Is E.S.G. Falling Out of Favor?
By Andrew Ross Sorkin, Ravi Mattu, Bernhard Warner, Sarah Kessler, Michael J. de la Merced, Lauren Hirsch, Ephrat Livni and Kate Kelly
Is E.S.G. Falling Out of Favor?
Chevron’s $53 billion bid for Hess may drive consolidation in the oil patch. Meanwhile, investors are pulling back from climate-focused investment products.
By Andrew Ross Sorkin, Ravi Mattu, Bernhard Warner, Sarah Kessler, Michael J. de la Merced, Lauren Hirsch, Ephrat Livni and Kate Kelly
Oct. 24, 2023, 8:14 a.m. ET
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Big Oil gets bigger
To oil analysts and investors, Chevron’s $53 billion takeover of Hess confirmed that there’s a new cycle of consolidation in the industry, coming less than two weeks after Exxon Mobil’s $59.5 billion bid for Pioneer Natural Resources.
Even as fossil-fuel producers face pressure from climate-minded policymakers, investors and activists to embrace greener energy — more on that below — they’re instead focusing on getting bigger. That could create a larger gap in the industry between those who have the firepower and freedom to buy rivals, and those who, because of politics or finances, do not.
Chevron and Exxon are acting from a position of strength, striking deals while they sit on billions in cash because of rising oil prices. That’s also reflected in their share prices, which have been climbing, making it attractive to use as deal currency.
Being able to offer stock helped persuade their targets — whose shares have also been rising — to sell. “We’re not only locking in and preserving the value we’ve created over the last several years but we still participate in the upside that you’re talking about,” John Hess, the C.E.O. of Hess, told investors on Monday.
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Many in the industry think consolidation is overdue. Investors increasingly aren’t willing to back dozens of drillers pursuing unprofitable exploration projects. “I think we’ve got too many C.E.O.s,” Mike Wirth, the chief executive of Chevron, told analysts on Monday.
Who’s next? News reports have suggested that midsize American shale producers are on the hunt, with Devon Energy looking at Marathon Oil and CrownRock while Chesapeake is studying a bid for Southwestern Energy. Analysts also point to ConocoPhilips, Diamondback and Occidental as being likely to look for deals.
A big question is what European oil giants like BP, Shell and Total will do. Until recently, all had emphasized their efforts to reduce carbon emissions, unlike their American rivals. Investors haven’t been pleased with that: BP, for instance, has a market capitalization of £180 billion, or about $220 billion, nearly half that of Exxon.
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Analysts say that the Europeans risk falling behind if they don’t also double down on fossil-fuel production. But the Europeans also face more pressure from their governments to transition to clean energy. (And antitrust regulators would probably frown upon the merger that investors crave: a union of BP and Shell.)
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HERE’S WHAT’S HAPPENING
G.M. reports a 7 percent year-on-year drop in third-quarter earnings. The carmaker cited the U.A.W. strike as a primary reason for its lower profit, and said it was continuing to negotiate with the union. Meanwhile, the U.A.W. ordered 6,800 union members to walk off the job at a Stellantis factory in Michigan that produces Ram pickup trucks, one of that automaker’s most popular models.
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U.S. Treasury yields fall. A rally in the bond market sent yields on the 10-year Treasury down to 4.86 percent on Tuesday, after hitting a 16-year high on Monday. (Yields fall when prices rise.) The rebound came as the billionaire investors Bill Ackman and Bill Gross announced they were abandoning their bearish bets on bonds. The other rally captivating investors: Bitcoin briefly topped $35,000 on hopes that regulators will soon approve the first spot exchange-traded fund for the digital currency.
The Justice Department expands an inquiry into Tesla’s business practices. Prosecutors are now examining how far the electric carmaker’s vehicles can travel on a full charge and the “personal benefits” given to some executives, the company disclosed in a regulatory filing. It’s the latest headache for Tesla: It’s stock price fell after a slump in third-quarter profit.
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The money flowing out of E.S.G.
Money managers closed their E.S.G. funds at a record clip last quarter, as Wall Street appears to be souring on the sector amid a wider market slump, slowing economic growth and higher interest rates.
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The shift away from funds that take into account environmental, social, and governance factors coincides with a regulatory crackdown on greenwashing and other misleading claims by investment funds. A number of Republican-led states are also stepping up boycotts against the asset managers.
Business leaders are increasingly feeling the heat on E.S.G. Some just wish that the larger debate would disappear.
E.S.G. investing is not going away … it’s shrinking. Investors pulled $2.7 billion out of E.S.G. funds last quarter, the fourth straight quarter of outflows from such funds, according to data from Morningstar. Most of the withdrawals were from two funds: BlackRock’s iShares ESG Aware MSCI USA ETF, and the Parnassus Core Equity Fund, run by the San Francisco-based Parnassus Investments.
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For the first time, U.S. money managers closed more E.S.G. funds than they opened. This may be part of a long overdue shakeout: Following a three-year boom in E.S.G. fund creation, there were 661 in operation at the end of September, up 11 percent since the start of the year.
E.S.G. funds have grown into a trillion-dollar investing force in recent years. This has been driven in part by investors motivated by a cause they believe in and by those chasing strong returns, Alyssa Stankiewicz, Morningstar’s director of sustainability research, told DealBook.
The slump in E.S.G. investing, she added, can probably be explained as much by “performance expectations” instead of advocates of sustainability-investing having “a change of heart about topics like climate change or diversity.”