The Ukraine war has put new pressure on ESG and impact investors, as the energy sector towers over environmental sectors as a result of Russia’s invasion in Ukraine, presenting a test for impact investors.
This begins a new phase for the move in popularity for impact investing and responsible business initiatives.
In early 2022, fossil-fuel companies were profiting from a resurgence in transport use and a huge increase in energy demand, as economies got back on their feet after the pandemic.
However, conflict in Ukraine has boosted gas and oil companies, as well as their investors, as prices rise in response to unease over Russian supply.
That energy sector shares have surpassed those of responsible investing, which has set forth one of the biggest tests for impact and ESG investors since the start of the ESG movement and the impact investing initiative.
Suddenly, impact investors, who tend not to invest large stakes in oil and gas, have started to notice their performance dwindling in comparison to other more conventional funds.
Asset manager Blackrock provides a perfect example of this recent change.
Over the last few years, they have set in motion multiple ESG funds and responsible business initiatives, all in an effort to support and finance the move to a net zero economy.
Despite their decarbonisation initiatives, they have recently indicated that the climate around ESG has changed, and advocated for some short-term investment boosts in fossil-fuels.
Europe is looking to alternative fossil fuels in order to move away from their use of Russian gas, as the European Commission has suggested that the European bloc can use 5% more coal in the next 5 to 10 years than they had predicted they would need, in order to replace Russian energy imports.
Another worry for impact and ESG investors is the fact that qualifying oil and gas companies are starting to become an increasing proportion of some ESG fund’s holdings as their share prices rise.
This is made clear by the fact that within Blackrock’s largest ESG fund, natural gas company ExxonMobil had made the 17th-largest holding as of May 2022, up from the 38th position by the end of 2021.
However, shareholders still have leverage to keep the transition away from conventional energy sources and fossil fuels moving, should they decide to use it.
MSCI notes that energy companies Chevron, ConocoPhillips and Pioneer Natural Resources have all boosted their dividends in response to surging energy prices.
Both the companies and their investors could very well use these extra dividends to fund sustainable initiatives and promote renewable energy projects.