For Big Oil’s Future, Look To Big Tobacco’s Past

If you want to know the future of Big Oil, look to the past of Big Tobacco. Depending on who you believe, they will be either greenwashed money machines or transformed businesses dedicated to reversing the damage done by their old products to the planet and health. Confusingly, they might be both.

From the 1980s until a few years ago, Big Tobacco was a money machine. Cigarette sales fell a little pretty much every year, but prices rose more than enough to compensate and profit margins were, well, to die for. New technology changed everything. The development of e-cigarettes, and to a lesser extent heated tobacco, overthrew the business model and the marketing. Now, Big Tobacco is trying to present itself as a leader on environmental, social and governance issues—and even health.

“We think of ourselves as having an ‘H+’ ESG strategy: ‘H’ for health,” says Kingsley Wheaton, chief marketing officer at British American Tobacco, or BAT, the biggest tobacco company by sales. “It’s the sine qua non of our transformation.”

ESG, environmental, social and governance investing, has swept into the world of finance and according to its adherents can help change the world. I’ve taken a critical look at the ESG trend in a series of Streetwise columns. Tobacco offers a guide because 40 years ago it faced similar challenges from investors who took a moral stance against its products and governments who wanted to tax and regulate it out of existence.

Oil has proved as addictive for the economy as nicotine is to smokers. Environmentalists and governments want to wean customers on to alternatives, especially electric cars but potentially also hydrogen or simply lower consumption. Just as the prospect of ever-increasing regulations, combined with limits on marketing, made it almost impossible to launch a new tobacco company, the prospect of action on fossil fuels has hit investment in new drilling. Many investors believe the limited expansion of supply means high oil prices could last.

The oil industry and its investors are now split between the two approaches taken by Big Tobacco.

On one side are those who think the route to lower oil consumption will look like tobacco did from the 1980s to the 2000s. Volumes will fall but higher prices will boost profit margins. Addicted customers meant that cigarette sales continued even when marketing spending was slashed due to legal restrictions. Gasoline sales will continue for many years, but oil companies might not spend the vast sums they did in the past exploring and drilling new wells, leading to higher prices and fatter margins even as existing wells are run down.

As with tobacco, this strategy cannot last forever—but if governments are serious about their 2050 net-zero emissions promises, there’s no future in drilling anyway. And in the meantime the oil companies could pay shareholders the fat dividends offered for decades by tobacco stocks.

Most of the firms following this strategy are privately-held, buying assets being sold off by listed companies trying to cut their emissions. In practice, emissions simply continue under new ownership. But creating a standalone limited-life oil producer was part of the pitch of hedge fund activist Daniel Loeb, who is pushing to break up British oil major Shell.

On the other side are oil majors, mainly in Europe, who think the future involves a steady switch from oil to new energy such as wind farms. Just as with Big Tobacco recently, they are using some of the profits from selling oil to pour money into the new areas.

Like Big Tobacco, these oil companies trumpet their environmental projects, as well as social projects and corporate governance. That disgusts activists, who label it “greenwashing,” designed to distract customers and investors from the harm they do. BAT even removed the word “tobacco” from its brand in 2020, as well as dropping the tobacco leaf from its logo and adding the slogan “A Better Tomorrow.”

“Despite all the prominence the newly re-branded BAT is placing on ESG, what is quite clear is that although the leopard may have changed the colours of its spots from black to green, BAT is still a leopard,” says Andy Rowell from the Tobacco Control Research Group at the University of Bath in England.

Mr. Wheaton bridled at the suggestion that its efforts were all about distraction, during an interview at BAT’s London headquarters. “If you knew the sheer energy that goes into building the new business you wouldn’t think it was greenwashing,” he said. “When you leave the office I’m not going to say ‘hahaha, he believed all of it’.”

At least some of the agencies that rate companies on ESG characteristics do believe it. BAT last year was ranked as third-best in the FTSE 100 by Refinitiv, and Sustainalytics, part of Morningstar, rates it medium risk, 88th out of 598 companies it rates in what it calls the “food products” industry globally. S&P Global thinks BAT is among the best tobacco companies, while MSCI doesn’t buy the story, rating BAT as only average within the tobacco industry. But MSCI thinks Shell is great for an oil company, giving it AA, its second-best rating, while Refinitiv says Shell has the best governance in the world.

The historic arguments used by both industries developed the same way: first, denial (of cancer or climate change), then fierce lobbying campaigns to head off restrictive laws, in some cases triggering accusations of outright bribery. The current argument is that people will want or need cigarettes and fossil fuels for many years, so they need to be provided – and are better provided by a big public company than by private firms with no transparency.

