Environmental, social and governance (ESG) funds may see a continued spike in investment as oil prices crash, despite the Securities and Exchange Commission (SEC) cracking down on funds to clarify their intents, according to Bryan McGannon, director of policy and programs at the Forum for Sustainable and Responsible Investment (USSIF).
McGannon says the oil market crash may lead to long-term ESG investment strategies.
“I think maybe it does put a fine point on how volatile and how much risk is involved in the fossil fuel markets. That might point to a stronger direction towards ESG funds and still being broadly invested in the market, but without that component which is bringing in a lot more risk than you may not want,” says McGannon.
“It may be opening people’s eyes to ‘I can still have a broad portfolio, an ESG portfolio, that takes out that one sector that has an inordinate amount of risk,’ that they’re becoming aware of in the current situation. They can still get that broad level of exposure but without that area of risk.”
Some commentators have remarked on ESG funds’ outperformance of conventional funds as the coronavirus pandemic wreaks havoc on the market. Data from Morningstar shows that over the past month, sustainable equity funds have been overrepresented in the top quartiles and top halves of their peer groups.
In September 2019, Exxon Mobil dropped out of the S&P 500’s top 10 stocks for the first time in nine decades as part of the lowest weighting for oil and gas in four decades, CNBC reported. The current oil war between Saudi Arabia and Russia, brought on by falling prices from the coronavirus outbreak, may serve to expediate a pre-existing problem with oil investments.
“I think the change is already happening. I think people are looking at additional factors that are contributing to the profiles of these companies and how well they’re managed and what their long-term growth and profitability profiles look like,” says McGannon.
Meanwhile, ESG funds may face greater scrutiny as the SEC welcomes comment on how the funds should be named. On March 2 the SEC published a request regarding the “names rule,” which would require a fund’s name to broadly match what it invests in. With Morningstar reporting that sustainable funds attracted €120bn globally in new investments last year and BlackRock pledging to centre green investments, ethical investments are cementing their places in investors’ portfolios. This progress raises questions over the potential for fooling investors.
“In my conversations with the SEC, the division that handles the naming of funds and the registering of funds spends a lot of time working with the funds and going back and forth, and they want to be able to streamline that proves and be a little clearer on the naming rules. On one hand we think it’s good that they are taking a critical eye on greenwashing or ESG washing, so if they say they’re doing ESG, they should be doing ESG,” says McGannon.
The SEC comment period is open until May 5. But while it is required to respond to all comments, McGannon points out that corporate interests may have a lot of sway at the current SEC.
“I think the corporations have an immense amount of political power in the United States – they would consider this a regulatory burden, and I don’t think that the SEC is necessarily looking at ESG with all positive intent. They may be looking to scrutinise because they’re getting pushback from special interests that they don’t want the scrutiny that the ESG brings to certain sectors.”