Why are fund managers including commodities in ESG portfolios?

Why are fund managers including commodities in ESG portfolios?
Oil, gas, and mining stocks are making the grade as 'future green'.
AUG 28, 2024
By  Bloomberg

The days of equating ESG with the blacklisting of commodities are over, it seems.

In a fresh study, analysts at Goldman Sachs Group Inc. have found that fund managers are increasingly including oil, gas and mining stocks in portfolios that are registered as ESG. 

The development coincides with a regulatory rethink of how to frame environmental, social and governance strategies, opening the door for ESG investors to hold assets that might be green one day, even if they aren’t yet. It also follows protracted attacks by the US Republican Party, which has repeatedly accused the ESG industry of blacklisting fossil fuels. 

Goldman’s research looked at funds registered under the European Union’s Sustainable Finance Disclosure Regulation, which is the world’s biggest ESG investing rulebook. SFDR has two sustainable fund categories: Article 8 (the broadest) and Article 9 (the strictest). The analysis found that fund managers are generally more exposed to oil, gas and mining stocks now than they were 12 months ago.

Among Article 8 funds, a category that Bloomberg Intelligence estimates covers more than $7 trillion of assets, 51% now hold at least one oil and gas company, up from 47% a year ago, Goldman’s analysis found. When it comes to metals and mining, 46% of Article 8 funds hold at least one company in the industry, while the equivalent figure for Article 9 managers is 32%, the analysis shows. That’s up about 5% to 6% from a year ago, Goldman found.

Though ESG funds continue to be overall underweight commodities, “we see more willingness to own metals and mining companies,” Goldman analysts including Evan Tylenda and Grace Chen wrote in the report, which was published this week. And there’s evidence that ESG fund ownership of oil and gas stocks has “increased slightly,” they said.

SFDR is currently in the middle of a major overhaul following a lengthy consultation period. The revamped version is expected to make greater allowance for transition investing, meaning fund managers will be able to hold formerly controversial assets provided they can show their ownership is helping improve a holding’s ESG profile. 

Changes in the ESG regulatory backdrop in Europe “will spark the advent of improved mainstreaming of transition/improver funds as credible sustainability strategies, which could drive flows towards companies traditionally excluded,” the Goldman analysts said.

What BloombergNEF Says:

Uranium is increasingly seen as one of the important minerals for the energy transition as nuclear energy becomes integral to decarbonizing the power sector. Supply and demand estimates for yellowcake used in nuclear power generation point to a deficit from now to 2040.

The findings follow signs of a wider retreat from ESG in recent years, amid lackluster returns and mixed evidence of any positive environmental or social impact.

In the first half of 2024, Article 8 and 9 funds had a combined $17 billion of outflows, compared with $68 billion of inflows for non-sustainable equity funds (a category known as Article 6 within SFDR), the Goldman analysis found. The picture is different in the bond market, however, with sustainable fixed-income funds generating $115 billion of inflows, compared with $75 billion for non-sustainable funds, the analysts said.

What’s more, there are signs of improvement in recent months, with Article 8 and 9 funds seeing “modest net inflows” in both May and June, they said.

And despite net outflows during 2024, assets under management in Article 8 and 9 funds are close to “all-time highs,” the analysts said.

Latest News

Ashton Thomas-linked Amplify debuts QuantumRisk to help RIAs weather market shocks
Ashton Thomas-linked Amplify debuts QuantumRisk to help RIAs weather market shocks

"QuantumRisk, by design, recognizes that these so-called “impossible” events actually happen, and it accounts for them in a way that advisors can see and plan for," Dr. Ron Piccinini told InvestmentNews.

Turning conversations into clients: Attract prospects and gain new clients with these five strategies
Turning conversations into clients: Attract prospects and gain new clients with these five strategies

Advisors who invest time and energy on vital projects for their practice could still be missing growth opportunities – unless they get serious about client-facing activities.

Tax Foundation analysis highlights biggest OBBBA beneficiary states, counties
Tax Foundation analysis highlights biggest OBBBA beneficiary states, counties

The policy research institution calculates thousands in tax cuts for Washington, Wyoming, and Massachusetts residents on average, with milder reductions for those dwelling in wealth hotspots.

Meltdown of some Yieldstreet real estate funds raises eyebrows from financial advice industry
Meltdown of some Yieldstreet real estate funds raises eyebrows from financial advice industry

Yieldstreet real estate funds turned out to be far riskier than some clients believed them to be, according to CNBC.

RIA M&A activity hits record pace in H1 2025: Fidelity
RIA M&A activity hits record pace in H1 2025: Fidelity

The race to 100 transactions ended a month early this year, with April standing out as the most active month on record for RIA dealmaking.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.