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Can BP shares overcome oil volatility to become an ESG play?

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BP (LSE: BP) is an oil supermajor as we all know, and as the world continues to embrace the reality that this pandemic is still far from over, both crude oil prices and, consequently, BP shares are continuing to experience volatility.

BP’s share price is inherently tied to the performance of oil, but in a world where natural resources are drying up and I am looking more and more towards sustainable alternatives, could BP actually undergo a renaissance of its own and win back my confidence enough to invest?

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ESG play offers BP shares a lifeline

As a sustainable investor, I think that BP shares could benefit from going all-in on more sustainable energy, and thus rebrand itself as an environmental, social, and governance (ESG) play. This investing methodology is not new, but it is growing in popularity rapidly. In 2020, assets under management in funds that abide by ESG principles surpassed $1 trillion for the first time on record.

And, ever since the Deepwater Horizon disaster of 2010 — when 4.9 million BP barrels spilled into the Gulf of Mexico, marking the worst oil spill in history — BP hasn’t exactly been turning eco-conscious heads. BP’s share price has suffered since the spill, falling more than 50% in that time.

However, BP has begun to make changes to its business model, with CEO Bernard Looney outlining the company’s sustainability plans at industry conference CERAWeek earlier in March, stating: “We decided to really embrace that energy transition more as an opportunity than as some sort of threat to our core business.”

What Looney is referring to is BP’s plans to cut oil and gas production by 40% over the next decade, with the aim of getting to net-zero by 2050 or sooner. In order to make this a reality, the company is investing in an industrial-scale green hydrogen plant in Germany as well as entering the US wind power market. BP is also looking to expand into power and renewables trading, although this isn’t as profitable as oil trading, which delivered $1.7 billion last year.

Can BP shares regain their former glory?

I believe that there is definitely a risk here that companies like NextEra Energy and The Renewables Infrastructure Group Limited a dividend-paying renewable energy company — will simply leave BP in their dust in terms of sustainable energy production. BP is lagging behind, relying heavily on the very finite supply of crude oil still left on earth, and if it doesn’t try harder to pivot its business towards greener solutions, I believe that it will become like the very fossils that its oil comes from — finite and forgotten.

The global renewable energy market was valued at $928 billion in 2017 and is expected to reach $1.5 trillion by 2025. So luckily for BP shares, there is still hope in the massive total addressable market for them. However, I would still not be comfortable adding them to my portfolio until they showed real progress in becoming a more sustainable business.

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Jamie Adams has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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