Some in Big Tobacco have reached the acceptance stage, that eventually cigarettes will vanish, and their business needs to change or die. Not every oil company is there yet, but the debate is on. Shell and others in Europe are spending heavily on change. But at least some investors prefer the die option, with fat profits to be made along the way and perhaps a longer life than environmentalists wish.

ESG investors expecting big carbon emitters to get their just deserts should think again. There’s plenty of money to be made from oil before the dirty fuel is no longer needed, just as there has been from cigarettes. And that money might end up going to investors who just don’t care about ESG.

LIKE MARVEL VILLAINS, most fashion writers have origin stories. Mine began with a navy nylon Prada purse, salvaged from a Boston thrift store when I was a teen in the 1990s. Scuffed with black streaks and sagging, it was terribly beat-up. But I saw it as a golden ticket to a future, chicer self. No longer a screechy suburban theatre kid, I would revamp myself as sophisticated, arch, even aloof. The bag, I reasoned, would lead the way.

That fall, I slung it against my shoulder like a shotgun and marched into school, where a girl far more interesting than I was called out, “Hey, cool bag.” After feigning apathy —“I don’t know, you could use a Sharpie on a lunch bag and it would look the same”—we became friends. She introduced me to a former classmate who worked at a magazine. That woman helped me get an internship, which led to a job.

Twenty years later, I still wonder how big of a role that Prada purse played in my future—and whether designer bags can function as a silent partner in our success. Branded luxury bags took off in 1957, when Grace Kelly posed with an Hermès bag in Life magazine. (Hermès renamed that bag “the Kelly” in 1973.) The term “status bag” was popularised in 1990 by Gaile Robinson in the Los Angeles Times, describing any purse that projects social or economic power. Not surprisingly, these accessories are costly. Kelly bags cost over $10,000; ditto Chanel’s 11.22 handbag. Some bags by Louis Vuitton and Dior command similar price points. The cost isn’t repelling customers—both brands reported revenue surges in 2023. But isn’t there something dusty about the idea that a branded bag carries meaning along with your phone and wallet? How much status can a status bag deliver in 2024?

Quite a lot, said Daniel Langer, a business professor at Pepperdine University and the CEO of Équité, a Swiss luxury consulting firm. Beginning in 2007, Langer showed a series of photo portraits to hundreds of people across Europe, Asia and the U.S., then asked them 60 questions. Those pictured carrying a luxury handbag were seen as “more attractive, more intelligent, more interesting,” he said. The conclusion was “so ridiculous” to Langer that he repeated the studies several times over the next decade and a half. The results were always the same: “Purchasing a ‘status bag’ will prepare you to be more successful in your social actions. That is the data.”

Intrigued, I gathered various Very Important Purses—I borrowed some from friends, and others from brands—to see if they could elevate my station with the same unspoken oomph as a “Pride and Prejudice” suitor.

First, I took Alaïa’s Le Teckel bag—a narrow purse resembling an elegant flute case and carried by actress Margot Robbie—to New York’s Carlyle Hotel on a Saturday night. The line for the famous Bemelmans Bar stretched to the fire exit. “Can I get a table right away?” I asked the host, holding out my bag like a passport before an international flight. “It’s very busy,” he said in hushed tones. “But come sit. A table should open soon.” I sank into one of the Carlyle’s lush red sofas and sipped a martini while waiting—a much nicer way to kill 30 minutes than slumped against a lobby wall.

Wondering if this was a one-time thing, I called up Desta, the mononymous “culture director” (read: gatekeeper) who has worked for Manhattan celebrity hide-outs like Chapel Bar and Boom, the Standard Hotel bar that hosts the Met Gala’s official after party. “Sure, we pay attention to bags,” he said. “Not too long ago at Veronika,” the Park Avenue restaurant where Desta also steered the social ship, “we had one table left. A woman had a Saint Laurent bag from the Hedi Era,” he said, referencing Hedi Slimane , the brand’s revered designer from 2012 to 2016. “I said, ‘Give her the table. She appreciates style. She’ll appreciate this place.’”

Some say a status bag can open professional doors, too. Cleo Capital founder Sarah Kunst, who lives between San Francisco and London, notes that in private-equity circles, these accessories can act as a quick head-nod in introductory situations. Kunst says that especially as a Black woman, she found a designer bag to be “almost like armour” at the beginning of her career. “You put it on, and if you’re walking into a work event or a happy hour where you need to network, it can help you fit in immediately.” She cites Chanel flap bags made from the brand’s signature quilted leather and stamped with a double-C logo as an industry favourite. “People love to talk about them. They’ll say, ‘Ohhh, I love your bag,’ in a low voice.” They talk to you, said Kunst, “like you’re a tiger.”

