Commodity Investing in the Age of ESG and Inflation

Abstract

The risks posed by climate change are real and urgent. We need to make significant changes to reach net zero by 2050. But from copper to corn to crude, we need commodities to do that. As the largest global investment consultant Mercer noted: “Commodities will remain an essential component of the economy. Investors should note that there is no transition pathway to a climate-neutral world that does not involve commodities” (Mercer, 2020).

Much has been published about ESG frameworks for resource stocks and bonds, but what about commodity futures? Commodity futures are generally not tied to any specific source or production company. Financial participation in futures markets does not directly influence a particular company’s actions, as it can with equities or bonds. This makes applying ESG principles challenging.

Commodity futures also do not create or consume the underlying commodity. As opposed to an equity or bond investment, with futures there is no resulting increase or decrease in production. Futures also tend to have lower correlation and stronger diversification benefits than the equity or bonds of resource companies. How should a responsible investor weigh these benefits?

Up to this point neither the Organization for Economic Cooperation and Development (OECD) nor the UN Principles for Responsible Investment (UNPRI) provide comprehensive guidance specifically related to commodity futures.

What about Societal and Governance goals? These are often overshadowed by the “Environmental” in ESG, particularly when considering commodities. Beyond environmental considerations, what role do commodity futures markets play more broadly in society?

Finally, can a responsible investor invest in commodity futures? We believe the answer to this question is an unequivocal yes.

Keywords: Commodities, ESG, Inflation, Derivatives, Futures, Responsible Investing, Commodity Trading Advisor, CTA, Hedge Funds, Managed Futures, Investing