Should I sell BP and Rio Tinto shares – am I funding climate change?

During the pandemic I started investing for the first time. Until that point all my money was in savings earning virtually nothing.

I followed Warren Buffet’s mantra: ‘Be fearful when others are greedy’ and I invested in a few of the worst hit stocks after the markets crashed during spring and summer 2020.

This included some shares I’m becoming increasingly ashamed of holding, including the oil company, BP, and the mining company, Rio Tinto.

All three have performed well since they were purchased and they have also all paid out generous dividends. However, I’m not sure whether I should continue profiting from these types of companies, given global warming and should instead be buying more ‘ESG friendly’ shares.

I want to know whether holding shares within these companies is actually helping them profit in any way? Will selling my shares in the companies mentioned above actually make any positive difference in the world other than relieving my own conscience?

Also is there an argument for keeping the shares and using my position to try and encourage the firms to be more ethical, and how would I do that? Via email.

Ed Magnus of This is Money replies: First and foremost, full credit must be given to our reader for having the courage to begin investing for the first time in the aftermath of the pandemic.

Stocks across the world plummeted in the early months of 2020. The FTSE 100 index, which lists the biggest 100 companies by market value on the London stock exchange, started 2020 at 7,604 points and dropped to a low of 4,993 on March 23rd – a staggering 35 per cent drop.

If our reader hadn’t followed Warren Buffett’s advice they would no doubt be poorer, given the low savings returns and 30-year high inflation we face at present.

That said it’s important to note that investing is a long-term game and should only be done with savings that aren’t needed in the short term or for a rainy day fund. Stock markets go down, as well as up. 

Peak demand: BP believes that oil demand may not peak for another decade.

Despite our reader’s moral conundrum, they will likely have been pleased by the performance of these two shares since purchasing them in 2020.

Rio Tinto shares, currently sit at just under £5,200 on the London stock exchange, having risen from a low of £2,968 in March 2020 to a high of £6,788 earlier this year. BP shares have doubled in value to 418p since November 2020.

While our reader doesn’t say exactly when they bought Rio Tinto and BP, shares in both bought after markets crashed in 2020 and held until now should be up considerably. 

However, our reader is going through somewhat of an investing moral crisis. A crisis that is likely spreading fast among other investors grappling with whether their investment choices are having a positive or negative impact on the planet.

It seems a cut and dry case for the environmental, social and governance, aka ESG, bandwagon here and that our reader’s investments are having a negative impact and are therefore indefensible.

BP is accused of having one of the worst environmental records in the industry, according to Greenpeace, this is heavily driven by the Deepwater Horizon oil spill in 2010 when 130 million gallons of crude oil was released into the Gulf of Mexico causing the largest marine oil spill in history.

Mining giant Rio Tinto is forecasting its iron ore shipments to rise in 2022 after a dip in 2021. 

Meanwhile, others will argue, Rio Tinto’s mining operations damage and contaminate the planet.

Perhaps the answer is therefore simple – if you care about the future of the planet, you should sell up and no longer profit from these companies.

But is it that simple? Whilst we may be moving to a more renewable future, it is also undeniable that we remain heavily dependent on the raw materials that both BP and Rio Tinto produce – alongside other mining and oil companies.

There is also an argument that companies such as BP and Rio Tinto are critical to the transition to cleaner energy, and so might still merit investment to achieve this purpose.

For example, if we want to replace petrol and diesel cars with electric then we’ll also likely need the copper that Rio Tinto creates.

Electric vehicles will contribute to a cleaner and more energy-efficient environment. However, copper is required to power this sustainable technology due to its superior electrical conductivity and reliability.

Going green: Over half of UK adults say it’s important to them to be able to make greener financial choices, according to recent research by RCI Bank.

Our reader is also right to ask what selling these shares would achieve? The answer is, not much. After all, when you sell shares, someone else buys them.

Furthermore, by selling up, there is also an argument that our reader will effectively be surrendering their ability to help change these companies for the better – potentially to another shareholder who doesn’t care about this.

This is because for a brief window every year, shareholders are given the tools to exercise some control.

When UK-listed companies hold an annual general meeting and an annual vote, every shareholder from the biggest pension fund to the smallest individual investor has a right to have their voice heard.

A person’s vote and participation could help influence executive pay, whether directors are reappointed, and of course a company’s climate change policy.

Although the votes on climate resolutions are non-binding, they do still show the growing investor pressure on these companies to intensify efforts to reduce carbon emissions.

