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Oil price declines do not change long-term ESG risk analysis

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By John StreurPresident and CEO, Calvert Research and Management

Washington -- Five years ago, responsibly managed Calvert Funds (Calvert Funds) began to exit positions in stocks and bonds of oil & gas companies and never returned. These decisions were based on environmental, social and governance (ESG) analysis at the time, and Calvert Research and Management (Calvert) continues to believe today that the numerous ESG risks associated with oil and gas exploration and production are too high to justify investment in the stocks and bonds of companies that directly own material amounts of fossil fuel reserves.1 I am often questioned about this aspect of Calvert Funds portfolio compositions, frequently by skeptics who cannot imagine a portfolio without oil companies.

With the market and media focus on the plunge in the price of oil and oil company stocks, we want to make clear that these type of market events, which can be short-term, do not impact our long-held view of inherent ESG risks. Only if we believe that a company successfully addresses financially material ESG risks, based on our research and analysis, would we consider a change to this position. Perhaps that will happen in the future, by an oil company transitioning itself to a low-carbon energy company. However, that transformation seems a distant possibility today.

Calvert does not celebrate the damage to market capitalization, brand value, or the real risk to jobs and employment in the oil and gas sector. More productively, and in our commitment to driving positive change in the companies within which we invest, Calvert will continue to advocate for a transfer of the more than $700 billion per year invested in oil and gas supply toward renewable energy and infrastructure. Similarly, Calvert will continue to stress the importance of optionality in a company's business units and exposure to a range of fossil and nonfossil revenue drivers.

Calvert sees that the global energy system is in a stage of transition, toward a lower-carbon future. Innovative and disruptive companies across the energy value chain are working to maximize energy efficiency and develop renewable energy systems that generate no carbon emissions or greatly reduced carbon emissions.

'State actors' pose significant risk

One of the significant risks of companies that have material fossil fuel reserves we have talked about is the fact that the majority of the world's fossil fuel reserves are controlled by "state actors" like Russia, Venezuela, Saudi Arabia, Iran, Iraq and other countries that depend on fossil fuel revenue to operate. These state actors have different motivations, incentives, governance structures and market tactics than public companies.

To be clear, we did not foresee the historic drop in oil prices that occurred Monday. However, it does seem that the Saudis have determined that the potential slowdown in economic activity from global reaction to the novel coronavirus, combined with an already fragile supply and demand scenario, would have tipped the oil market in a negative direction. This may explain their decision to make a move, lower prices and inflict financial pain on their competition (countries and companies alike) to secure market share in their industry.

Although Calvert Funds, including our Responsible Index Funds and our actively managed equity and debt (including Floating Rate and High Yield) funds, do not own securities of companies that have material fossil fuel reserves some funds do have positions in companies that provide equipment and services to the fossil fuel industry. Nonetheless, across Calvert Funds, portfolios have been significantly underweight, in some cases with zero exposure, to the energy sector since 2015.

Staying the course

Despite our large underweight to energy, Calvert Funds are subject to the high market volatility currently reverberating across global capital markets. In light of the recent market volatility and the Saudis move on the oil supply this weekend, two important questions are: 1) How much of an economic impact will the reaction to the coronavirus actually have? and 2) Can the United States Federal Reserve and other central banks around the world counter any slowdown in economic activity with interest rate cuts or other forms of stimulus? While no one has the answers, I expect our portfolios will continue to reflect our long-held view on companies with material fossil fuel reserves and seek to avoid other companies that we believe present financially materials ESG risks.

Bottom line: Economic uncertainty, market volatility, and steep price declines can test investor commitment to long-term outcomes. Calvert's proprietary ESG research is based on our assessment of financially material risks and individual companies' ability to manage those risks. This has historically resulted in a large underweight to the energy sector and little to no exposure to fossil fuel reserves. Changes to the price of oil or to the price of oil company stocks and bonds will not impact our ESG analysis and conclusions.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.