New analysis shows many of the top largest ESG energy holdings have severed investment ties in Canada's oil sands
Against the backdrop of Russia's continuing assault on Ukraine, markets are discovering uncomfortable realities for environmental, social, and governance-focused (ESG) investments. That has prompted demands for the asset management industry to rethink the loosely defined term – and the discovery of "shocking" holdings within some ESG funds are a case in point.
Citing a new report by CIBC Capital Markets, Yahoo Finance reported that many of the ten largest energy holdings among ESG funds have reduced or discontinued investments in Canada's oil sands while half have remained invested in Russia.
The bank discovered that ESG funds owned twice as much Russian oil and gas as Canadian oil and gas at the end of 2021.
"Perhaps most shockingly, the ratio of dollars held in Gazprom (a Russian state-owned energy firm) was six times that of Suncor," CIBC analysts wrote in a research published last week.
The main four Russian energy companies, NK Lukoil, Novatek, Gazprom, and NK Rosneft, accounted for around 0.2% of worldwide ESG holdings, according to the study. This is more than double the amount invested in TC Energy, Suncor Energy, and Canadian Natural Resources in Canada, according to the bank.
"Russia and Saudi Arabia may well emit less CO2 per produced barrel of oil equivalent than some North American firms, but they also invariably have less robust social and governance oversight," the analysts wrote.
"This says nothing of the reality many of their energy entities are de-facto state controlled and often aligned with foreign policy objectives – many of which will be an affront to mainstream ESG investors."
In recent weeks, several of the world's major corporations and institutional investors have taken steps to terminate connections with Russia in the wake of increasingly brutal attacks on the Ukrainian people.
According to Bloomberg data, ESG funds held at least US$8.3 billion in Russian assets before Russia attacked Ukraine. Among them are the country's financial institutions.
Bloomberg News reported that Vanguard Group and Northern Trust increased their interests in Russia's top bank through their respective index-based ESG funds in January. These instances, according to Vlad Tasevski, chief operating officer and head of product at Purpose Investments, demonstrate the need to counterbalance the three ESG priorities.
In an interview with Yahoo Finance, he argued that the environmental "E" in ESG is over-emphasized, owing to the increased difficulty of assessing social and governance variables vs real carbon emissions statistics.
"I think we are going to see a reassessment both by investors, and the data providers of information for ESG factors," he said in a phone interview with the news outlet. "Work on the 'S' and 'G' has been around for a while, but it's still newer. They're maybe not as straightforward as the environmental factors."
The lack of enthusiasm for Canadian fossil fuel firms among ESG investors doesn't surprise Tasevski. Even while the industry has sought to reduce its carbon footprint and invested in technology such as carbon capture and storage, he claimed that the ESG movement has "overwhelmingly negatively impacted" Canadian farmers.
"Perhaps the recent uptick in ESG fund outflows is simply a reflection of investors becoming aware that simple 'black box' metrics, such as ESG scores, often used in security selection, are inadequate for a topic as multifaceted as ESG," the analysts wrote.
