Oil and Gas Divestment Should Be Last Resort
Investors maintain that engagement is the “only way” to get companies to change course on climate transition pledges.
Investors have doubled down on avoiding divestment from oil and gas companies to ensure they follow through on climate commitments, despite firms becoming tougher to engage with.
This commitment comes as asset manager Sarasin & Partners said it was divesting from petroleum refining company Equinor following more than four years of engagement. The investor said that this divestment, seen as a last resort, was due to the rolling back of Equinor’s climate transition efforts. The Norwegian government owns 67% of the energy company.
Previously, investment manager Aviva Investors said it would divest of high-emitting firms that it had previously put on a climate watchlist, but recently abandoned this pledge in favour of broader engagement with such firms.
Last month, US pension fund The California Public Employees Retirement System (CalPERS) underscored that it does not support energy divestment when responding to a report criticising its investments at companies with high greenhouse gas (GHG) emissions, including oil and gas firms.
Engagement with oil and gas majors is seen as becoming more challenging by some, with many firms backsliding on climate commitments and increasingly entrenching in their positions emboldened by regulatory and policy trends.
“If an investor divests, you lose your influence, and the companies will continue to hurt your entire portfolio,” said Mark van Baal, Founder of Dutch campaign group Follow This. “It’s a pity when a critical shareholder voting for climate resolutions divests, because they will be replaced by less responsible shareholders.”
Analysis from researchers at the University of Southern California and the University of Utah agreed that divestment would lead to higher emissions from polluting companies, with new investors less likely to focus on the long-term value of decarbonisation.
“We’ve seen a few notable examples of oil and gas companies scaling back their emission targets immediately or soon after revising their production plans upwards [and] that’s no coincidence,” said Saidrasul Ashrafkhanov, Associate Analyst – Oil, Gas and Mining at think tank Carbon Tracker. “While investors may indeed wish to consider their continued position in companies that don’t respond to engagement, they can also directly influence executive decision-making by voting on directors’ pay.”
Influence through engagement
A report from California Common Good, a coalition of environmental advocates and public sector unions, published last month, highlighted that CalPERS’ climate adaptation, transition, and mitigation investments include holdings in 52 of the world’s largest greenhouse gas emitters. It particularly levelled reproval at the pension fund’s investment in seven oil and gas companies.
The report made the point that, unlike CalPERS, 439 US institutional investors have divested or made a binding commitment to divest from all firms on the Carbon Underground 200 list, inferring that the pension fund should follow suit.
CalPERS hit back at the report in a public letter, saying that taking such steps would “require a sweeping energy divestment”. This would “ignore the value of climate transformations and investor engagement”, the letter added.
By refraining from divesting, CalPERS could attempt to influence the seven oil and gas companies from within and try to drive change.
“Oil companies are energy companies. They can easily change, and they must change for their own future and the future of the world economy,” said van Baal. “Our advice would be to stay invested and use your vote, because it’s the only way these companies are going to change, and if they don’t your entire portfolio is endangered.”
Divestment decisions
But continued engagement can be tough, as Sarasin & Partners divestment of Equinor underscored.
Natasha Landell-Mills, Head of Stewardship at the asst manager, said that divestment was the “last step” of the firm’s escalation strategy. Sarasin & Partners previously divested from oil and gas giant Shell in 2019 over similar concerns.
“Our approach is very much one of engagement first. We don’t feel that divestment, in and of itself, necessarily moves the discussion along, but you get to a certain point where nothing is pointing in the right direction,” she added. “The recent momentum [at Equinor] was wrong from our perspective.”
Last May, Sarasin co-filed a shareholder resolution alongside Danish pension fund Sampension, Achmea Investment Management and West Yorkshire Pension Fund at the company’s AGM calling for it to align its climate strategy and capital expenditure with the Paris Agreement.
An estimated 32.1% of non-state shareholders backed the proposal, including Storebrand, Robeco and Railpen. However, Equinor recommended shareholders vote against the resolution, despite the engagement efforts made by Sarasin. The asset manager also acted as an engagement co-lead with Equinor as part of Climate Action 100+.
Sarasin’s letter stated that despite statements of supporting a 1.5°C pathway, Equinor had not revised its strategy to deliver on these in the view of the asset manager. It added that Equinor has “followed other oil and gas majors in rolling back its efforts” since its 2024 AGM.
“We will always divest if we think capital is at risk [and] we have a duty to do that for our clients,” said Landell-Mills. “Supporting positive change alongside voting against directors and making public statements are much more effective tools [than divestment].”
Laura Hillis, Director, Climate and Environment at the Church of England Pensions Board (CoEPB), agreed that companies’ targets have “either stayed much the same or weakened as companies appear to double down on oil and gas production and exploration. This is “both disappointing and short-sighted”, she added.
In June 2023, the CoEPB and Church Commissioners announced they would be divesting from oil and gas firms, including BP, Equinor, ExxonMobil, Shell and Total, for failing to align with climate goals.
“When and how to use divestment is a matter for individual investors. However we have found that having divestment as a last resort in an escalation hierarchy for stewardship can give your engagement clarity and credibility by having a consistency message with clear implications for investment strategy if these messages are not fulfilled by companies,” said Hillis. “We absolutely believe in the opportunity and influence that shareholders have to work with companies to drive better practices. Doing stewardship well, however, can be resource intensive and challenging, and it can take time to drive good outcomes.”
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