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Jan. 23, 2021, 11:37 a.m. EST

If you support green energy, you should buy utilities and oil stocks — here’s why

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By Debbie Carlson

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ESG raters are noticing the improvements. MSCI upgraded its ESG rating on Southern Co. from BBB in December 2016 to AA by December 2018, and considers it a leader in the utilities industry. It also upgraded Duke Energy /zigman2/quotes/201480230/composite DUK +0.18% to an A rating in August as Duke expands its renewable power generation and retires coal plants. MSCI’s top rating is AAA.

Read: Here’s how you can add sustainable investments to your 401(k) holdings even if your plan doesn’t include ESG funds

Oil companies are behind the utilities, but some major European oil companies such as Total, Royal Dutch Shell and BP /zigman2/quotes/202286639/delayed UK:BP -1.83% /zigman2/quotes/207305210/composite BP -0.89% are pushing to a greener transition. But McNally and Meyer say rather than becoming completely fossil-fuel free, they may transition to being integrated energy companies. Even so, advocates can pressure oil companies to decarbonize, such as fixing methane leaks, or abandon expensive projects like drilling in the Arctic.

Investors interested in holding utilities at the forefront of green transition could look at a utilities ETF. One is Virtus Reaves Utilities ETF /zigman2/quotes/207452676/composite UTES +0.08% , which has a top MSCI ESG Fund Rating of AAA. However, many index funds are considered light-touch ESG, meaning they aren’t shareholder advocates.

However, this is starting to change as large fund providers like BlackRock and State Street Global Advisors say they are becoming more active at shareholder meetings

Read: Your ESG investment may be a ‘light-touch’ fund and not as green as you think

Investors also shouldn’t expect the sort of rapid results that Praxis had with NiSource. Shareholder engagement takes time, but is more successful than divestiture. While many divestiture advocates point to the success of ending South African’s apartheid in 1994, anti-apartheid activism started in the 1960s, and there was a lot of shareholder engagement, too.

Greg Wait, adviser at Riverwater Partners, who specializes in ESG, says investors who buy advocacy mutual funds or companies transitioning to green energy should make sure there’s clear evidence that the transition is happening, such as by building more renewable power or retiring coal plants to avoid greenwashing. And be patient.

“All this positive change takes years. You can’t just say if we own a bunch of big mutual funds … there’s going to be automatic change. That’s not how it works,” he says.

Debbie Carlson is a MarketWatch columnist. Follow her on Twitter @DebbieCarlson1.

Also read: Rockefeller Foundation built on a fossil-fuel fortune becomes largest philanthropist to shun oil investments

And: Asset managers with $9 trillion under watch launch a plan for net zero emissions — and U.S. funds sit this one out

/zigman2/quotes/201480230/composite
US : U.S.: NYSE
$ 99.31
+0.18 +0.18%
Volume: 620,712
Dec. 6, 2022 12:16p
P/E Ratio
20.03
Dividend Yield
4.04%
Market Cap
$76.34 billion
Rev. per Employee
$1.02M
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/zigman2/quotes/202286639/delayed
UK : U.K.: London
474.65 p
-8.85 -1.83%
Volume: 36.43M
Dec. 6, 2022 4:48p
P/E Ratio
N/A
Dividend Yield
4.16%
Market Cap
£87.35 billion
Rev. per Employee
£2.66M
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/zigman2/quotes/207305210/composite
US : U.S.: NYSE
$ 34.69
-0.31 -0.89%
Volume: 4.84M
Dec. 6, 2022 12:17p
P/E Ratio
N/A
Dividend Yield
3.91%
Market Cap
$106.73 billion
Rev. per Employee
$3.38M
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/zigman2/quotes/207452676/composite
US : U.S.: NYSE Arca
$ 47.22
+0.04 +0.08%
Volume: 362.00
Dec. 6, 2022 11:36a
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