As Elliott Moves In, BP Investment Case Splits ESG Fund Market

(Bloomberg) -- As Elliott Investment Management pressures BP Plc to abandon its renewable-energy ambitions, ESG fund managers can’t agree on how to treat the UK oil giant. 

BP’s pledge to beef up investments in oil and gas — and slash its commitments to renewable energy — has coincided with ESG fund inflows into the company of $200 million since late February. ESG fund outflows from BP, meanwhile, were $315 million, resulting in net withdrawals of $115 million, according to data compiled by Bloomberg. 

Money managers who say BP still belongs in an ESG portfolio include Legal & General Investment Management, which added BP to its Climate Action Global Equity fund in September and has held on to the stake despite the company’s pivot away from its climate commitments.

“We’ve seen some backpedalling,” said Nick Stansbury, manager of the fund and head of climate solutions at Legal & General. “But that is in the context of an awful lot of backpedalling everywhere else.”

Stansbury said that “what matters isn’t only the absolute sustainability performance of a company, but its performance relative to other companies.”

Elliott has now built up a stake in BP to just over 5%, making it one of the oil major’s biggest investors along with BlackRock Inc. and Vanguard Group Inc. Elliott has made clear it wants BP to return to its core oil and gas business as part of a strategy to generate $20 billion of annual free cash flow by 2027.

Against that backdrop, BP has embarked on a major pivot within its energy strategy. The company said on Feb. 26 it was abandoning earlier transition plans, and will instead seek to increase investment in oil and gas to about $10 billion a year. It also plans to reduce annual investment in low-carbon energy to $1.5 billion to $2 billion, which is roughly $5 billion less than BP’s previous guidance. 

Since BP’s announcement, more than 60 funds that commit to a sustainability objective in their prospectus have added to their existing stakes in the company, according to data compiled by Bloomberg. A further six such environmental, social and governance funds invested in BP’s stock for the first time.

The ESG investment industry’s biggest purchase of BP shares since late February was made by Franklin Templeton’s Investment fund (Ticker: TEMGGRI LX), which added 3.2 million shares, Bloomberg data show.

A spokesperson for Franklin Templeton hasn’t responded to a request for comment. 

BP’s decision to mount a full-throated retreat from the green transition while boosting investments in oil and gas has enraged climate activists and drawn criticism from a number of pension funds with sustainable investing policies, including Nest in the UK and Sampension in Scandinavia. 

The ESG fund industry has long struggled to reach a consensus on how to handle fossil-fuel companies. Many fund managers tout years-long engagement strategies they say will ultimately drive oil and gas producers to decarbonize. But the retreat from climate goals by BP and other oil majors indicates those efforts are having little impact.

Nazmeera Moola, chief sustainability officer at Ninety One Plc., said the Anglo-South African asset manager came to the conclusion about one year ago that “engaging with oil companies to run down their oil business was not a strategy that made sense in the medium term.” That’s because oil and renewables are based on very different business models, and a change in company leadership can result in a drastic change in strategy, she said.

Yet close to 5,000 funds marketing themselves as ESG hold stakes in companies in the fossil-fuel industry, according to a recent analysis by nonprofits Urgewald and Facing Finance. Over a third of the roughly 14,000 funds assessed had more than $134 billion invested in companies “actively pushing” projects that expand the production of oil, gas and coal. BP was among the most popular stocks among the ESG funds analyzed.

“Companies that pursue fossil-fuel expansion projects in the midst of a climate crisis are jeopardizing our future,” said Julia Dubslaff, finance researcher at Urgewald. “Their presence in ESG funds violates the very concept of sustainability.”

New European regulations are about to make it more difficult for fund managers to say they’re ESG-compliant when they’re invested in fossil fuels. The European Securities and Markets Authority is requiring asset managers to ensure that at least 80% of their funds reflect the sustainable fund names that they use. ESMA also says that a fund’s name may require it to exclude certain exposures, such as oil.

About $460 billion of assets currently don’t meet ESMA’s ESG fund-naming guidelines, according to a report published by Bloomberg Intelligence analysts Adeline Diab and Hitomi Kimura. They also note that roughly 500 funds representing $380 billion dropped their ESG labels last quarter, as the industry adjusts to the new naming requirements.

Stansbury at L&G said the climate fund he manages is designed to hold companies that represent a “plausible financial opportunity to make money and profit from being decarbonization leaders rather than laggards.” That means L&G will target high-emissions companies it thinks have a good chance of transitioning to a cleaner business model.

Natalie Stafford, head of ESG and sustainability at S-RM, a consulting firm, said BP’s climate pullback “represents a period of proper reflection,” which isn’t “necessarily a bad thing.” The company’s earlier climate pledges smacked of “green grandstanding,” she said.

The oil and gas industry “hasn’t done a great job of investing in pure-play renewables,” Stansbury said. “But there’s lots and lots of other places in a low carbon energy system for them to play in.” 

(Adds Ninety One comment in 13th paragraph.)

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