Arguably this means that our reader may be able to have more influence over climate change by holding shares rather than selling up.

To help in answering our reader’s questions, we spoke to Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, Poppy Fox, investment manager at Quilter Cheviot and Russ Mould, investment research director at AJ Bell.

 By owning shares in Rio Tinto and BP, our reader has the right to vote on their fossil fuel reduction policies.

What’s the argument for selling?

Sophie Lund-Yates, of Hargreaves Lansdown, replies: We believe that investing with ESG criteria in mind is good risk management.

You want to invest in sustainable businesses – businesses that aren’t going to fall foul of regulation or dwindling consumer demand because of the way they operate.

They are more likely to have sustainable revenues, profits and dividends.

That said, there are certain sectors – known colloquially as sin stocks – that for some people are simply unpalatable to invest in.

It may not matter that a tobacco company is pivoting away from cigarettes, or an oil major is developing renewable energy technology.

Climate change: Many pension firms have started adapting their ‘default’ workplace funds to accommodate customers’ wishes for sustainable investments.

What’s the argument for holding?

Russ Mould, of AJ Bell, replies: There is an argument, especially in the case of EVs and metals like copper, lithium, nickel, manganese, cobalt and aluminium, or even wind turbines and steel – because at the moment we need iron ore to make steel.

There also seems to be a growing awareness that the energy transition from hydrocarbons to renewables and alternatives isn’t going to happen at the snap of a finger and oil and gas will be needed for some time to come, whether we like it or not.

As a result, there seems to be a shift in thinking towards how we manage the energy transition rather than just shun oil and gas in the short-to-medium term.

One reason why those commodity prices are so firm, and had been firm before Russia launched its war in Ukraine, is producers have been told not to drill and explore, have been told by banks and insurers that financing and insurance for new projects are not available, and been threatened with windfall taxes by Governments if they do drill and strike oil or gas.

As a result, they are doing less work than is normally the case, and supply is not growing at a time when demand for energy is still increasing.

That is a recipe for rising prices. Campaigners will hope this energy price shock jolts Governments into action toward managing the transition faster and more effectively but it does suggest there is going to be a cost in that transition that we may all have to bear.

Energy stocks have also been brilliant performers this year and in an inflationary environment ‘real stuff’, like commodities and miners, have historically outperformed ‘paper’ assets like cash and bonds, so if investors shun those sectors on principle there is a risk that they miss out on potential premium returns.

Advice for our reader?

Sophie Lund-Yates replies: Our house view is not to take an exclusions approach, but instead focus on best in class.

The main oil majors have vastly differing approaches to timelines when it comes to investing in renewable energy, for example.

A best-in-class investor recognises that whether we like it or not, oil and mining are going to make up part of society for years to come, and what matters is supporting those that are striving to do their best for the environment, society and integrate the highest levels of governance.  

Shareholders – retail and professional alike – should also use their voting power to engage with companies to future-proof their business, and to be as socially responsible as possible.

Selling out of these names entirely means you don’t get to exercise your vote, to bring about positive change.

There is also an argument to say if investors abandon certain sectors and stocks altogether then they will leave the public market, privatise, and are therefore less likely to take ESG criteria into consideration in their growth strategies.

The investing adage about being in it to win it applies here – you don’t have to be an activist investor to make your voice heard when it comes to doing the right thing, and encourage a company to deliver both ethics and profits.

Poppy Fox replies: It may be worth the reader considering taking some professional advice as to how to approach their investments and looking to create a balanced portfolio that aligns with their values.

There are arguably two schools of thought in terms of whether it is better to hold onto these sorts of investments or divest from such investments and move your money towards more ESG friendly shares.

At Quilter Cheviot, we favour the first approach and as the reader says, try to use our position as a large wealth manager to engage with companies and encourage better behaviour.

This is however more challenging as an individual investor, particularly when talking about such mega cap companies.

We probably need to think about what we might mean by ESG friendly; all companies have positive and negative ESG attributes, however some operate in sectors which are inherently more problematic such as tobacco.

However it is not always that clear cut – you will struggle to manufacture an electric car without a mining company such as Rio Tinto extracting minerals.

Russ Mould replies: Your reader can perhaps follow the example of institutional fund managers who have begun to refine their strategies.

More are now looking to stay involved as shareholders, act as stewards and work with management to effect the shift away from hydrocarbons in a more controlled way.

With the shares, you have a voice and a vote. Without the shares, you do not, seems to be the theory.