Oil and gas companies in the United States are striving to find a balance between ongoing environmental, social and governance (ESG) initiatives and a desire to ramp up production as the world battles a sweeping energy crisis. All the while a larger conversation concerning so-called “greenwashing” – the practice of misleading investors into thinking environmentally unfriendly practices are, in fact, good for the environment – grips the U.S. financial market.
Rystad Energy has evaluated the ESG performance of a peer group of 43 public oil and gas producers in the U.S. and Canada, including supermajors ExxonMobil, Chevron and BP, and compared it against their stock price to understand how focusing on these issues impacts their share performance. The analysis shows that while companies ranked the lowest on ESG outperformed the market since the recent rally, companies with a higher ESG score performed better over the long term.
Indexed to January 2021, producers with the worst ESG ratings (named ESG LAG) gained almost 250 points, whereas those with the highest scores (ESG LEAD) gained only around 150 points. However, if you expand the timeline and compare prices to those in December 2016, the companies with the strongest ESG ratings gained 78 points, while the lowest performers dropped 12 points on average. This is a clear illustration that ESG ratings impact long-term financial performance.
The short-term trend is easily explained, as operators in the ESG LEAD group are mostly larger producers, with an established sustainability strategy and stronger finances. Companies with the lowest scores are the more volatile smaller operators that have yet to build financial endurance and sustainability improvement plans. In an upcycle like the one witnessed since the start of 2021, higher leveraged and undervalued companies are the ones that recover the fastest.
“It is clear that ESG performance impacts investor appetite, even though ESG scores have not been the lead indicator of stock growth during the latest market recovery in 2021. As such, ESG performance affects the ownership profile of the energy sector with sustainability-focused investors diversifying into the other sectors,” said Alisa Lukash, Rystad Energy’s vice president of shale research.