BP (LSE:BP) might talk about being a good investment for the environmental, social & governance (ESG) side of my portfolio. But there are obvious flaws in its shares in my opinion.
BP’s road to net-zero
BP currently aims to achieve net-zero emissions across its entire operations by 2050. From 2019, it has been aiming for a 20% reduction by 2025 and a 50% reduction by 2030, with ambitions to help the world achieve net-zero emissions. The company’s goals include renewable energy development, electric vehicle (EV) charging expansion, and carbon reduction.
I have concerns about the profitability and share price growth that the company can realistically achieve given the new ESG approach and also considering the laggard decades for BP shares behind us. Since 1999, the stock has actually dropped by around 25% at the time of writing.
There are positives to consider. The company plans to increase its investment in Transitioning Growth Enterprises (TGEs) to up to $8bn by 2030. BP isn’t neglecting oil and gas, assigning an equal up-to-$8bn by 2030 to these sectors.
BP is currently planning to potentially allocate twice as much in oil and gas projects compared to renewables in the coming years. This raises questions about how dedicated the company is to ESG, of course, and also whether ESG investing is really financially sustainable for the company.
Any investment for a ‘green’ portfolio has to balance two factors: profit and ethics. One without the other is a failed investment in terms of ESG investing.
There is potential for ‘greenwashing’ with BP — where companies exaggerate or falsely claim to be environmentally friendly. There is a cultural stigma around ESG at the moment, and if it isn’t executed properly it is likely to be both ethically unsound and unprofitable.
Elon Musk has referenced ESG investing as “the devil”, also making comments that ESG evaluation methods are “fundamentally flawed” and lack “real-world impact”.
Share price dynamics
In February, BP’s share price jumped 20% when the company decided to dial down aggressive renewables targets. That indicates the market expectation that short-term profitability for BP is hinged on traditional revenue streams of non-renewables.
With that negative short-term sentiment for BP and ESG initiatives related to its share price, it doesn’t mean the long term is the same. Kellogg School of Management has noted that ESG policies can improve share prices.
However, BP would also need more favourable ESG ratings to get considerable improvements in its share price from its renewable initiatives. BP has the highest Bloomberg ESG disclosure score for global oil organisations (the company is transparent about its initiatives) but is still considered high ESG risk by Sustainalytics, ranking 56 out of 300 on their rank for major oil companies, with one being the lowest risk.
Considering my research, BP shares don’t meet the conditions I have for my ‘green’ portfolio. I believe there are much stronger candidates, like Tesla and Ferrari. For example, Ferrari is aiming for 40% electric vehicle sales by 2030. I currently prefer companies leading in business efficiency and authentic impact investing.