How to talk to sustainable investors about high oil and gas prices

Soaring fossil fuel prices are testing the resolve of sustainable investors. But sustainable portfolios will deliver better long-term outcomes, argues Pendal’s MICHAEL BLAYNEY

• Oil prices test resolve of sustainable investors
• Expect better long-run outcomes from sustainable portfolios
• Portfolio construction can smooth the ride

INVESTORS are understandably asking whether there’s a long-term cost to being in a sustainable fund when oil is trading above $US100 a barrel.

“The reality is that sustainable portfolios have had a more difficult time of it recently and people are asking whether investing in a sustainable fund might mean a long-term drag on returns because they can’t get exposure to certain sectors such as fossil fuels,” says Pendal’s Head of Multi-Asset Michael Blayney.

“The short answer is we don’t expect to get worse returns from sustainability over the long term.

“Indeed, we expect to get better long-run outcomes from sustainable portfolios.

“But you will see greater variation relative to a benchmark in certain types of environments.

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“If you want a sustainable strategy — and you screen out fossil fuels and weapons and tobacco and gambling and so on — then you have to accept that sometimes you will outperform and sometimes you will underperform.

“We saw a sustainable strategy work really well during Covid. During that period oil prices collapsed.

“Also, many sustainable portfolios have a slight growth tilt to them. And 2020 was a really great environment for growth investors and much of 2021 was pretty good too.

“But if you look at one-year returns of sustainable funds as a category now, they’re not looking as great. And year-to-date has been very difficult.”

Portfolio construction critical

In this environment portfolio construction takes on even greater importance.

“If you look at other asset classes for economic exposures that you’re lacking in equities, that gives you an extra tool to manage through these periods,” Blayney says.

“While we encourage people to focus on the long term, the reality is people do think about the short term and they do think about peer comparisons.”

Investing across asset classes can smooth the road for sustainable investors.

“If your sustainability strategy gives you a slight growth bias then you might want to look for investments that fit your sustainability strategy but also gives you a value bias, for example in your alternatives.

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“Or you might actively seek out a bit of energy price exposure and inflation hedging via commodity futures or certain types of renewable energy infrastructure.”

Beyond Aussie equities

Looking beyond the local equity market is also attractive.

Oil and gas companies have outperformed this year as oil prices have pushed beyond $US100 a barrel.

But oil and gas companies are less than 4 per cent of the MSCI World Index. So in global equities at least, there are plenty of opportunities for investors outside that sector.

“There is no reason to believe the oil and gas sector is going to outperform in the very long term. If anything, because of the decarbonisation economy it has big structural headwinds,” Blayney says.

All investors — including sustainable investors — need to have realistic expectation from the beginning.

“They need to understand that some equities in their portfolio might trail the market over the short term. But that is okay if they have the right strategy, structurally, for the long term,” Blayney says.

“To help them through some of those periods, they should think about sustainable balanced funds which hold some renewables, for example.

“To the extent that they can, investors should look at what they’re missing from equities and then use other asset classes to identify exposures which are consistent with what they are trying to achieve from a sustainability perspective.”

About Pendal’s multi-asset capabilities

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

These include Australian and international shares, property securities, fixed interest, cash investments and alternatives.

In March 2024, Perpetual Group brought together the Pendal and Perpetual multi-asset teams under the leadership of Michael O’Dea.

The newly expanded nine-strong team will manage more than $6 billion in AUM and create a platform with the scale and resources to deliver leading multi-asset solutions for clients.  

Michael is a highly experienced investor with more than 23 years industry experience, including almost a decade leading the team at Perpetual.

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