ESG Funds Are Quietly Buying Oil Stocks

By Tim Quinson, Bloomberg ESG reporter and analyst

Managers of environmental, social and governance funds are starting to shift a larger portion of their assets to oil and gas producers, especially in Europe.

European-based ESG equity funds have been increasing their investments in energy companies, including Shell Plc, Repsol SA, Aker BP ASA and Neste Oyj, according to analysts at Bank of America Corp. About 6% of the funds invested in Shell this year, compared with none in 2021.

The allocations are driven by the outperformance of fossil-fuel stocks — the S&P 500 Energy Index is up 30% this year — along with optimism that the world’s biggest oil and gas companies will spend more to make the transition to cleaner energy.

Shell, TotalEnergies SE and Equinor ASA are among the companies that have evaluated the suitability of European utilities for takeovers, according to people familiar with the matter. Potential targets include some of the region’s largest wind and solar producers, such as Iberdrola SA, Orsted A/S and SSE Renewables Ltd.

The Robeco QI Emerging Conservative Equities fund, which adheres to Article 8 of the EU’s Sustainable Finance Disclosure Regulation, holds shares of carbon-intensive companies China Petroleum & Chemical Corp. (Sinopec) and PetroChina Co.

Managers of the $2.2 billion fund justify those holdings based on their three-year plan to actively encourage Sinopec and PetroChina to boost their sustainability performance. If that engagement works, Robeco says it will raise its equity position in each of the companies. If not, it probably will divest.