Consumers, governments and shareholders need to do more, rapidly, to make the biggest energy companies and other big emitters address the climate emergency, argues Rod Oram
The fierce fight to get fossil fuel companies to take responsibility for their roles in helping to create the climate crisis, and how they can help solve it, still has a very long, tough road ahead. Far greater shareholder, consumer and government engagement is urgently needed.
That said, recent shareholder victories against ExxonMobil and Chevron and a ground-breaking court ruling against Royal Dutch Shell mark an historic turning point. They will put much more pressure on the companies to reduce greenhouse gas emissions from their own operations and the far larger emissions from the fuels their customers burn.
At last week’s Exxon AGM, Engine No. 1, a US activist hedge fund, with only a 0.02 percent stake in the oil company, got three of its four candidates elected to the 12-person board against the company’s wishes. It was backed by BlackRock and Vanguard, two of the largest fund managers in the world, plus many other investors.
Likewise, at Chevron’s AGM shareholders voted strongly for the company to devise and execute strategies to sharply reduce its own emissions and those of its customers.
Activist shareholders and directors also got a big boost from a Dutch court. It ruled that Shell’s plans to reduce the carbon intensity of its products by 20 percent by 2030 were inadequate and inconsistent with the 2015 Paris climate agreement. It said the company had to reduce the actual emissions of it and its customers by 45 percent by 2030 on the way to the company’s stated goal of net zero emissions by 2050.
This was the first time a court explicitly tied the climate responsibilities of a fossil fuel company to the Paris agreement, which was signed by virtually every country in the world.
The court’s decision to make Shell’s responsibility for the emissions generated when consumers use its products is akin to major court rulings against tobacco companies in the 1990s. Then too, “producers became more liable for the choices of their customers,” said Lars Eirik Nicolaisen, deputy CEO of Rystad Energy, an energy-research company.
Yet, the global oil and gas sector fiercely resists such rigorous evidence and shareholder pressure. One of its tactics is to make vague promises about reaching net zero emissions by 2050 which lack the strategies to deliver on them, Global Action Tracker, a consortium of leading climate institutions, says in a recent report.
For example, only the top 3 of 10 companies it analysed - ENI of Italy, Total of France, and BP of the UK - have set targets for actual emission cuts, while the rest are promising only to reduce emissions intensity. The worst offenders are US oil and gas companies, as this chart shows:
Yet, we have the technology and financial capability to decarbonise the entire energy sector worldwide by 2050, the International Energy Agency proved recently in a detailed roadmap. This was a remarkable shift for an organisation with a long history in oil. It was founded by the OECD in 1974 during the first Arab oil crisis to give energy policy advice to member countries.
The IEA said oil companies should invest no more money in exploring for additional reserves or developing new production fields. Instead, it showed how countries can transition rapidly to a zero carbon future by using existing clean technologies, ranging from those widely available to those at a prototype stage. Greater energy efficiency is also a key driver, which will ensure the total demand for energy won’t rise in the next 30 years. It also identified some 400 actions for governments to take to help drive the energy revolution.
While many investors are gradually reducing the carbon exposure of their portfolios, the New Zealand Superannuation Fund has gone far further with its assets, which are currently worth $58 billion. It set targets to reduce between 2017 and 2020 the emissions of intensity of its entire portfolio by 20 percent, and its exposure to potential emissions from companies with fossil fuel reserves by 40 percent. It met the targets a year earlier and then set 2025 targets of 40 percent and 90 percent cuts respectively.
Beginning in 2017, it also added climate change to the list of issues it actively engages on with companies in which it invests. Its latest report on its climate strategy is here.
Divesting from heavy emitters is only one side of responsible investment practice. The other side, investing in companies contributing positively to a zero carbon future, is a lot harder, as MSCI, a global provider of investment research and indices, describes in its 2021 report.
As its graphic below shows, stock market listed companies with strategies aligned to limiting the rise in the global temperature to only 1.5C (a change in climate we could probably cope with) account for only 10 percent of listed companies. At the other end of the scale, a no-change portfolio would be consistent with a 4C rise. An interactive version of the graphic is here and an interactive version of the report is here.
ESG is the usual shorthand for responsible investing, standing for the environment, social and governance criteria by which companies are screened. Growing awareness of the necessity of applying such investment disciplines, and the often-higher financial returns from doing so, has caused a surge of funds into ESG portfolios in the past two years. Global flows into ESG funds totalled US$178 bn in the first quarter of this year, up from US$38 bn in the same quarter last year, according to Morningstar, a research firm. ESG funds accounted for 24 percent of total fund inflows so far this year, up from 11 percent in 2018.
Recent analysis by The Economist showed the impressive gains that can accrue from ESG investments. But it also highlighted serious weaknesses in disclosure, company selection and other practices. For example, its scrutiny of the 20 largest ESG funds in the world showed that:
“On average, each of them holds investments in 17 fossil-fuel producers. Six have invested in ExxonMobil, America’s biggest oil firm. Two own stakes in Saudi Aramco, the world’s biggest oil producer. One fund holds a Chinese coal-mining company. ESG investing is hardly a champion of social virtue either. The funds we looked at invest in gambling, booze and tobacco.”
ESG investing is enjoying a surge here in New Zealand too, as the Responsible Investment Association Australasia described in its annual benchmark report last September. It estimated that funds applying ESG disciplines accounted for $153 bn of the $296 bn managed funds market here; and that 80 percent of them screened for fossil fuel companies, up from 45 percent the previous year.
While celebrating the growth, the RIAA is very engaged on improving the range, depth and skills in the sector to ensure it can play its investment role in driving economic transformation, as the agenda of its annual NZ conference this week showed.
Still, its members and their colleagues around the world have a long way to go. Far too often they merely select companies in a given sector that score best on ESG ratings provided by external advisers such as Institutional Shareholder Services and Sustainalytics.
They are not yet making anywhere near enough smart investment decisions in companies driving systemic change; nor are they being seriously active and ambitious shareholders like those who led the victories at Exxon and Chevron, or the climate champions who took Shell to court in Holland.
Until they do, they will fall far short of being truly responsible investors and advisers.
