This time last year, we saw unprecedented action from investors on climate change.
Investors backed a historic shareholder resolution requesting ExxonMobil, the world’s largest publicly held oil & gas company, to demonstrate its commitment to a low-carbon economy. This was echoed at Occidental Petroleum’s AGM, where Blackrock and Vanguard both voted in favour of climate reporting.
Today, investors at Royal Dutch Shell’s AGM were urged to force the oil major to align its strategy with the goals of the Paris Climate Agreement. An activist investor group - Follow This - filed a shareholder resolution calling on Shell to set firm targets to meet the Paris goals of limiting global warming to below 2°C.
Although the vote only achieved a 5.1% motion in favour with 7.2% abstaining, there is still momentum and support by investors. Today at the AGM a group of 27 investors managing $7.9 trillion called for ambition to be translated into firm medium and short-term targets aligned with the Paris Agreement.
This reflects a turn of the tide for oil & gas companies with greater investor appetite for meaningful action post-Paris, as illustrated in the recent open letter in the FT backed by leading investors with $10.4 trillion in assets.
In many respects, Shell has shown leadership amongst oil & gas companies with its ambition to cut its net carbon footprint by around half by 2050. Crucially, this includes Scope 3 emissions – indirect emissions that occur across the value chain. Since 2017, Shell has also incorporated climate-related remuneration at board level - the annual bonus includes a target for greenhouse gas metrics.
Our joint report with investor groups last year analysed 10 of the world’s largest oil and gas companies, including Shell. We ranked Shell fourth, in part due to its increasing shift to natural gas, reduced exposure to oil sands assets and its growing New Energies business, which includes investments in wind and solar.
However, the 2°C target set by the Paris Agreement means that only a limited amount of emissions can be produced if the world is to stay below the 2°C warming threshold. This is often referred to as the global “emissions budget” and has led to concerns around stranded assets.
So what does the future look like for companies in the sector? Our report on the oil & gas industry in 2016 outlined some potential options. In the medium to long-term, companies could manage the decline of fossil fuel production coupled with a shift to becoming a diversified energy company. Ørsted (formerly DONG Energy) is a good example of such a transformation, having shifted its business from oil & gas production to offshore wind.
Following the recommendations of Mark Carney’s Task Force on Climate-related Financial Disclosures (TCFD), oil & gas companies must set meaningful targets to help manage the risks and opportunities presented by a low-carbon transition.
Companies can also set a science-based target to align themselves with a 2°C future. This will be available next year as the Science Based Targets initiative is currently developing a methodology tailored to the oil and gas sector.
Following the US’s recent departure from the Iranian nuclear deal, oil price volatility is expected to continue. With the Brent price approaching $80 a barrel, companies need to remember the lessons learned from previous cycles and focus on delivering value in their long-term strategy.
The oil and gas industry is cyclical by nature; however, against the backdrop of increasing climate regulation, and ever close peak oil demand forecasts[1], the importance for capital discipline is heightened.
In the wake of increasing climate regulation and political instability, investors are looking for confidence and trust in companies adapting to the energy transition. Shell has taken the first step; the next step is translating ambition into meaningful action and the industry demonstrating resilience for the changes ahead.