Engage or Divest? Our Approach to ESG and Energy Investing

Posted by Dana Funds Investment Team on Dec 9, 2021 11:49:54 AM

It’s a question that comes up often with ESG investing. In the long run, is it better to divest and avoid oil and gas companies that are responsible for high carbon emissions, or try to get them to change course? At Dana, we’ve chosen the engagement route, encouraging oil companies to clean up their act and pivot away from fossil fuels.

In this blog post, we explain our reasoning behind that stance and a few other points related to ESG and energy investing:

We believe divestment ignores the transition that needs to take place. Divestment in energy companies only affects the secondary market. In our view, that impacts the oil company minimally, either through negative news headlines, or by lowering the stock price and hurting management compensation tied to the stock. While we have divested in companies when a client requests it, we believe we can affect greater change by using our ownership voice to nudge oil and gas companies to move from being fossil fuel companies to energy companies.

This is already happening in Europe, where firms such as Orsted have transitioned themselves to clean energy companies. We are frustrated that U.S. oil majors are moving too slowly down this path, but as we have shared in a prior blog, we are taking action to make them change.

There are negative social implications that come from transitioning away from oil too quickly. While eliminating fossil fuels immediately would be the best thing possible for the environment, it would have negative social implications if it happens too quickly. Many emerging market economies are oil producing states and the industry has provided thousands of jobs. We want to see the transition away from oil, but in a thoughtful manner that considers these social factors.

Outright avoidance of the energy sector carries performance risk. ESG strategies are often benchmarked against standard equity indices that include the energy sector. By not holding any energy stocks, an ESG strategy can perform quite differently than the benchmark. That works both ways. Many ESG funds outperformed their benchmarks in the early days of the pandemic in large part because they had no exposure to the energy sector. Such strategies then underperformed when the sector bounced back this year.

We avoid sector bets at Dana. Such calls are nearly impossible to predict. Our preference is to try and outperform benchmarks through stock selection — an area we believe we have an edge — than through macro or sector calls that are tough to get right.

We seek to reduce oil demand in other parts of our portfolio, also through engagement. We believe fossil fuels should be eliminated in the long run and are actively encouraging that in our strategies. We analyze the carbon footprints of companies across our portfolio and seek change. We are encouraging utility companies to invest in renewable energy, and industrial firms, which are often big energy consumers — to increase efficiency and up their use of renewable energy. We believe this will have more impact on reducing carbon emissions than selling shares of existing fossil fuel companies that still experience steady demand. We have also engaged with banks to reduce lending for fossil fuel projects. We believe this is an additional pressure point to reduce fossil fuel investment.

In tandem, we believe these engagements will create a faster, socially just, transition to a low- or zero-carbon emission economy.

 

OPEN QUESTIONNAIRE

 

The Dana Funds are distributed by Ultimus Fund Distributors, LLC. There is no affiliation between Ultimus Fund Distributors, LLC. and the firms referenced in this blog post. 

ESG Investing: Environmental, Social and Governance (ESG) investing may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating. There is no assurance that employing ESG strategies will result in more favorable investment performance.