Stocks to Buy: 15 Energy Stocks That Are Also ESG-Friendly: BofA Business InsiderRead More
Impact Investing Forum 2024
London. April 24-25, 2023.
According to Bank of America analysts, a cold winter could push oil prices higher than $100 per barrel.
This could cause headwinds for S&P 500, and requires a more active investing strategy to reap the benefits of gains.
The analysts recommend 15 energy stocks that can be bought to capitalize on the price rise and have high ESG scores.
As a wider commodity supercycle begins to take hold, energy prices are rising. The WTI crude oil price has risen 76% to $84 per barrel in the past seven years, a seven-year record. Analysts at Bank of America don’t believe this trend will change anytime soon. In a October 22 research report, equity analyst Savita Subramanian stated that the energy market is still tight due to limited supply and rising demand. She also said that the commodities team believes energy prices could stay high until the next economic downturn. However, pressure will intensify in the coming months. “They expect Brent prices to rise above $100/bbl if strong trading, low stocks and a rebound in air travel combine with a cold season.” Despite oil prices rising, most energy stocks remain cheap, especially when compared to high-growth technology stocks. Investors would normally be thrilled at this opportunity, but instead they face a dilemma. The rise of ESG mandates in investment funds makes locating capital to companies that contribute to climate change more difficult. ESG funds have seen a surge in investor interest over the past few years. Bank of America analysts reported that ESG funds have accounted for $3 in every $10 of equity investments to date.
However, there isn’t enough investment in infrastructure to meet current demand. This has created an attractive investment opportunity. Insider was also recently contacted by Ben Inker, head asset allocation at Grantham, Mayo and Otterloo, who highlighted the challenges this environment presents for investors. Inker stated, “This is a difficult investment situation.” I sympathize with people who want to invest here, and I am also sympathetic to people who aren’t sure how to approach investing in a business that may not be profitable for the next few decades but could be losing its value over the next 20 years. In previous cycles, investors would have simply enjoyed higher energy prices by owning the S&P 500 Index. According to Bank of America analysts, this dynamic is changing. First, the index’s weight has been decreasing in oil and energy beneficiaries. These companies accounted for just 6% of the total earnings of the S&P 500 in 2010 compared to over 20% in 2010. Subramanian stated, “Meanwhile the share of consumer sector, which have historically had a negatively correlated to rising crude oil prices, has remained steady.” He also said that “We expect benefits to higher oil prices to be much less than they used to be.” Energy companies are also more disciplined in their capital investments due to the lower capital flows. Companies that are able to benefit from capital expenditures in energy will see lower revenue and earnings. This is a change from previous cycles. Subramanian stated that this discipline means that companies that receive less revenue will experience lower earnings. Subramanian stated that the current cycle is supply-led. This is a relationship that has often been inverted with the S&P 500. The analysts stated that there is a 27% negative correlation of the S&P 500 with oil prices in a supply-led cycle compared to a 29% positive correlation for a demand-led cycle. The report outlines a variety of strategies to play the energy sector, from stocks that are pro oil to stocks that have pricing power to stocks that are energy-friendly. These stocks could benefit from both the short-term surge in oil prices and the long-term ESG exposure. The analysts recommend 15 stocks to purchase that have high ESG scores, but are underweight in ESG portfolios. Subramanian stated that energy remains massively underweight by both traditional active funds and ESG funds. Subramanian stated that Energy companies have increased their attention to ESG issues despite the large increase in ESG from investors, which has been detrimental to the sector. “Energy is now leading in setting net zero emission targets alongside Utilities. 36% of S&P 500 Energy companies have net-zero emission targets, and 36% have emission reduction targets. S&P 500 Energy companies have 77% now having executive compensation plans that are tied to ESG metrics.