Oil companies could transform into battery or wind generation companies in the future as they navigate a world facing the problem of climate change.
A report was released by the Intergovernmental Panel on Climate Change (IPCC) recently which forecast drastic changes to the environment if steps were not taken soon to address climate change.
This meant many people were reluctant to invest in companies which were seen to be perpetuating the problem such as oil or coal miners.
However, oil companies currently comprised more than 6% of the market capitalisation of global companies which meant it could be hard to avoid them particularly in index funds.
Pendal head of global equities, Ashley Pittard, said there was an argument that certain companies were taking positive steps and it would be investors’ interest to work with them on this.
“They aren’t the most environmentally-friendly companies in an increasingly green world. And they haven’t attracted many investor friends recently with activist shareholders aggressively challenging boards,” Pittard said.
“But some oil companies can change and the best example is TotalEnergies. Over the last five years that have spent a significant amount of their free capital on battery farms, wind farms and gas. They have used their free cashflow to reinvent themselves and already at the front end of being green among the integrated oil companies.”
Shares in French oil giant TotalEnergies had risen 10.8% over the past year and was a top 10 holding in Pittard’s Pendal Concentrated Global Share fund.
Shareholders could expect oil firms to embark on buybacks, dividends and to invest in green technology such as wind and hydrogen as capital expenditure would be reduced in the future, leaving excess free cashflow.
“It’s better to be in the tent, buying businesses and enacting change via proxy voting then saying we’re just not going to fund these businesses,” Pittard said.
“What you will see over time is the best oil companies becoming more like wind generation companies, or battery technology companies.
“Ironically that will reduce cyclicality among the integrated oil companies and they will end up with a business model which is more like a utility companies.”
The Pendal Concentrated Global Share fund had returned 40.5% over one year to 31 July, 2021, according to FE Analytics, while the global equity sector returned 30.2% within the Australian Core Strategies universe.
