Fresh analysis by responsible investment non-profit ShareAction reveals that shareholders in Royal Dutch Shell plc (Shell) and BP plc continue to face significant financial risk as both companies fail to comprehensively adapt their business models to succeed through the low-carbon transition that is gathering pace. The reports, widely circulated to the global investment community, recommend that shareholders escalate engagements with boards and management at both companies.
Specifically, the reports recommend that investors press Shell and BP to:
- Provide detailed analysis on the resilience of each company’s portfolio of assets (operational and in reserve) to a ‘faster-than-expected’ low-carbon transition.
- Reduce or eliminate volume-based KPIs and executive incentives, and include instead “per share” indicators that align the interests of long-term shareholders with management in the context of heightened uncertainty facing companies in this sector.
- Outline plans for reducing total lifecycle emissions (i.e. including emissions from customers) as part of each company’s low-carbon transition strategy.
- Disclose each company’s position on up-coming climate legislation in different jurisdictions across the world as well as all memberships of entities to which the companies are linked or those that act on their behalf on climate and energy policy lobbying.
In 2015, ShareAction, along with a global coalition including pension funds in the USA, Sweden, the UK, Australia and Canada; asset managers CCLA, Sarasin and Partners, and Folksam; and a number of retail investors, filed shareholder resolutions at the FTSE 100 oil and gas giants. The resolutions (see full text below) required ‘enhanced reporting’ in five areas relating to the business risks of an economy shifting away from fossil fuels. Both resolutions passed with over 98% support, and became legally binding on the companies.
Two years on, ShareAction finds the companies’ business models look increasingly vulnerable to the threats posed by low-cost renewables and public policies that address the health and environmental impacts of fossil fuels. Shell and BP’s response to these threats is so far cautious and unconvincing, which puts at risk the savings of millions of pension savers, notably in the UK where exposure to Shell and BP in pension portfolios is especially high.
While both companies are publicly committed to the Paris climate agreement, BP’s low-carbon investments constitute just 1.3% of its total capital expenditure, while Shell has pledged to invest 3% of annual capex in low-carbon solutions by 2020. Both companies lack a bold solution to the problem of peak oil demand, which could be with us as early as 2021, according to then Shell CFO, Simon Henry.
ShareAction’s reports urge investors to increase pressure on BP and Shell to ensure capital is safeguarded in the low-carbon transition. In particular, investors are urged to question the potential return on capital deployed in new high-carbon growth projects.
Catherine Howarth, Chief Executive of ShareAction, says: “Ben Van Beurden and Bob Dudley are both running companies that look poorly prepared for the speed of technological and economic change now underway in the global energy market. Millions of pension savers are exposed to Shell and BP’s shares. These reports challenge the professional investors looking after our pension savings to manage the growing financial risks facing BP and Shell more actively in the coming year.”
Michael Chaitow, Senior Campaigns Officer at ShareAction, says: “Shell and BP want to have their oil and drink it too, by advocating for the landmark Paris Agreement to limit global temperature rises to below two degrees Celsius, while planning for scenarios that would violate it. Our report exposes an uncomfortable discrepancy between Shell and BP’s public support for a low-carbon economy and their actual business planning.”