Why Energy Firms’ Performance Varied: US vs. Europe

Since the end of the U.S. recession in April 2020, companies in the oil, gas and consumable-fuel industry have rallied and outperformed broad equity markets across the globe. Moreover, U.S. firms have outperformed their European counterparts, as measured by the MSCI USA IMI Oil Gas and Consumable Fuel Index’s returning 11.8% per year more than the MSCI Europe IMI Oil Gas and Consumable Fuel Index over the last three years in gross USD terms. For context, the long-term (April 2013 – April 2023) performance of the two indexes have been quite similar at 5.2% and 5.0% per year, respectively.

At the same time, the European companies, on average, exhibited higher low carbon-transition scores and better ESG profiles, indicating they may be more resilient to climate risks and potentially positioned to benefit from climate-related opportunities.

Did the different sustainability profiles play a role in the regional performance difference?

A deeper look into the performance decomposition of the indexes showed that the performance lag in Europe stemmed largely from industry effects and, to some extent, country and currency effects. The oil- and gas-exploration and -production sub-industry, which was the primary beneficiary of the energy-sector rally, represented 30% of the U.S. index but only 2% of the European index, which was dominated by integrated oil and gas (92%). That sub-industry benefited from the energy rally, as well, but to a lesser extent. At a factor level, the higher exposure of the European index to the ESG and carbon-efficiency factors did not detract from performance.

Over the period of study, industry effects played a larger role than sustainability characteristics.