Surprising ETF Could Gain ESG Credibility | ETF Trends

Among sector exchange traded funds, traditional energy offerings such as the Energy Select Sector SPDR (XLE) would appear to be unlikely environmental, social, and governance (ESG) candidates.

While fossil fuel producers can make inroads on governance and social issues, the “E” in ESG is a tougher mountain to climb for these companies. However, it’s not impossible, and it starts with reducing carbon emissions — an effort some XLE components are committing to.

Some XLE member firms are unveiling commitments to pare methane emissions while still meeting global energy demands.

“Three leading U.S. oil and natural gas producing companies, Pioneer Natural Resources Company (PXD), Devon Energy Corp. (NYSE: DVN) and ConocoPhillips (COP), jointly announced today that they have joined the Oil and Gas Methane Partnership (OGMP) 2.0 Initiative,” according to a statement.

The $31.91 billion XLE allocates over 11% of its weight to those three companies, and ConocoPhillips and Pioneer Natural Resources are top 10 holdings in the ETF. Over the long term, the OGMP initiative could bolster the energy firms’ ESG credentials.

“The initiative’s mission is to improve the industry’s transparency in methane emissions reporting and encourage progress in reducing those emissions. The companies’ membership in OGMP 2.0 demonstrates their commitments to reducing methane emissions and meeting U.S. and global energy demand with reliable and responsibly sourced production,” according to the statement.

Methane emissions occur when natural gas is flared during the production process, indicating that a number of XLE member firms can contribute to the methane emissions reduction effort because many are major producers of the natural gas that produces the excess methane in the first place.

Reducing methane emissions is relevant to XLE components because natural gas burns cleaner than coal, but its production is broadly opposed by environmental groups due in large part to flaring. It’s likely to take time, but if XLE components can materially reduce methane emissions, it’s possible that natural gas could gain new footing as a cleaner energy source. That’s a longer-ranging theme, but for now, fossil fuel producers moving to cut methane emissions is a step in the right direction.

“The OGMP 2.0 Initiative is a voluntary, public-private partnership between the United Nations Environment Programme, the European Commission, the Environmental Defense Fund and over 80 oil and gas companies aimed at minimizing methane emissions from global oil and gas operations. Its work has helped to raise awareness of methane emissions and contributed to the growing priority of mitigation activities,” according to the statement.

For more news, information, and strategy, visit the ESG Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.