May 26th, 2021 – a turning point for investments in Big Oil?

‘Netherlands court orders oil giant to cut emissions’

Widely reported on May 26th 2021, a ground-breaking court case in the Netherlands ruled that the oil giant Shell must reduce its CO2 emissions 45% from 2019 levels by 2030. Determining that Shell was responsible not only for its own CO2 emissions, but also for those of its suppliers, Friends of the Earth said this is the first time a company has been legally obliged to align its emissions reduction policies with the Paris Agreement. On the same day, at its annual general meeting, Chevron shareholders voted 61% in favour of the proposal to cut Scope 3 emissions. Although the proposal did not specify amounts or dates, the overwhelming support for it shows growing investor frustration with companies which, they believe, are not doing enough to tackle climate change. Whilst both outcomes signal increasing momentum towards tackling climate change, they also highlight the role that investors and shareholder activists can play in supporting oil majors who are investing in the transition to producing zero or low carbon energy.

Is it time to completely disinvest from Big Oil?

It’s well known that burning oil and gas (principally for generating electricity) is a significant cause of global CO2 emissions. In 2019, this sector was responsible for emitting over 20 billion tonnes, including 429.5 million tonnes emitted by flaring — burning off gas to relieve pressure during oil extraction. Estimates suggest that this wasted gas would be sufficient to satisfy the natural gas demand of all residential buildings in the US.1 Most of the quoted oil majors have pledged to end ‘routine flaring’ by 2030 but many of their smaller, privately owned rivals have yet to do so. Detailed data from operations in the Permian Basin — the most productive US oil region accounting for more than half of US oil output — suggests that private companies are burning this unwanted natural gas at almost six times the level of publicly listed companies.1 Unchallenged by public scrutiny, these private operators have little incentive to invest in the technical infrastructure necessary to put the gas to productive use. Given the often remote and hostile locations in which these operations take place, it’s easy to see why they take the cheaper option and ignore environmental concerns.

Can investor activism deliver real change?

On what was clearly a significant day, May 26th saw a third successful action against an oil major by an activist investor concerned about global warming. A tiny hedge fund, Engine No. 1, dealt a major blow to Exxon Mobil, unseating at least two board members in a bid to force the company’s leadership to adjust its business strategy to match global efforts to combat climate change. Engine No. 1 acquired its 0.02% stake recently at a time of depressed share prices for oil majors with a clearly stated purpose to ‘create long-term shareholder value [by investing in] jobs, workers, communities, and the environment’. Other hedge funds or venture capitalists might not be so altruistic in their decision making, taking advantage of lower share prices to acquire any debt-laden companies struggling with lower oil prices and taking them private. Unencumbered by the disclosure requirements of their listed rivals, these organisations can prioritise short term extraction at the expense of any other longer term considerations.

What can I do to support positive change within Big Oil?

As an individual investor, few have the financial muscle to replicate the actions of Engine No. 1, and many are actively disposing of any privately held shares. With enough sellers in the market, share prices will fall and the opportunity for unscrupulous leveraged buyouts increases. Before you make any decision to sell, ask yourself whether you are ok with others acting on your behalf to drive through the energy transition. Might it be better to stay invested, however modestly, and make sure your vote counts and your voice continues to be heard?

Reference:

  1. Rystad Energy data & additional Financial Times research 2021

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