At the surface, the oil industry might appear impervious to the cleansing efforts of responsible investors. But if we drill deeper, it is clear that integrating environmental, social and governance (ESG) analysis into investments – and engaging with companies – can deliver both a better financial return and a public good. In the latest Spectrum Audra Stundziaite, Senior Credit Analyst, and Jaime Gornsztejn, Associate Director, Hermes EOS, at Hermes Investment Management, discuss how ESG analysis and engagement with Petrobras and Pemex, the Brazilian and Mexican state-owned oil giants, enabled them to pinpoint risks and subsequently work constructively with the companies to help improve their financial performance.
Oil poses more than a few headaches for ESG investors. Besides the obvious high carbon content of petroleum products, the industry as a whole has accrued a reputation as risky across a range of ESG measures. For credit investors, however, oil companies are a significant presence, as they are the largest debt issuers in the global high-yield market, accounting for approximately 16% of notional debt. With so much at stake, it would be short-sighted to abandon the oil field to disengaged industry participants. Credit investors, like shareholders, need to discuss ESG concerns with oil firms if the industry is to improve. In turn, companies like Petrobras and Pemex, the Brazilian and Mexican state-owned oil majors, are heavily reliant on credit markets for financing and should be compelled to engage with bondholders.