Major investors move against Shell and gas sector

Oil rig in the ocean
ShutterstockLucasz Z

Pressure is building on oil and gas groups to adopt tougher carbon reduction strategies ahead of a series of annual general meetings (AGM) next week.

A coalition of major investors representing $10.4 trillion in assets under management have written to the Financial Times on May 18 urging oil and gas majors to be more transparent and robust in their efforts to tackle escalating climate risks.

The letter, signed by 60 investors including Axa Investment Managers, Legal and General Investment Managers and Aviva Investors, insisted the "case for action on climate change is clear" and stressed they are "keenly aware" of the need to shift the global economy onto a low-carbon footing.

Emissions from the oil and gas industry account for about half of all global carbon pollution, according to CDP, with the vast majority, around 90 percent, arising from the use of their products.  

Warning that a smooth transition to a low-carbon economy is essential in order to maintain global economic stability, the investors want to see oil and gas firms make "concrete commitments" to substantially reduce their carbon impacts. They also want firms to be much more transparent about how their investments and business activities are compatible with global climate targets, warning laggards in the low carbon transition are at risk of stranded assets. 

"Reducing the carbon impact of their products is the most effective strategy for these companies to move to a low-carbon world," the letter stated. "The capital allocation decisions they make today are important to determine how likely they are to survive that transition."

The investors behind today's letter also want to see policymakers take "clearer and more collective action" to regulate emissions from high carbon industries and drive investment into low-carbon alternatives.

The letter comes ahead of a crucial vote at Tuesday's Shell AGM, where a resolution will call on the oil giant to set firm carbon reduction targets in line with the Paris Agreement to limit global warming to well below two degrees.

Shell already has promised to cut the net carbon footprint of its energy products — expressed in grams of CO2 per megajoule consumed — by around 20 percent by 2035 and by around half by 2050. The company also has responded to concerns about stranded assets by stressing that its reserves will be produced by 2030. Moreover, it has stepped up its diversification strategy in recent months through new investments in power generation and electric vehicle infrastructure.  

However, campaigners argue that the company's targets are not aligned with the goals of the Paris Agreement and may still allow for an increase in absolute emissions.

The campaigners therefore want to see firm targets to bind Shell to a downward emissions trajectory, with "tangible metrics" and "intermediate objectives" to reduce wiggle room for the oil giant, which admitted that its carbon emissions rose in 2017

The resolution is proposed each year by campaign group ShareAction, and last year achieved 6.3 percent support. But momentum is building around this year's event: U.K. pension fund NEST said it would support the motion and encouraged other shareholders to get on board.

"We commend Shell's ambition to reduce its carbon footprint but believe it can and should go further in the interests of all shareholders, including 6 million U.K. workers who invest in the company via their NEST pension," NEST chief investment officer Mark Fawcett said.

"We think that concrete targets, against which executive incentives can be set, are a sensible way to measure progress and enable investors to assess ongoing risks. We hope to see investors joining together on this vital issue to signal not just to Shell but to the wider oil and gas industry that setting long-term and intermediate targets provides, rather than hinders, the flexibility to adapt and change in line with the internationally agreed Paris goals in a staged and progressive manner."

The pressure on Shell is undoubtedly part of a trend that is starting to gain traction with some of the world's oil majors. This week saw Statoil complete its high profile rebrand, ditching the word oil from its name in favor of a new corporate identity as Equinor. Meanwhile, Bloomberg reported that Spain's Repsol is working on what could be the most ambitious climate strategy yet adopted by an oil company, citing sources who suggest the firm is to proactively move to limit growth from its oil and gas business and keep no more than eight years of reserves on its books.

At the same time, every major corporate announcement on investment in EVs and lower carbon vehicles — and they are coming thick and fast — is serving to underscore what advocates of the carbon bubble hypothesis have been saying for years: Oil demand destruction could come far faster and prove far more precipitous than industry projections suggest.

As long-standing campaigner Jeremy Leggett observed in response to the reports on Repsol's new plan: "In Jan. 2015 I predicted that one major oil company would turn its back on fossil fuels 'in the near future'... I had a phased withdrawal plan in mind though. Prediction: Repsol's freeze will turn into a total retreat plan."

Even the pope is cranking up the pressure on extractive industries. The Vatican this week released a new missive from Pope Francis, in which he calls for an overhaul in the management and regulation of financial markets to promote more ethical trading principles and a more equitable society.

He called for an end to the use of Gross Domestic Product as the main measure of economic wealth and instead urged nations to adopt economic and financial "biodiversity." "Selfishness, in the end, does not pay while it makes everyone pay a high price; hence, if we want the real well-being of humanity, 'Money must serve, not rule!'" Francis wrote.

It echoes calls earlier this year from BlackRock chief executive Laurence Fink, who in a letter to business leaders argued the current economic system was failing to deliver for too many people.

"We are seeing a paradox of high returns and high anxiety," Fink explained. "Since the financial crisis, those with capital have reaped enormous benefits. At the same time, many individuals across the world are facing a combination of low rates, low wage growth and inadequate retirement systems … For millions, the prospect of a secure retirement is slipping further and further away — especially among workers with less education, whose job security is increasingly tenuous. I believe these trends are a major source of the anxiety and polarization we see across the world today."

Fink added that governments' failure to tackle these trends meant there was more onus on the private sector to respond, and as such companies are increasingly being asked to address "broader social challenges."

Amid a growing feeling of discontent that the upheaval of the financial crisis may have failed to reshape what many see as a deeply unfair and unsustainable global financial system, grassroots movements to force companies to adopt more socially and environmentally responsible strategies have been gaining ground. Now it seems that message, alongside increasingly resonant carbon bubble fears, has become firmly embedded in much of the investment community — making this year's AGM season one to watch closely.

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