The attempt by major oil companies to attract ESG (Environmental, Social, Governance) investors has fallen short of making a significant impact. Despite making a commitment during COP28 to cut emissions, many sustainable fund managers remain unconvinced about including these companies in their portfolios.

The skepticism arises from the omission of pollution resulting from the usage of oil and gas in the companies’ emission reduction pledge. The pledge by 50 of the biggest oil and gas companies at the U.N. climate talks in Dubai commits to reaching near-zero methane emissions by 2030 as well as net-zero carbon emissions in their energy use and production by 2050.

Those Scope 1 and 2 emissions from the companies’ own operations account for about 15% of the total associated with the companies. The pledge does not address Scope 3 emissions caused by the use of the fuels the companies produce that account for 85%.

Although some of the energy companies had already made promises ahead of the COP28 announcement, several state-owned firms have newly joined in.

Investors in socially responsible, often known as ESG (environmental, social and governance), funds, said the commitments were overdue and not enough.

Asset manager Candriam said it would stick to excluding major oil and gas companies from its socially responsible funds because none was aligned with their preferred scenario for meeting the objectives of the Paris Agreement on climate change. The agreement calls for limiting global warming to within 2 degrees Celsius (3.6 Fahrenheit), and aims for a 1.5C limit.

Meeting that goal requires cutting global emissions by 43% by 2030 and to net-zero by 2050. “The transition to a low-carbon world does not mean producing the same volume of oil and gas in a more carbon efficient manner. It means shifting away from fossil fuels as the main energy source towards low-carbon energy,” Alix Chosson, lead ESG analyst at Candriam, said.

The COP28 talks, hosted by OPEC-member the United Arab Emirates, have attracted a record attendance from the oil and gas industry while delegates are divided over wording on the future of fossil fuels.

A Step Forward But Not Far Enough

ESG funds have long wrestled with how to approach conventional energy producers. Some exclude them out of scientific principle. Others say divesting has no impact and it is better to try and persuade them to pollute less, which means making them responsible for Scope 3 emissions.

Kamal Bhatia, global head of investments at Principal Asset Management, said fossil fuel companies without energy transition strategies do not environmentally 100% meet the definition to be included in pure ESG funds.

At an industry dinner in Dubai, Leon Kamhi, head of responsibility at asset manager Federated Hermes, said the companies’ pledge announced at the talks was a “big step forward”, but not enough.

Only one – Italy’s Eni (ENI.MI) – of the 25 biggest oil and gas companies is aligned with the Paris Agreement, according to Carbon Tracker’s assessment.

As war in Ukraine sent fossil fuel prices soaring, ESG fund holdings in the sector increased. At the same time, a cost of living crisis in many parts of the world shifted the focus away from sustainable investment and back towards the most easily achieved shareholder returns.

The proportion of U.S.-domiciled sustainable open-ended funds and exchange traded funds that owned oil and gas stocks hit 49% in September, against 43% three years earlier, Morningstar data show. Among conventional funds, the share with oil and gas holdings rose to 68% from 45% over the same period.

But as energy prices weaken, funds’ exposure to oil and gas is also shrinking. The average exposure to oil and gas stocks for the U.S.-domiciled funds hit 1.86% in September, versus 2% in late 2022, a faster rate of decline than for conventional funds, which had 5.3% exposure in September, according to the data.

Funds marketed as sustainable in the European Union saw average exposure to oil and gas fall to 2.43% in September, from a peak of 3.33% in late 2022, the data shows.

Sustainability-minded investors have achieved little when trying to influence oil giants as stakeholders, U.S. billionaire environmentalist Tom Steyer told Reuters in Dubai.

“A bunch of people have bought into Exxon to try and change it, and Exxon’s response was to spend [on buying a rival],” he said, referring to ExxonMobil’s (XOM.N) $60 billion deal to acquire Pioneer Natural Resources. “It’s very important to recognise how hard it is to change 100-year-old corporate cultures,” he added.

Missing Renewables

For some ESG investors, the case for investing in the energy giants has been weakened by the realisation “oil and gas companies are not going to become renewable energy companies”, Global Head of Sustainability and Transition Strategy at U.S. bank Jefferies Aniket Shah said.

Oil and gas companies have cut spending on production in favour of shareholder payouts. Of every $10 in cash spent in 2022, less than $5 went into capital expenditure, compared with $8.6 in 2008, the International Energy Agency calculates. By comparison, the amount spent on low-carbon capital expenditure last year was 10 cents of every $10.

That has created credibility issues the COP28 commitments are unlikely to dispel. “If a certain energy provider is communicating, we are now really going for a different form of source and delivery’, then the trust really has to still develop,” said Gunther Thallinger, chair of the U.N.-convened Net-Zero Asset Owners Alliance and board director at Germany’s Allianz.