OUTSIDE THE BOX
A long-awaited stock-market rotation back to value stocks might benefit oil and gas companies in the short-term, but long-term there are concerns about the sustainability of the energy industry as it now exists. The sector’s woes are such that at the end of August 2020, energy stocks accounted for just 2.6% of the S&P 500 (SPX) , down from more than 16% in 2008.
The systemic risk surrounding energy companies due to climate change underscores the difference in approach between active managers and their index-fund counterparts and large retirement funds, as well as the tools active managers can use to make a persuasive case for meaningful change. While active fund managers increasingly are avoiding the energy sector and its risk of permanent capital impairment, many passive-fund investors recognize that as universal owners of the market and, by default, the economy, they have a stake in encouraging a successful energy-sector transition to renewables.
Eschewing the entire industry is short-sighted and misguided. While some investors have divested from fossil fuels, many continue to hold these investments in the hope of driving change through engagement. Active managers, drawn by seemingly low valuations, are engaging alongside them, with the combined weight of their collective voices leading to better reporting and some shift in strategy towards redirecting capital expenditure to renewables. The challenge will be if the change being supported by engagement will be enough to avoid fossil fuel stocks becoming “value traps.”
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Active managers have distinct advantages when it comes to proxy voting and engagement, the most obvious being that active managers have a far smaller number of securities to cover than a passive manager. Further, through their research processes, active managers can incorporate