Big Oil has a place in ESG funds, says Deutsche Bank CIO

By Tommy Wilkes

LONDON (Reuters) – Sustainability funds should be able to hold traditional energy shares because excluding them is denying investors one of the best ways to bet on a shift to renewable energy, a senior ESG executive at Deutsche Bank’s Private Bank said on Tuesday.

Fossil fuel stocks have boomed since Russia’s invasion of Ukraine in February 2022 sent fossil fuel prices soaring, leaving the performance of environmental, social and governance (ESG) funds lagging.

Pure-play renewable energy stocks such as Orsted and First Solar have also fallen sharply this year as higher interest rates and inflationary pressures squeeze profitability.

Markus Müller, chief investment officer ESG at Deutsche Bank’s Private Bank, said the fossil fuel effect was behind a drop in a recent survey in the percentage of investors who believe ESG factors can help manage risks to their portfolios.

“When we think about clean energy, these are business models which are quite new and sensitive to interest rates,” Müller told Reuters, noting that the number of “meaningful” global wind power players had reduced to three from eight before COVID-19.

“Investors are looking for traditional [energy] companies that have capex in renewables… They prefer the transition than to exclusions,” he added.

European oil and gas companies including BP and Shell have increased renewable energy investment, although they are expanding production of dirtier energy too.

Sustainability-minded investors, Müller said, needed more disclosures from firms about their plans for shifting to lower-carbon models, and regulatory clarity on labelling transition-focused funds.

ESG approaches range considerably and many funds invest in fossil fuels, but as regulations tighten more exclusions are possible.

France has said that from 2025 funds using the ‘ISR’ label, or Socially Responsible Investment label, could be banned from investing in firms involved in the exploration, exploitation and refining of new fossil fuels. Morningstar estimates that 45% of funds have exposure to traditional energy, totalling 7 billion euros ($7.6 billion).

Investors remain committed to sustainability goals, Deutsche Bank’s Chief Investment Office ESG survey found, with 18% of respondents choosing the energy transition as their preferred investment opportunity, beating artificial intelligence.

Yet fewer investors are confident ESG factors can help manage portfolio risks — 37% of respondents strongly or slightly agreed, down from 44% last year and 48% in 2021.

The survey, which received 1,759 responses, mostly in Europe, also found that only 15% of investors said they had a good knowledge of ESG, while 3% considered themselves experts.

($1 = 0.9168 euros)

(Reporting by Tommy Reggiori Wilkes; Editing by Susan Fenton)