A surge in energy stocks is
challenging climate-conscious
money managers who beat the
market for years when the sector struggled but are now
missing out on Wall Street’s
hottest trade.
The S&P 500 energy sector
has rebounded 54% this year,
outpacing the broad index’s
21% climb and leading the second-best-performing group by
about 16 percentage points.
That would mark the thirdlargest such gap between the
top two sectors since 2000, according to Dow Jones Market
Data.
Big gains in shares of companies such as Devon Energy
Corp. and EOG Resources Inc.
are putting some investors in a
bind. Many limited their positions in the energy sector after
the group lagged behind the
S&P 500 in eight of nine years
through 2020, hurt by low oil
and gas prices and rising
global supplies.
For much of that period, traders were rewarded for favoring green-energy companies that were perceived to
have more attractive long-term
prospects. Calls for large investors to divest themselves of
fossil-fuel producers crescendoed.
But now, those who avoided
the sector also avoided its 19%
surge in the past month. The
S&P 500 is up about 3% in that
span. Investors who for years
could easily eschew companies
such as Exxon Mobil Corp. or
Chevron Corp. must choose
whether the possibility of rosy
returns outweighs their climate considerations.
“It is a test of your conviction,” said Lee Baker, president
of Apex Financial Services.
“It’s hard not to ride the wave
when you see an opportunity.”
Mr. Baker recommended
that clients buy shares of energy companies such as Exxon
and Chevron when shares cra tered at the onset of the coronavirus pandemic. He is now
advising them to hold them,
wagering that they could go
higher. A few of his clients still
prefer to limit their investments in energy due to climate
concerns.
The percentage of fund
managers holding a larger position in energy stocks than
the benchmarks they track recently hit its highest level
since 2012 in a monthly Bank
of America Corp. survey.
Investors could have some
alternatives. Citigroup Inc. analysts recently compiled a basket of global stocks that are
correlated with the energy sector but have better environmental, social and governance—or ESG—scores.
European banks are featured
prominently in that group,
likely because energy prices
tend to climb alongside government-bond yields when the
economy expands. Rising bond
yields boost lending profitability for banks.
Such trades are in focus because U.S. crude-oil prices
have risen to their highest
level in seven years, at about
$84 a barrel. The power-generation fuel natural gas has
roughly doubled this year and
trades above $5 a million British thermal units.
The rapid price increases
threaten the global economy
heading into winter, when demand rises from consumers
heating their homes.
Surging energy bills and
fuel costs at the pump are contributing to investors’ worries
about inflation and eventual interest-rate increases. Meanwhile, power shortages are
shutting down factories in
parts of Asia and Europe, exacerbating global supply-chain
disruptions.
The economic ripples are
pressuring policy makers leading into a global climate summit in Glasgow, Scotland, that
begins next Sunday. Many analysts say tumbling investments
in new supply by energy producers—at least in part to assuage investors who want
them to limit emissions—are
helping drive up prices.
Investors will also be monitoring the latest earnings results from Exxon and Chevron
this week to gauge whether
energy companies will increase
production. Some analysts expect energy firms to drive
much of the stock market’s
earnings growth moving forward if oil and gas prices stay
elevated.
Deciding whether to put
more money into these stocks
than market benchmarks is
also tricky because S&P 500
energy companies make up
only about 3% of the broad index. They were more than 15%
of the S&P 500 at their peak in
2008, before commodities
crashed and technology became the dominant industry.
The sector’s minuscule influence means investors who
put money into market-tracking funds such as the roughly
$400 billion SPDR S&P 500 ETF Trust haven’t gotten much
of a boost.
Many analysts are wary of
“greenwashing,” the practice
of energy companies and investment firms making their
operations seem more environmentally friendly than they really are.
Phil Orlando, chief equitymarket strategist at asset
manager Federated Hermes,
said the company has been favoring the energy sector in recent months while still keeping
it as a small part of portfolios
and giving priority to ESG factors. He said the firm tries to
engage with management
teams at energy companies
and favors those that are
working to limit climate damage.
“You’ve got to try to find
that tricky middle ground,” he
said. “You can make money
here and be ESG compliant and
conscious at the same time.”
Traders are monitoring energy stocks in particular because they represent the main
way that many investors wager
on oil and gas.
Still, those who trade commodity futures contracts or invest in bonds tied to energy
producers must also decide
how much climate factors influence their fossil-fuel positions.
Amanda Agati, chief investment officer at PNC Financial
Services Group Inc., said concerns about the sector’s climate impact factor into her
decisions differently depending on the investment strategy
she is working on.
Her firm continues to hold a
smaller energy-stock allocation
than the S&P 500, betting that
higher supply from the Organization of the Petroleum Exporting Countries and other
producers will eventually cool
the rally at the same time renewables gain traction.
“It’s definitely one of those
crossroads moments for the
sector,” she said.