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Should Ethical Investors Stay Away from Oil and Gas Stocks?

Ethical investing is quickly becoming one of the hottest topics in the investment world. Here at Face to Face Finance, we’ve talked before on our blog about the rise of green bonds, and we’re seeing continued high demand in our sustainable portfolios.

One of the big debates amongst ethical investors is whether or not portfolios should invest in oil and gas companies. On the one hand, these companies are responsible for lots of environmental damage and global warming. But on the other, they’re also some of the biggest investors in renewable energy.

In this article, we’ll dig into the issue and give you the information you’ll need to know to make an informed decision for your own investment portfolio.

What is ethical investing?

Firstly, let’s cover the basics. Ethical, responsible or environmental, social and governance (ESG) investing refers to a specific style of investing where decisions on which companies to invest in are made on certain ethical or moral principles. Of course, there are a lot of different ways to do this, and lots of different criteria that people can use.

For example, some responsible investors are focused on sustainability and climate change, while others focus more on social impact and social issues. Still more are concerned with proper corporate governance.

When it comes to ethical investing, it’s also important to remember that it is still a form of investing. Which is to say, the intent is still to grow a portfolio and ultimately generate a return on the capital invested. Different investors will take different views on how to weight the decisions that they make: some will be more or less aggressive in terms of the standards they expect from the companies that they purchase. Others will be more accepting of lower standards if there is a real opportunity for growth.

While there are some accepted guidelines and standards (particularly in terms of grading for ESG policies), there are lots of different ways to invest ethically or responsibly. And, lots of people have different opinions on the best way to do it – just like other kinds of investing.

So, should ethical investors buy oil and gas companies?

Well, there are two sides to this argument.

The first and perhaps most obvious answer is that oil and gas companies contribute massively to climate change through their production of oil, petrol and gas. Because of this, they shouldn’t be included in any funds that consider themselves ethical or responsible.

In addition, oil companies are responsible for oil spills, causing devastating environmental damage across the world that we are still feeling the effects of today. And, new pipelines and oil rigs are being built all the time, causing even more damage to the environment.

So – case closed. Oil and gas companies are out.

But hold on a minute – there’s another perspective to consider. Firstly, while the oil and gas companies are, of course, in the business of supplying oil and gas, they are also some of the biggest investors in sustainable energy. So, is it better to overlook the oil and gas components of their business to be able to invest money towards the sustainability aspects? The huge market caps of these companies mean they are able to make massive progress in sustainable energy very quickly, and investing in them both enables this and allows the investor to reap the rewards of the sustainable investment.

Not only this, but by investing in oil and gas companies and then attending shareholder meetings and exercising the voting rights of their stock, savvy investors can actually influence the future direction of companies. So-called “activist investors” are well-known for doing this, but it’s an option for any investor who has stock that comes with voting rights (not all stock classes do).

Is it actually a better ethical move to purchase shares in oil and gas companies and then use them to influence the companies towards pursuing more sustainable business strategies? This is the other side of this argument.

Many people will make up their own minds over whether oil and gas companies should be included in their ethical investment strategy. If you’re looking to invest in ESG or responsible funds, check the fund description and terms to see what their strategy is, and whether it’s compatible with your attitude to investing.

Really, the best person to decide whether oil and gas is a part of your ethical strategy is you. Different people will have different ideas of how much of a priority they want sustainability to be in their portfolios – and different appetites for taking activist stances and exercising their voting rights.

So, should ethical investors invest in oil and gas stocks? There, unfortunately, isn’t one easy answer. Like many things in the market, it’s about your own preferences.

This article is informational and for entertainment purposes only. It should not be considered as investment advice. Your capital is at risk when you invest.

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