ESG funds which bought bonds issued by ConocoPhillips to finance the acquisition of an oil sands field may have to sell them again as the purchase will likely breach their thresholds for revenue and production of oil sands.
Climate-focused think tank the Anthropocene Fixed Income Institute (AFII) pointed out that the acquisition, due to complete in late 2023, may well result in the firm exceeding the 5 percent limit for oil sands involvement used by a number of major investors.
Conoco raised $2.7 billion from a three-tranche deal in early August to buy out Total’s 50 percent stake in the Surmont oil facility, a Canadian oil sands field it co-owns with the French oil major.
Data from the Global Oil and Gas Exit List (GOGEL) and estimates by AFII show that the field contributed around 3.9 percent of Conoco’s hydrocarbon production and 3.6 percent of its revenues in 2021. Depending on how production is reported, the acquisition of the second 50 percent stake could result in production and revenue proportions rising above 5 percent in either 2023 or 2024.
The delay between asset purchase and reporting “facilitates the paradox of investors funding deals which produce companies which are uninvestible”, the AFII researchers say.
Conoco is unlikely to fall foul of many portfolio-wide exclusions policies, as its operations in the Arctic mean it is already excluded under some policies.
AXA, for instance, has a 5 percent threshold for oil sands, but GOCEL data shows that Conoco derives 14.1 percent of its production from the Arctic, which breaks a separate barrier under the policy. There is no indication that AXA bought the Conoco bonds.
The main issue lies in passive ESG-screened funds, which may have bought the bonds only to have to sell them again due to the transaction they were financing.
A systematic analysis was not carried out due to the lack of transparency around bond holdings, but BlackRock’s iShares ESG Aware ETFs have screens in place which exclude issuers over the 5 percent threshold for oil sands.
The AFII researchers flag the iShares ESG Aware US Aggregate Bond ETF in particular, and Responsible Investor analysis of recently disclosed fund holdings shows the fund took a position in all three tranches of this month’s deal.
“Passive investments in particular, where positions are dictated by index rules with an inherent delay, will end up financing excluded behaviour. This should raise concerns for investors with any type of exclusion policies,” the note concludes.
ConocoPhillips did not respond to a request for comment outside of normal business hours.