Options Still Open for Fossil Fuel Engagement
Patience is a virtue when engaging with the oil and gas industry on climate, but opinions are mixed on whether investor efforts are paying off.
It’s no secret that the oil and gas industry has been slow to act on the climate crisis.
But with the sector accounting for around 15% of global greenhouse gas (GHG) emissions, and science dictating that oil and gas demand must peak by 2030, the need for drastic action to reduce real-world emissions and support the transition to clean energy is getting more pressing by the day.
In March, a report demonstrated yet again that the sector was widely unprepared for the climate transition, with disclosures made by ten major companies deemed insufficient for investors to accurately gauge transition risk. Separate research also highlighted that just three of the world’s top 25 oil and gas firms were planning for flat production volumes in the near-term, with only one – BP – targeting a decline.
The sector’s overall contribution to climate change, paired with its slow decarbonisation progress, have meant that these companies are – unsurprisingly – often at the heart of investors’ climate engagement strategies.
But trust in the impact of investor engagements with the oil and gas sector has been shaken following mounting evidence of firms reneging on their climate promises.
“Investors should be under no illusion that any major oil and gas companies are currently aligned or on track with the climate goals of the Paris Agreement,” Ben Cushing, Director of the Fossil-Free Campaign at US-based NGO Sierra Club, tells ESG Investor.
BP has cut its oil and gas production reduction target from 40% to 25% by 2030, Shell dropped its goal to cut oil production by the same deadline, and TotalEnergies plans to increase both its oil and gas production by 2-3% per year until 2028.
Meanwhile, ExxonMobil has taken it a step further and chosen to pursue legal action to challenge shareholders’ climate ambition, potentially setting a precedent which could be harm investors’ ability to escalate engagement on the issue.
This backsliding has increased polarisation between investors, with some choosing to divest and others – in recognition of their responsibility as universal owners – doubling down on engagement with the sector.
Plugging methane gaps
The oil and gas industry has not, however, been completely reticent to climate action.
Methane accounts for around half of total emissions from sector operations. The majority of these is fugitive, coming from leaks that occur in energy industry infrastructure, which could be fixed by replacing old equipment with zero-emission alternatives and implementing robust leak detection systems.
“Following investor engagement, oil and gas companies are making commitments and progress in this area,” says Mike Coffin, Head of Oil, Gas and Mining at Carbon Tracker.
At COP28, more than 50 oil and gas companies launched the Oil and Gas Decarbonisation Charter (OGDC) to help speed up methane emissions reductions across the industry.
Oil and gas methane emissions has also become a climate engagement focus area for the California State Teachers’ Retirement System (CalSTRS). The pension fund has been asking eligible portfolio companies to join the Oil and Gas Methane Partnership 2.0 (OGMP 2.0) – an independent initiative requiring members to actively measure emissions and set credible reduction targets.
Since CalSTRS began engaging with companies on methane, 15 of them have joined the OGMP 2.0 – including Chevron.
“The sector is responsible for a big portion of the world’s methane emissions, and the technology already exists to avoid these,” explains Aeisha Mastagni, Senior Portfolio Manager in CalSTRS’ Sustainable Investment and Stewardship Strategies Team. “It’s also a sellable GHG product for oil and gas firms. If they can keep it in the pipes, they can make money out of it.”
Proof of action
To ensure more rapid progress on decarbonisation, some investors have recognised that engagement efforts must shift to focus on concrete action.
“Having oil and gas companies provide greater disclosure and transparency is a first step, but it’s far from sufficient,” says Sierra Club’s Cushing. “It’s critical for investors to now require actual implementation of climate targets by companies and demonstrable progress in the form of shifting capital expenditures (capex) and strategies towards decarbonisation.”
Climate Action 100+ took a step in this direction last year when it unveiled the second stage of its engagement initiative, pledging to shift its focus from corporates’ climate-related disclosures to the adoption of climate transition plans, the implementation of governance frameworks, and tangible actions to reduce value-chain emissions.
“It’s also crucial that investors engage oil and gas companies on the positive steps they are taking to fuel the climate transition,” adds Coffin. “Engagements have predominantly focused on how oil and gas companies are phasing down carbon-intensive activities, rather than how they are upscaling solutions.”
