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Advisors clash on fossil fuel strategies

Financial advisor Tom Nowak says there’s no long-term future in fossil fuels.

“They may have a good year,” is the most he will concede.

Yet Nowak, who spent 30 years as an analytical chemist before founding his firm, doesn’t push his clients to adopt ESG investing.

“I can’t undo my scientific knowledge and divorce it from my fiduciary responsibility,” he says.“I tell people that as a fiduciary my goal is to make them the best version of them, not the worst version of me.”

Regardless of their take, advisors across the ESG spectrum are becoming increasingly comfortable with clients separating fossil fuel stocks from their portfolios, and say that unless the sector keeps up with the times, it risks becoming a fossil itself.

Nowak sees the recent comments on environmental sustainability by BlackRock CEO Laurence Fink as indicative of a trend.

“Once you know the trend,” he says, “you can move a little faster.”

Still, energy investments — financial and emotional — run deep in the United States.

Donald Calcagni, chief investment officer of Mercer Advisors, travels frequently to many of the 40 Mercer offices around the United States. “There are parts of the country that are ideologically in love with energy; there are parts of the country that despise energy companies,” Calcagni says.

But due to what he describes as the “rapidly increasing” number of Mercer clients with philosophical objections to energy investments, the firm offers ESG options. Still, Calcagni says, the choices are far from clear-cut. “Exxon’s one of the largest investors in green technology, yet, it’s Exxon Mobil,” he says.

Oil and gas companies could help themselves by getting ahead of this by expanding their portfolios.
Kerri Kimball, managing partner, Apogee Wealth Advisors

What investors believe about energy — particularly fossil fuels — can shape the type of advice they pursue. Clients opposed to the use of oil and gas for instance, often seek out advisors whose firms espouse environmental, social and governance factors when selecting investments.

“My firm is one that was founded on the fundamental beliefs of ESG,” says Derek Eckert, managing director of Syntropy Wealth Management in Austin, Texas.

Yet more than a few of his ESG-minded clients currently hold large positions in oil company stock due to previous employment or inheritance. Some have a very low-cost basis in the shares.

When true ESG believers want to dump the position, pay the taxes and move on, Eckert often suggests selling off the holdings over multiple years to ease the tax burden.

“My personal belief, and the one you see becoming more and more prevalent, is oil has had its day,” he says. “But the fact is that major endowments, foundations and institutions are making these very same decisions based on economics alone. This is financially the right thing to do for my clients.”

Major oil and gas companies have almost become a cuss word in ESG circles.
Justin Brownlee owner, Brownlee Wealth Management

Justin Brownlee, owner of Brownlee Wealth Management in The Woodlands, Texas, sees it differently. Some 80% to 90% of his clients are employees or retirees of the oil and gas industry. And the ESG movement worries some of his clients.

“Major oil and gas companies have almost become a cuss word in ESG circles,” Brownlee says. “If 70% of the people in the market don’t want anything to do with them, that’s going to affect the stock price.”

Indeed, the market value of energy in the S&P 500 index has slid over the past decade. It was 12% of the index’s weighting in 2010, but only 4.35% in 2019.

Nevertheless, Brownlee is optimistic that the industry will rebound. “It’s not uncommon for one industry to have a really tough five- or 10-year stretch and do really well in the next decade,” he says.

But, he adds, a comeback will not be achieved by conducting business as usual. One reason for Brownlee’s optimism is that oil and gas companies have the expertise to help switch the world from coal to natural gas. Therefore, he reasons, planners who shun energy stocks could be making a mistake.

“I think eliminating oil and gas is a big gamble,” Brownlee says.

Right now energy is a classic value sector.
Donald Calcagni, chief investment officer of Mercer Advisors

Kerri Kimball, managing partner at Apogee Wealth Advisors in New York, gives the green light to new clients who arrive with ESG goals. She recommends that they eschew fossil fuels investments, noting that “there’s no significant difference in performance,” largely due to tech-stock-driven market gains in recent years.

“I think that oil will never go back to where it was in the ‘80s and ‘90s,” says Kimball. But she, like Brownlee, sees a path to oil and gas companies becoming more relevant.

“[They] need to be thinking of themselves as true energy companies” and invest in solar, wind and other new technologies in a big way, Kimball says, adding that “they could help themselves by getting ahead of this by expanding their portfolios.”

For clients seeking to emphasize factors, Mercer’s Calcagni recommends overweighting value.

“Right now energy is a classic value sector,” he says.

For factor investors who fear the potential effects of regulation or stranded assets, Calcagni offers this reassurance: “If markets are even remotely efficient, then that information should end up in the price. And I would argue that it does.”

Kerri Kimball understands that her clients have many different views. “It’s a journey,” she says. “I don’t think it’s for me to judge anyone for where they are on the journey.”

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