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ESG: Beware the ‘brownium’ penalty

Fossil fuel companies are paying a “brownium” penalty to raise money in fixed interest markets — and are now trading on lower earnings multiples in equity markets. Pendal’s MURRAY ACKMAN explains what it means

  • Energy companies’ performance muted due to ESG
  • Bond investors risk getting caught with securities they don’t want
  • ESG is a long-term thematic, high energy prices are shorter term

WITH high energy prices and oil and gas company revenues soaring, shouldn’t the big fossil fuel companies be outperforming in credit and equity markets?

In a pre-ESG world the answer would have been yes.

But the large fossil fuel-based companies have to pay a ‘brownium’ penalty to raise money in fixed interest markets — and are trading on lower earnings multiples in equity markets, compared to previous years says Pendal ESG credit analyst Murray Ackman.

It’s a demonstration of how fundamental ESG (environmental, social and governance) factors are now to investment decisions, Ackman says.

“When investing, everyone needs to do their fundamental analysis and ESG integration is now a big part of that analysis, just like financial analysis. If you are looking at downside risks, ESG factors can significantly destroy a company’s value.

“Of course, you can win on short-term trades, but the long-terms might be problematic.”

Underlying change

It’s important for investors to understand this underlying change in the energy sector, Ackman says.

“In the bond world, an investor could feel uncomfortable buying some energy bonds and holding them till maturity because the world in seven years or so will be very different.”

Some of the differences between investing in bonds and in equities are accentuated when buying into energy companies.

Pendal Sustainable Australian Fixed Interest Fund

A defensive bond fund with strong performance and positive environmental and social outcomes.

Liquidity is one difference, Ackman says. Buying and selling an energy company on the stock market is potentially easier than selling a corporate bond from an oil and gas company in the secondary market.

“Also bond people don’t tend to like taking as much risk. And bond investors look at the downside risk of ESG as pretty significant.

“You can buy a bond funding a gas pipeline that has a 20-year maturity. If you do that, you are making a call on the future.

“What if there’s a sudden policy change that no one saw coming. Pricing can be severely affected, and you don’t want to get stuck with a bond that you don’t want until maturity,” Ackman says.

Ultimately, it’s about how much return an investor gets for taking on the risk of buying a bond that finances fossil fuel companies.

Beware the “brownium”

“There is now a ‘brownium’ – energy companies are having to pay more and access to finance is getting trickier.

“Banks are under pressure not to provide finance to fossil fuel exploration. We are seeing more private investment in the sector.”

Ratings agencies are placing greater emphasis on ESG factors, which impacts pricing. And bond funds, like those that Ackman works across at Pendal, assess issuers’ ESG credentials.

“In our vanilla portfolios, if we think there’s an ESG risk but the pricing compensates for that then we might make a trade,” Ackman says.

“But in our sustainable and impact funds, we probably can’t make those trades. And that’s why people invest in those funds.”

ESG is a long-term play

The bottom line for investors is that ESG is a long-term thematic play while energy price rises are much shorter term.

“This isn’t a linear process. There will be times when oil and gas outperform, but that doesn’t mean we aren’t heading towards net zero,” Ackman says.

“In the past few years at every company presentation, the highlights slide at the front almost always has a couple of ESG points.

“Businesses are becoming proud of their achievements in ESG. Investors are asking a lot more questions about it and it is now front of mind.”

Find out about

Regnan Credit Impact Trust


About Murray Ackman and Pendal’s Income and Fixed Interest boutique

Credit ESG analyst Murray Ackman joined Pendal’s Income and Fixed Interest team in 2020 to provide fundamental credit analysis and integrate Environmental, Social and Governance factors across credit funds.

Murray has worked as a consultant measuring ESG for family offices and private equity firms and was a Research Fellow at the Institute for Economics and Peace where he led research on the United Nations Sustainable Development Goals.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.

Regnan Credit Impact Trust is a defensive investment strategy that puts capital to work for positive change.

Pendal Sustainable Australian Fixed Interest Fund is a defensive Australian bond fund that delivers market-leading performance with positive environmental and social outcomes.


This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at April 20, 2022.

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