ESG focus brings downstream opportunities: Panel

Institutional investor wariness of conventional energy businesses create new opportunities for downstream companies able to adapt, portfolio managers and analysts told the American Fuel and Petrochemical Manufacturers annual meeting this week.

Rising interest in environmental, social and governance (ESG) evaluations pose new risks of demand destruction and indirect regulation for refiners and petrochemical companies, the panel said. But they also create a chance for companies able to show material opportunities to grow into renewables or with stronger ESG performance to distinguish themselves from peers, the panel said.

"The universe is kind of telling you: 'It is going to be good for your stock price, it is going to be good for your long-term future, if you make a real attempt to become part of the solution to this energy transition'," Fidelity International portfolio manager Paul Gooden said.

ESG discourages institutional investors already tired of years of high spending and questionable performance for oil and gas producers, Barrow Hanley Global Investors managing director Lewis Ropp said. But swift downstream adapters can stand out among global peers for large investors seeking appropriate energy opportunities.

"Absolutely, it is an opportunity to invest in companies that are improving on their ESG risk factors," Ropp said.

Downstream companies have lots of data for environmental performance, and for safety, a part of social criteria for ESG investors. But diversity, community relations and supplier selection rely on less certain metrics. Investment management firm Neuberger Berman looks at the make-up of the full work force as well as issues like pay equity, managing director Jared Mann said.

"There is still a long way to go to enhance the robustness of these discussions, as well as the relevant disclosures," Mann said. "But we certainly see progress being made."

Major investors increasingly judge downstream companies by evolving and opaque criteria rooted in sometimes piecemeal data. Investment firms must establish clearer standards for these criteria — before governments impose them, panelists said.

"Everyone is pushing for this, for all of us to report more and to be more transparent in how we operate," Harmony Capital lead investor Robin Wehbe said. "We know that if we leave things up to government organizations, they are not going to make things easy for us."

The group had no answers for how downstream firms could prepare for regulation of how their products are used — so-called scope three emissions, not from the refining or petrochemical manufacturing, but from the use of their fuels, plastics and other products.

"I think the refining industry should not try to tackle this on its own," Gooden said. "It is something we are looking at in the future but at the moment that disclosure is just not there."

By Elliott Blackburn