Why investors should look beyond engagement with BP and Shell

Investors need to decide fast whose side they are on if they want to retain the trust of their clients and wider stakeholders.

With BP’s AGM tomorrow and Shell’s next week some investors argue that instead of divesting it’s better to engage with them because they are “leaders” transitioning to net zero companies compared to “laggards” like ExxonMobil and Chevron.

For example as reported in the FT in December 2020:

The New York State Common Retirement Fund, the third largest pension fund in the US with a quarter of a trillion dollars in assets, has pledged to purge its portfolio of energy companies that do not have a plan to cut emissions and transition away from fossil fuels.

I predict investors will find this kind of position becomes increasingly untenable.

The problem is all four companies are very unlikely to decarbonise in line with climate science and their net zero plans are an attempt to delay climate action (see my new journal article).

As a growing number of stakeholders realise these companies are sabotaging the low-carbon transition, and the jobs that come with it, they are unlikely to want investors to engage with big fossil fuel companies at all.

Some say that if investors divest from BP and Shell investors who care less about ESG will take over. That’s true…..as long as government doesn’t regulate to phase out fossil fuels which is looking more likely (this is what would stop the merry-go-round of fossil fuel asset sales in the UK’s North Sea for example).

A recent report from Carbon Tracker finds in terms of mass adoption of cheaper renewable energies, which will generate lots of local jobs, the “technical and economic barriers have been crossed and the only impediment to change is political.”  

At this point the transition away from fossil fuels is pretty much inevitable but BP, Shell etc still have huge political influence over governments which they use to secure fossil fuel subsidies etc to perpetuate high-carbon consumption for the general population (it's time to stop just blaming individual consumers for their carbon footprints!).

This political influence will be eroded as more and more stakeholders realise big oil and gas companies are blocking the transition.

An increasing number of stakeholders (think Greta and the youth climate strikers) are no longer accepting the transition plans of the fossil fuel companies. 

Even most investors don't believe the claims of the big oil companies, as this recent FT article found:

“Fewer than a fifth of big investors are confident that oil companies will successfully transition to become greener businesses, despite intense pressure from shareholders to cut carbon emissions and pledges from fossil fuel companies to overhaul their operations.” 

As BP, Shell, and the rest, lose the trust of the public there will be growing pressure on government to phase out fossil fuels – this is what will strand assets.

Investors can stay in their comfort zone and watch from the sidelines as fossil fuel assets are stranded, or they ask what they can do to accelerate the low-carbon transition. How could investors contribute to answering these kinds of questions?

• What mix of public and private investment is needed to replace fossil fuels?
• In a post-fossil fuel economy how can investors galvanize green entrepreneurs and green innovation?

Whilst it is important to recognise the positive impact of shareholder activism it is also important to acknowledge that the vast majority of fossil fuels will only stay in the ground if governments phase out oil, gas and coal extraction and use by industry and consumers (see my twitter thread on this yesterday).

Climate scientist Michael Mann was right when he said that whether we like it or not, we are in a "Climate War" against powerful fossil fuel companies.

So, investors have a choice. Get out of fossil fuels now and publicly distance themselves from BP, Shell, ExxonMobil, Chevron etc …or wait until it’s too late.