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Investors show true colours on oil and gas

Investors’ reactions to Europe-based oil and gas companies’ recent announcements show where they stand on climate action. Most large investors signalled that the companies’ huge profits and dividends take priority over decarbonising our economy or fixing the cost of living crisis. However, a few stepped forward to back a lawsuit that could find Shell’s directors liable for failing to act on climate risk.

As BP announced record annual profits of $28bn, its boss Bernard Looney lowered his 2030 target for reducing oil and gas output. Similarly, Shell responded to its record $40 billion profit by saying that it won’t increase capex on renewables and “energy solutions” above its current 14%. Both said that they plan to reward investors with further billions in dividends and share buybacks.

Most investors seemed to welcome this news, pumping up the share price of both companies. Adrienne Buller, Research Director at Common Wealth, a UK think-tank, told the FT: “these companies are set up to maximise returns to their shareholders and they’re doing exactly that.”

When BP revealed its results, Responsible Investor immediately contacted the Climate Action 100+ (CA100+) lead investors charged with engaging BP to “take necessary action on climate change”. But “none would comment on the firm’s announcement”.

Three days later, however, Bruce Duguid, Head of Stewardship at Federated Hermes EOS, and one of the CA100+ lead engagers with BP, told Reuters: “In the context of a very strong financial outcome, those investors with net-zero goals, including many of our clients, will be concerned at such a material change to BP’s 2030 absolute emissions reduction target.”

He went on to say that this change “also raises a significant governance question, given the high proportion of investors that supported the original (emission reduction) target only nine months ago” at BP’s annual general meeting, referring to the so-called ‘Say On Climate’ vote tabled by BP at its 2022 AGM.

Reuters calculates that “half of BP’s top ten institutional investors are members of CA100+”. So if they want to answer the question on governance, they have the firepower to vote strongly against BP’s board this May.

Mark van Baal, founder of Follow This, a Dutch group that has teamed up with several institutional investors to file shareholder resolutions calling for robust climate plans at both BP and Shell commented: “If the bulk of your investments remain tied to fossil fuels, and you even plan to increase those investments, you cannot claim to be aligned [with climate goals]”.

The Financial Times editorial board agreed, warning that “Big Oil chief executives and their shareholders need to wake up fast to the existential risk of leaning too heavily on the declining petroleum economy”.

A cluster of European pension funds showed that they are indeed awake to these risks. They backed a pioneering lawsuit filed by Client Earth in the UK courts alleging that Shell’s board members are personally liable for failing to tackle climate risks. Among the investors that are supporting the claim are British pension funds London CIV and Nest, Swedish pension fund AP3, French asset manager Sanso IS, Degroof Petercam Asset Management in Belgium and Denmark’s Danske Bank Asset Management and Danica Pension and AP Pension.

Somini Sengupta, writing in the New York Times’ Climate Forward newsletter, commented that “It’s the first such liability case against a company board and, depending on how it goes, it could make serving on an oil company board far riskier” as “the thrust of ClientEarth’s lawsuit is not that Shell’s board members aren’t protecting the climate, but that they are not protecting the interests of shareholders in the long run.”

This month Shell was also sued in London’s high court by 14,000 people from two Nigerian communities, who claim Shell is responsible for devastating pollution of their water sources.

Sengupta concludes that “when companies make voluntary commitments they can voluntarily change their minds, too”. In other words, if investors can’t be relied on to watchdog climate action that protects long-term economic value, we will have to rely on litigation and regulation to have any chance of keeping temperature rises below 1.5 degrees celsius.

The next few weeks, as they determine whether to vote for the Follow This resolutions at Shell’s and BP’s AGMs, to vote against directors’ reappointments, or to divest, every investor will show their true colours on Big Oil and climate risk.


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