securities in sustainability and related areas).

I am now tracking ten other ESG and related ETFs, with more certainly to follow. This is already providing a broader approach than investing only in renewable energy production companies.

Actions to Take:

  1. Buy iShares ESG MSCI USA ETF (ESGU) at market. Use a hard stop of $48.
  2. Buy Nuveen ESG Emerging Markets Equity ETF (NUEM). Use a hard stop of $18.



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  1. January 22nd, 2020 at 08:22 | #1

    I’m trying to invest

  2. February 20th, 2020 at 17:46 | #2


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