New EU-wide ESG regulations are influencing the investment strategies of banks and funds as investments in fossil fuels increase.

New EU-wide ESG regulations are influencing the investment strategies of banks and funds as investments in fossil fuels increase.

According to a report by finanzmarktwelt.de, ESG (environmental, social and corporate governance) is becoming increasingly important as a guideline for green politics and companies. However, a current development shows that the investment industry, which describes itself as ESG-oriented, is increasingly investing in the oil and gas sector. Data from Morningstar shows that ESG funds have increased their exposure to the oil and gas sector by about two-thirds since stricter regulations were introduced two and a half years ago. At the same time, the proportion of investments in renewable energies fell. This development, reflected in changes in valuations and direct purchases, follows a rise in oil prices and a difficult year for renewable energy, triggered by, among other things, the war in Ukraine. This shift also comes with growing global calls to phase out fossil fuels. An agreement calls for more renewable energy worldwide, but also leaves room for the use of lower-carbon fuels such as natural gas. The EU could soon allow asset managers to include companies with a high carbon footprint in ESG portfolios if they have a credible plan to reduce their emissions. However, studies show that transparency remains a problem and therefore there is a lack of disclosure of climate risks. Stricter ESG regulations in some EU countries could also result in billions of dollars worth of oil and gas assets having to be sold. From a return perspective, it was difficult to stick with renewables in 2023, while traditional ESG investments performed better in a high yield environment. The coming year will therefore be crucial for ESG regulations. The industry needs to prepare for changes that could take place at the regulatory level.

With increased investment in the oil and gas sector, ESG funds could change dramatically over the next few years. The increased focus on oil and gas shows that the ESG strategies of financial institutions and asset managers are adapting to economic realities. Tighter regulation and better disclosure of environmental risks could also drive changes in ESG investing. The financial industry must therefore be prepared for its ESG strategies and investments to adapt to these new developments.