If you’re looking for an “ESG” investment, why not try oil stocks?

If you are a nice person you won’t hold shares in any companies involved in fossil fuels or mining; their activities are dirty, environmentally unsound and that’s that. You can’t believe the planet is in trouble and also hold businesses involved in creating that trouble. End of.

This is certainly the view of Friends of the Earth. The group has recently produced research showing that British local government pension funds have almost £10bn invested in “climate wrecking companies” – even though many councils have expressed fears of a “climate emergency.”

Shocking. Or is it? Might – just might – there be another way of looking at this, one that is just a bit hard to hear over the cacophony of ostentatious do-goodery?

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The first question to ask is exactly what divesting – selling shares in “bad” companies of this sort – achieves. I’d venture nothing good. Sure, it makes it harder for firms that might want to raise new money via the equity markets and, if the generalised disapproval makes banks wary too, it might raise the cost of debt too. But for firms already chucking out cash, it makes no difference at all – and certainly none to current oil and gas production.

When you sell the shares, someone else buys them and the business just carries on. The transition to cleaner energy is under way, but it’s going to take several decades. In the meantime we need traditional sources of energy and shouting at oil doesn’t change that. You could even call it, as the UK pensions minister did this week, “reverse greenwashing” – something that might make you look good but that does nothing to fix the real problem.

You can argue this even more forcefully when it comes to the miners. If you want to get rid of the combustion engine – and find me someone who will say they don’t – you will need copper, as copper wire is one of the best ways to move electricity around. You will need mountains of rare earth metals too, for the magnets in electric motors and lithium for batteries. A medium-sized electric car currently contains two to three times as much copper as a comparable conventional car. Net zero might be a grubbier business than some like to think. What we want, then, is not no oil, no tin and no copper, but more carefully produced oil, tin and copper. How do you get that? Probably not by making a show of flouncing off in a huff.

Impact investing

Enter impact investing, the idea that instead of divesting, big investors should stay invested and encourage better behaviour. This is much harder than flouncing. But it works. Big energy companies, especially the European majors, are spending huge amounts on wind and solar and “committing vast sums for development areas such as green hydrogen and carbon capture”, says John Teahan of investment group RWC Partners.

Shell, Total and BP are all aiming for net zero by 2050 – partly as a result of pressure from the more hardworking of their large shareholders. It is the job of those shareholders now not to abandon them, but to make sure they stay on track and to “encourage them to go faster and further where possible”.

Paul Jourdan, of Amati, the investment house, says something similar about miners. Here the long-term environmental, social and governance (ESG) issues are endless – think everything from bribery to water pollution and worker safety. But again, regulation and engagement work: the past 15 years have seen “huge change”, with most miners offering “meaningful information” on all ESG aspects, he says. (John recently talked to Paul about this at length in the MoneyWeek Podcast – listen to what he has to say here.)

There’s something else the divesting cheerleaders need to bear in mind. Selling shares might not make any difference to a business, but it makes a difference to who owns the business. If you make a big institutional holder who really cares about, say, the climate, sell to a private holder who really doesn’t, what exactly have you achieved?

Take that a little further and imagine Friends of the Earth persuading all UK funds to sell fossil fuel firms. Those sales push the share prices down and down again. They become cheap – very cheap. But those who invest in listed companies are too media-aware to buy them back. The result? The companies are taken private by someone, maybe in the UK, maybe abroad, who doesn’t care what Friends of the Earth thinks. Now not only are its assets held by someone who might be, as Total’s chief executive puts it, less “mindful” of ESG matters than the original holders, but also by someone who doesn’t have to bother with the transparency and stewardship obligations that come with a public listing. Is that really what we want? Note that, according to data from Dealogic, five British companies have been taken private this year already, including power equipment firm Aggreko, on top of 34 in the past two calendar years.

Don’t forget the point of investing

There’s one more thing you need to think about. The money. The UK’s pension funds – and indeed the big retail facing funds – serve an important social purpose. They are there to finance your future. The core part of their job (for all the grandstanding about other stuff) is to compensate you for the years you put into boring Zoom calls with the capital and income required for a pleasant retirement.

So if renewable energy stocks are ridiculously expensive – there’s a bubble under way – and old energy stocks are cheap, do pension funds have a responsibility to sell the former and buy the latter? And if Exxon provides an income of more than 5% a year and that income is handy, why should they let someone else have it? Not for us, thanks; our pensioners have morals – let those nice chaps in private equity have the money instead. Hmm. And I’ll add another hmm to that on the basis that most pension funds hold private equity too. Let them take a dirty company over and odds are you will find you still own it – you’ll just be paying higher fees to less accountable management for the privilege.

So what should you do? Investing with an eye to sustainability is full of nuance. But if you care about the planet I’d say there is a case to be made for holding not fewer but more fossil fuel and mining stocks. Better they are in the right than the wrong hands. With that in mind you might look to UK value and income funds (they mostly hold this stuff).

Two investment trusts I have mentioned here before, the revamped Temple Bar (LSE: TMPL) (which I own) and BlackRock Energy and Resources Income (LSE: BERI) are good places to start. And if you are one of the seven million people with cash in the UK’s local authority pension funds maybe drop them a line explaining that maybe, just maybe, holding fossil fuel firms is one of the most socially responsible things an engaged and financially-aware investor can do now.