He suggests that asking companies about their capex plan was one way for investors to gain a better understanding their focus on climate solutions. In 2022, the oil and gas industry invested just 2.5% of its total capex in clean energy – yet the IEA suggests that a 1.5°C pathway by 2050 would requires as much as 50% by 2030.
Last year, Shell invested US$5.6 billion in low-carbon solutions – 23% of its total capital spending – but its investment in renewables and energy solutions simultaneously fell to 11% (US$2.7 billion), down from 14% in 2022.
Investors should also take heed of how oil and gas companies are linking climate-related goals to remuneration packages. “This doesn’t get the attention it deserves,” Coffin says. “We must see improved remuneration targets set by these companies, with the overall proportion of variable pay linked to oil and gas production volume decreasing over time.”
A paper recently published by Carbon Tracker revealed that most oil and gas companies’ executive pay schemes were still largely tied to oil and gas production, rather than climate targets. Only five firms incorporated pay metrics that matched their overarching emissions reductions targets, while only Shell’s remuneration incentives supported Scope 3 decarbonisation.
Other activist groups, such as NGO Reclaim Finance, have joined calls for investors to further escalate their climate engagements with oil and gas companies.
In the same spirit, a group of 16 investors sent a public letter to European oil and gas companies last week, asking them to halt fossil fuel expansion and increase investments in sustainable energy and outlining their commitment to vote against climate laggards.
“This unprecedented initiative shows the way forward for investors seeking credible engagement with these companies on climate issues,” says Agathe Masson, Stewardship Campaigner at Reclaim Finance. “It sets out news ways to engage that are vital given current shareholder dialogue approaches have failed. Other investors must follow suit and cast similar votes at 2024 AGMs to unambiguously oppose oil and gas expansion.”
Fortunately, there are plenty of climate-focused shareholder resolutions on the ballot this season.
When enough is enough
There comes a point, however, when drawing a line in the sand and divesting from companies that remain unresponsive to engagement efforts might emerge as a natural step.
“Investors have to have an end point in mind,” Coffin says. “There is value in engagement, provided it happens over a defined period and there are defined outcomes. Good engagement supports an investor’s climate ambitions and reduces their exposure to stranded asset risks.”
That end point has, in fact, already been met by a growing pool of investors. Last month, Danish pension fund P+ received shareholder support for a resolution proposing to extend its divestment criteria to oil, gas and coal companies planning to expand production. Earlier in the year, Dutch pension fund PFZW had also chosen to divest all but seven of its 94 oil and gas equity and credit holdings, following a two-year engagement programme and two previous waves of divestment.
“Despite the oil and gas industry being the focus of collaborative and individual investor engagement initiatives on climate issues for many years, the results achieved are derisory in the context of the climate emergency,” Masson deplores.
In parallel, other investors have been ramping up their climate engagement ambitions. The UK’s largest local government pension scheme (LGPS) pool Border to Coast, for instance, has made a new commitment to vote in favour of Paris-aligned shareholder resolutions, taking a “comply or explain” approach. It also extended its investment exclusions to cover thermal coal power generation, and its voting policy on board accountability to include decarbonisation strategy and net zero targets.
“Investors need to think differently about climate engagements, because it’s not a win-lose scenario,” says Mastagni. “It is a tool for evaluating risk in the portfolio and help us make informed decisions.”
As the world transitions to a low-carbon economy, there will inevitably be winners and losers, she explains, which is why CalSTRS is using engagement to determine who will be successful in the transition. Oil and gas firms need to be involved in that process, too, Mastagni argues.
“Simply choosing between engagement or divestment is a false binary,” claims Cushing.
“It doesn’t adequately recognise the role of different types of asset classes and financial institutions, or the types of capital and levers of influence that are most important to shaping corporate behaviour and driving change in the real world.”
As such, investors should strive to utilise all available tools across asset classes to maximise effectiveness and impact.
“This means denying new capital and debt financing to fossil fuel expansion and companies that refuse to align with the goals of the Paris Agreement, while utilising shareholder power to escalate pressure on companies,” Cushing adds.
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