Fund Pushing Back on ESG in Oil Patch Finds Profits in Kindred Souls

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Sometimes it's profitable to swim against the currents. To zig when everyone else is zagging. To push back on the conventional wisdom.

That's what DRLL, the exchange traded fund (ETF) launched this past August, exists to do: invest in oil and gas companies according to pure financial performance, without reference to environmental, social and governance (ESG) criteria.

ESG has become a significant issue for energy companies in recent years. For more on that, see September 26, 2022, article - Rick Perry Has Strong Words for Oil & Gas Critics; April 12, 2022, article - Oil & Gas Companies Detail Benefits of Integrated ESG Strategy; and September 28, 2021, article - Ceres Launches Effort to Fully Decarbonize Six High-Emitting Industries by 2030.

Many energy companies, and the DRLL fund, have criticized an effort by the U.S. Securities and Exchange Commission to compel publicly traded companies to disclose their greenhouse gas (GHG) emissions. For more on that, see March 23, 2022, article - Energy, Business Groups Slam SEC's GHG Disclosure Draft Rule.

The pushback against ESG investing criteria gained some steam last week when Florida's state treasurer announced it would begin withdrawing $2 billion from BlackRock Incorporated (NYSE:BLK) (New York, New York), one of the largest asset-management firms on the planet, over its embrace of ESG.

"BlackRock CEO Larry Fink is on a campaign to change the world," Florida's Chief Financial Officer Jimmy Patronis said in a press release. "Using our cash, however, to fund BlackRock's social-engineering project isn't something Florida ever signed up for."

That step followed a move by Louisiana and Arkansas to remove $794 million and $700 million, respectively, from that firm for the same reason.

Some states have taken steps to prohibit doing business with financial firms that support ESG. This past summer, West Virginia swore off doing business with a number of large financial firms, including Goldman Sachs Group Incorporated (NYSE:GS) (New York, New York), Morgan Stanley (NYSE:MS) (New York, New York), BlackRock, Wells Fargo & Company (NYSE:WFC) (San Francisco, California) and JP Morgan Chase & Company (NYSE:JPM) (New York, New York), over those firms' decisions to stop providing financing for coal companies.

Kentucky, Tennessee and Oklahoma have similarly stopped doing business with banks that curtail lending to energy companies over climate change or ESG, according to a report in The New York Times. Other states are investigating similar steps.

The DRLL fund was launched in August 2022, and since then its value has risen about 20%. Not quite as good as the pure-play S&P 500 Energy Index, which is up 26% since that date, but far better than the S&P 500 Index, which is down about 2% since then.

DRLL's assets under management (AUM) have grown to a recent $412.4 million, as of early December. When the fund was launched this past August, its AUM went from zero to $238 million in the fund's first two weeks of existence.

"Everyday citizens are delivering a powerful message to American energy companies: It's time to drill, frack and do whatever else is necessary to succeed without apologizing for it," Vivek Ramaswamy, executive chairman of Strive Asset Management (Columbus, Ohio), told Yahoo Finance in an August 2022 interview. "We hope to unlock the potential of the U.S. energy sector by mandating U.S. energy companies to focus exclusively on excellence over social agendas imposed by ESG-linked asset managers."

Industrial Info covered the launch of the DRLL, which is managed by Strive Asset Management. For more on that, see August 12, 2022, article - Asset Manager Pushes Back on ESG Narrative. A passively managed fund, DRLL's largest holdings are ExxonMobil Corporation (NYSE:XOM) (Irving, Texas) at 22%, Chevron Corporation (NYSE:CVX) (San Ramon, California) at 16.5%, ConocoPhillips (NYSE:COP) (Houston, Texas) at 6.8% and EOG Resources Incorporated (NYSE:EOG) (Houston) at 3.5%.

Notably absent from the fund's holdings are European-based supermajors, such as Shell plc (NYSE:SHEL) (London, England) and BP plc (NYSE:BP) (London), which have for several years been reorienting their business around ESG.

In launching DRLL, Ramaswamy, co-founder and executive chairman of Strive, said ESG and so-called "woke" capitalism were "the single greatest threat to American democracy."

He pushed back against a "small group of elites that were making consequential decisions in private," a practice he likened to the sensibility that led to the American Revolution. At one point, he explicitly referenced 1776, the year 13 colonies began their revolt against Great Britain, eventually leading to the founding of the U.S.

The "small group of elites" to which he was referring are asset-management companies giants as BlackRock, Vanguard (Valley Forge, Pennsylvania) and State Street Corporation (NYSE:STT) (Boston, Massachusetts), which make investment decisions according to ESG criteria. Those three firms collectively have more than $21 trillion in assets under management--nearly the size of the U.S. economy. Their adoption of ESG criteria shifts markets, particularly when shareholders are asked to approve or reject resolutions. Large asset management firms like BlackRock, Vanguard and State Street own large blocks of common stock, and how they vote on shareholder resolutions are an important force shaping corporate decision-making.

Back in August, Ramaswamy said asset managers like BlackRock and Vanguard "are not the owners of capital, they're the custodians." The owners of capital--individuals and institutional investors who have given their retirement and investment capital to asset-management firms to make investment decisions on their behalf--needed to stand up under the heading of "business excellence, not politics."

Strive's website continues in that vein: "We created Strive to offer everyday Americans a way to invest in the stock market without mixing business with politics."

"Many Americans invest in the market by selecting large asset managers to oversee their retirement and investment accounts. These asset managers charge low fees, but there is a hidden cost: these firms tell America's public companies to adopt divisive social and political agendas that most Americans disagree with. Even worse, they cause America's companies to perform more poorly by mixing politics with business, which harms the investment accounts of everyday Americans."

In a Nov. 1 letter to ExxonMobil seeking a meeting with CEO Darren Woods, Ramaswamy said: "Strive is a new asset management firm whose mission is to restore the voices of everyday citizens in the American economy. We ... focus exclusively on delivering excellent products and services to customers in a manner that maximizes long-run shareholder value, without regard to sociopolitical objectives or other mixed motivations."

Throughout 2022, both before and after launching the DRLL fund, Ramaswamy has made numerous appearances on TV networks--including CNBC, Fox News and Newsmax--and has drawn favorable commentary from the Wall Street Journal.

In railing against ESG in Corporate America, Strive said a record 529 ESG proposals were filed by shareholders in 2021, up 22% from the previous year. It said several firms, including ExxonMobil and Chevron, had "untapped potential, if liberated from ESG-imposed constraints."

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).