One question I’m contemplating out of our nearly 1,000-attendee-strong GreenFin 23 event last month: Are we entering a new chapter in the perennial "divest or engage" narrative surrounding the fossil fuels sector?
Consider recent controversy over Shell, one of the few oil majors open to shareholder engagement and dialogue regarding its role in the transition to a clean economy. Shell’s windfall profits over the past year could have been used to accelerate its transformation to and participation in a future without fossil fuels. Instead, they were used to boost shareholder dividends and buy back shares. What’s more, the company has scaled back its climate targets.
Shell is not the only oil major to deprioritize decarbonization as its balance sheet got healthier. TotalEnergies plans to funnel most of its investments into fossil fuels. And after a 2022 profit of over $27 billion, BP — rebranded 23 years ago to go “beyond petroleum” — cut its emissions reduction targets. It now aims to cut emissions by 20 to 30 percent by 2030, down from a prior goal of 35 to 40 percent.
For some investors — whose answer to the "divest or engage" question has largely leaned toward the latter — these shifts by the oil majors have started to tip the scales in the opposite direction.
Adam Matthews, chief responsible investment officer for the Church of England Pensions Board, recently attributed the fund’s decision to divest all of its oil and gas sector holdings to the fact that "no [oil and gas] company is aligned over the short, medium and long term to net zero."
Oil majors face decline no matter what actions it takes — the question is whether it destroys humanity in the process by continuing to procrastinate.
Of course, the ethos that guides a religious organization’s pension investments isn’t totally comparable to that of other institutional investors. But take the $1.35 trillion Norwegian Sovereign Wealth Fund, the largest such fund in the world and a universal owner with shares in 9,200 companies.
As Carine Smith Ihenacho, chief governance and compliance officer of the fund, said earlier this year, "We want to support and push the company through the transition to a low-carbon economy … But in the end, we may [sell out of] some companies, and we have already sold out [of] quite a few companies that we just believe have an unsustainable business model when it comes to climate."
The Church of England Pensions Board and Norway’s Sovereign Wealth Fund are asset owners, but other investors are also adjusting their stance. Legal & General Investment Management, the United Kingdom’s largest asset manager with over $1.5 trillion in assets under management, for example, is expanding its list of assets marked for exclusion due to climate concerns. Exxon Mobil, a long-time climate laggard, is included.
Hearts, minds and markets
A not insignificant number of readers may reflect on the fossil fuel sector’s backpedaling on climate with: "Well, capitalism."
But let’s remember that one primary aim of sustainable investing is to help redefine the assumptions that underpin such a response. As Principles for Responsible Investment (PRI) CEO David Atkin has told me, responsible investors’ goal is to reset "the plumbing of the finance sector so that it rewards those investors that have a truly long-term lens." The attempts by oil majors to put off a future without fossil fuels are at best myopic.
Two key elements will play a central role in where we go from here: retirement accounts; and a heightened public awareness of corporations’ social license to operate (regardless of industry sector).
The $35.4 trillion retirement fund industry has become a lifeline for the fossil fuel industry as large pools of capital from major endowments including Harvard (divested) and Princeton (dissociated) dry up and major foundations, including the Ford Foundation and the MacArthur Foundation, reorient their investments away from fossil fuels.
But that might not be in the best interest of the folks invested in those retirement accounts, namely you and me. Going back to the "well, capitalism" sentiment: Looking strictly at value and not values, trends data from the last 10 years is enlightening. The S&P 500 Ex-Energy — that is, the S&P 500 index sans energy (translation: fossil fuels) — outperformed the S&P 500 by 81 basis points.
Investors are rightfully focused on creating long-term value, and the economy of the future is one powered by clean energy.
So while the retirement fund lifeline is a positive for the fossil fuel industry, it may not be for retirees’ returns, despite arguments being raised in recent red state legislation about what is perceived as a prioritization of "values" through sustainable investing.
Oil and gas majors may also be losing their social license to operate — that is, the ongoing acceptance of their business and operating procedures by employees, stakeholders and the public — as they renege on climate commitments.
One notable example: Christiana Figueres, former executive secretary of the U.N. Framework Convention on Climate Change (UNFCCC), who memorably coaxed a youth climate activist back on stage to promote open dialogue with Shell’s CEO at 2022’s TED Countdown Summit. Figueres recently shared that she has "for years held space for the oil and gas industry to finally wake up and stand up to its critical responsibility in history … what the industry is doing with its unprecedented profits over the past 12 months has changed my mind."
She continues: "Let’s remember what the industry could and should be doing with those trillions of dollars: stepping away from any new oil and gas exploration, investing heavily into renewable energies and accelerating carbon capture and storage technologies to clean up existing fossil fuels use."
Figueres concludes her column by noting that the sector faces decline no matter what actions it takes — the question is whether it destroys humanity in the process by continuing to procrastinate.
Investors are rightfully focused on creating long-term value, and the economy of the future is one powered by clean energy. It’s a not-so-distant future, and fossil fuels companies that prioritize thwarting trends such as electric vehicle adoption rather than allocating capital to become energy firms of the future can’t indefinitely remain companies of today’s portfolios.