For high-stakes jobs that rely on commissions—sports agents or sales reps, for instance—a fancy handbag can help establish credibility. “It says, ‘I’m succeeding at my job,’” said Mary Bonnet, vice president of the Oppenheim Group, the California real-estate firm at the centre of Netflix reality show “Selling Sunset.” As a new real-estate agent in her 20s, Bonnet brought a fake designer bag to a meeting. To her horror, a potential buyer had the real thing. “I work in an industry where trust is important, and there I was being inauthentic. That was a real lesson.” Now Bonnet rotates several (real) Saint Laurent and Chanel bags, but notes that a super-expensive purse could alienate some clients. “I don’t think I’d walk into [some client homes] with a giant Hermès bag.”

Hermès bags are supposedly the apex predator of purses. But I didn’t feel invincible when I strapped a Kelly bag around my chest like a pebbled-leather ammo belt. The dun-brown purse cost $11,800, a sum that prompted my boyfriend to ask if I needed a bodyguard. Shaking with “is this insured?” anxiety, I walked into a showing for an $8.5 million apartment steps from Central Park. I made it through the door but was soon stopped by a gruff real-estate agent asking if I had an appointment. No, but I had an Hermès bag? Alas, it wasn’t enough. The gleaming black door closed in my face.

“What went wrong?” I asked Dafna Goor, a London Business School professor who studies the psychology behind luxury purchases. “You felt nervous,” she replied. “That always makes others uncomfortable, especially in a high stakes situation,” like an open house with jittery agents. Goor said recognisable bags from Louis Vuitton and Christian Dior are also often faked, which can lead to suspicion if not paired with “other signals of wealth.”

“You can’t just treat a bag as a backstage pass,” said Jess Graves, who runs the shopping Substack the Love List. Graves says bags are more of a secret code shared between potential connections. “I’ve been in line for coffee and a woman will see my Margaux [from the Row] and go, ‘Oh, I know that bag.’ Then we’ll chat.” Graves moved from Atlanta to Manhattan in 2023, and says she’s made some new, local friends thanks to these “bag chats.”

I had my own bag chat that night, when I brought Khaite’s Olivia—a slim crescent of shiny maroon leather—to a house party thrown by a rock star I’d never met. In fact I knew hardly any guests, but as I stood in the kitchen, a woman in vintage Chanel pointed to my bag and asked, “How did you get that colour? It’s sold out!” Before I could tell her my name, she told me the make and model of my purse. Then she laughed about her ex-boss, a tech billionaire, and encouraged me to buy some cryptocurrency. The token I picked surged nearly 30% in about a week. Now I was onto something—a status bag that might bring not just status, but an actual market return.

Thanks to their prominence on social media, certain bags have gained favour among Gen Zers. “TikTok and Instagram make some luxury items even more visible and more desirable to young people,” said Goor. I experienced this firsthand on a stormy Saturday morning, when a girl in a college hoodie pointed at my Miu Miu Wander bag as I puddle-hopped through downtown New York. The piglet-pink purse is a TikTok favourite seen on young stars like Sydney Sweeney and Hailey Bieber. “Your bag is everything!” yelled the girl from the crosswalk. “Thanks, can I have your umbrella?” I shouted back. She laughed and left. My Wander had made a splash—but it couldn’t keep me dry. I ran to the subway, soaked. The bag looked even better wet.

Changing the Status Bag Quo

Everyone loves an ingénue—fashion insiders included. Perhaps that’s why at Paris Fashion Week in September, newer handbags from Bottega Veneta and Loewe jostled for space and street-style flashbulbs.

“These bags, especially ones by independent labels like Khaite, are quieter signals of cultural access,” explained Goor. “Everyone knows what an Hermès Kelly bag is. So now there need to be new signals” beyond traditional status bags to convey power.

Sasha Bikoff Cooper, a Manhattan interior designer, says there’s a less cynical explanation for why these bags have captured celebrity fans—and more important, paying customers. “They’re fresh and also beautiful,” she said. “Hermès is always classic. It’s like a first love. But you want newness, too.”

The Wall Street Journal is not compensated by retailers listed in its articles as outlets for products. Listed retailers frequently are not the sole retail outlets.

For Big Oil’s Future, Look To Big Tobacco’s Past

There’s plenty of money to be made from oil before the dirty fuel is no longer needed, just as there has been from cigarettes.

Some designer handbags like the Hermès Kelly have implied power. But can a purse alone really get you a restaurant table—or even a job?

Changing the Status Bag Quo