Sustainable Investments Match Fossils' Returns

With oil markets crashing under the combined weight of a global pandemic and a sustained price war between rival producers, new analyses show renewable energy developments offering competitive returns against fossil projects, and sustainable funds outperforming traditional investment portfolios.

As oil prices settled below US$25 per barrel late last month, a report by Wood Mackenzie determined that solar and wind projects were now competitive with oil and gas—and would be at oil prices as high as $35, Recharge News reported. And as the coronavirus brought down the global economy, separate analyses by Bloomberg and financial services firm Morningstar Inc. showed investment funds with strong Environmental, Social and Governance (ESG) criteria “faring better than their conventional counterparts” and “overrepresented in the top quartiles of their peer groups in terms of their performance,” Grist stated.

Before the pandemic, oil prices ranged as high as $60 per barrel, and renewable energy projects “found it difficult to compete with expected double-digit returns” for oil and gas. Even then, the pressure on fossils to decarbonize “presented opportunities for [renewables] companies with strong balance sheets,” said Valentina Kretzschmar, WoodMac’s vice-president of corporate analysis.

In the post-pandemic market, “oil and gas projects are now in line with average returns from low-risk solar and wind projects,” WoodMac wrote, in a special note on the impact of the pandemic on the fossil sector. That means “capital allocation is no longer a one-way street for Big Oil,” since “renewables projects suddenly look as attractive as upstream projects at $35 per barrel.”

(On Sunday afternoon, world oil prices stood at $34.11 per barrel for benchmark Brent crude, $28.34 for West Texas Intermediate.)

With oil below the $35 threshold, Kretzschmar said fossils will “struggle to generate enough cash to maintain operations and honour shareholder commitments,” but the deep budget cuts they’ve been announcing will have little or no impact on the growth of renewable energy. “Historically, the oil price has shown no correlation with investment in renewables,” she said. “The installation of both wind and solar continued to increase through the last oil price downturn.”

And ultimately, “oil and gas companies make up a tiny proportion of global investment in renewables,” she added. “The sector accounts for less than 2% of global solar and wind capacity. Even if Big Oil stopped investing in renewables altogether, that would have a minor impact on growth.”

The picture was much the same for ESG funds when analysts compared their performance to the more conventional Standard & Poors (S&P) 500 stock index. For years, sustainable funds were viewed with suspicion by investors who doubted they could generate high enough returns without oil and gas, tobacco, or other contentious stocks. But now, “with a crash in oil and stock prices battering the value of financial assets across the board, ESG funds appear to be weathering the storm better than the traditional funds that might previously have been considered safer bets for investors,” Grist writes.

“According to a Bloomberg analysis, the average ESG fund fell by about 12% this year,” adds reporter Naveena Sadasivam. “That’s a big tumble, but it’s just half the decrease seen by the S&P 500 Index over the same period.” Morningstar’s analysis of about 200 U.S. funds reached much the same conclusion.

“Analyses of ESG funds are somewhat complicated by the fact that financial institutions do not have a universally accepted definition for ESG,” Grist explains, leading to concerns about loose language and greenwashing. But “research conducted even before the current crash supports the idea that ESG funds do better than traditional funds during times of market volatility. A 2019 white paper by BlackRock, the world’s largest asset manager, noted that ESG funds were more resilient during downturns, and a Morningstar analysis found that, when the S&P 500 fell by more than 7% during the first week of February 2018, two-thirds of ESG funds outperformed their peers.”