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Sin stocks – a tangled web for ESG investors to unpick this earnings season

We look at some of the biggest names in ‘sin stocks’ and provide an update for responsible investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

This earnings season, responsible investors had their eyes firmly trained on the oil and gas sector. Big names BP and Shell reported their progress following a controversial about-face from their previous climate commitments. But, energy wasn’t the only place under the ESG investing microscope, AB Inbev’s attempt to promote inclusivity backfired and volumes suffered as a result. Meanwhile defence contractor BAE struck an optimistic tone about its potential to fit in to some responsible investing strategies.

Responsible investing is a catch-all term that describes a wide variety of strategies that allow you to invest in line with your values. Everyone falls somewhere on the responsible investment spectrum, and we offer tools and research to empower you to invest in a way you’re comfortable with. For more information, we’ve recently updated our responsible investing pages with a video, and a wealth of other resources.

Explore our responsible Investment hub

This article isn’t personal advice. If you’re not sure what’s right for you, please seek advice. Investments rise and fall in value, so you could get back less than you invest.

Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.

Oil and gas profit decline underscores a need for diversity

It was no surprise to see profits at both Shell and BP fall. Oil prices were considerably lower this year than last, and that led to significant declines. It also underscores the pressing need for these big names to keep focused on long-term strategy. The war in Ukraine saw countries around the world turn back to fossil fuels in a bid to shore up their energy independence. It offered a significant boost to oil prices, and likely played into both Shell and BP’s decisions to walk away from their previous climate commitments.

These companies are heavily reliant on fossil fuels, and a renewed global push toward net zero would be damaging to their operations. A carbon tax or falling demand for the black stuff could leave oil majors like Shell and BP struggling. For investors concerned about these future problems, spending on lower-carbon alternatives is a key metric to watch.

While there were no major changes to planned investment in lower-carbon technology at either company, there were some red flags. BP boss Bernard Looney warned that the group wouldn’t invest in green energy projects that didn’t meet its returns threshold. He also reaffirmed BP’s commitment to both clean energy and oil production. On the surface this makes sense — no one expects a company to start a project that won’t bear fruit. But BP’s rhetoric about a transition to low-carbon alternative energy is becoming increasingly negative, raising questions about whether Looney is teeing the market up for a further retreat from renewables.

AB Inbev continues to try and walk a tightrope

AB Inbev’s results came with an unwelcome decline in US volumes thanks in large part to ongoing boycotts of its Bud Light brand. An advertising campaign involving a transgender influencer led to backlash and conservative American lawmakers used the ordeal to advance their agendas further.

In the wake of the scandal AB Inbev found itself at odds with both sides of the debate after trying to step back from the controversy without withdrawing support for the LGBTQ+ community. However by not taking a strong position, the group’s found itself targeted by both sides on a tightrope.

The group’s second quarter earnings call showed it’s continuing to tiptoe away from the controversy. AB Inbev revealed that a survey of its customers showed they wanted the group to “focus on brewing beer” and that they wanted to enjoy their beer “without a debate.” The feedback suggests the group will continue to distance itself from the LGBTQ+ community in an effort to placate its customers and regain market share.

The move represents a failure in the group’s attempt to amplify this community. The advertising campaign was ill-planned and paints the group’s efforts to drive positive social change in a disingenuous light. AB Inbev’s ESG targets don’t specifically call out improving the LGBTQ+ community’s visibility, but it does choose spokespeople to help drive social change. The group’s specifically chosen female athletes to promote the brand to further gender equality in sport. This initiative hasn’t sparked the same kind of ire as the LGBTQ+ campaign, but responsible investors must be wondering whether the group would abandon it if it did.

BAE carves out a space among responsible investors

Defence stocks are a hotly debated topic among responsible investors, with many refusing to invest in the industry at all. But the war in Ukraine’s opened the conversation of whether these industries have a place in a responsible investing strategy. When BAE released its half-year results CEO Charles Woodburn said ESG investors are now more open to taking a wholistic view of the sector. He argues that BAE and its peers are necessary for governments around the world and shouldn’t be automatically excluded from responsible investing portfolios.

While exclusion will be an appropriate strategy for some, others will applaud the unfolding conversation. BAE’s typically regarded as having strong ESG risk management. However more work needs to be done around its human rights monitoring given it regularly sells to high-risk countries. But, now that the group is actively engaging in the conversation around ESG we could see further improvements to BAE’s human rights initiatives moving forward.

The Author holds shares in BAE.

Unless otherwise stated estimates are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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