October 16, 2018 / In-depth

“Big Oil” stuns investors with commitment to tradition

By Joe McGrath, ESG Clarity

Higher carbon prices and investor lobbying efforts are doing little to make oil and gas companies change their ways

“Big Oil” stuns investors with commitment to tradition

Heightened investor lobbying, and a threefold rise in the cost of carbon prices, are having a negligible effect on the world’s oil majors, who are spending big on oil and gas discovery once more, new research suggests.

In the year to the end of September 2018, the cost of carbon credits – which oil and gas companies must buy to offset their carbon dioxide emissions – climbed from €8 per tonne a year ago, to €24 per tonne, according to data from the Intercontinental Exchange, cited by Schroders.

However, the asset manager’s latest quarterly Climate Progress Dashboard, shows a pickup in investment in oil and gas by these companies, meaning that global temperatures remain on course to rise 4°C, significantly more than the international target of 2°C, as stipulated in the Paris Climate Agreement.

Andrew Howard, head of Sustainable Research at Schroders, said that the recent recovery in oil prices has led to the world’s oil majors spending on traditional oil and gas development one more.

“There has also been a fall backward,” explained Howard in a statement accompanying the findings. “Last quarter, we highlighted the importance of continued discipline in capital investment across the oil and gas industry as prices rise.

“Unfortunately, investment data from the latest quarter indicates that this has tempted producers into opening their wallets as the oil price has recovered. Investment discipline lies at the heart of fossil fuel producers’ ability to decarbonise.”

 

Investor pressure

In recent years, investors have been working together to force oil and gas companies to provide forward looking projections on how climate change could negatively affect their businesses in the years ahead.

In 2017, shareholders including Vanguard and BlackRock made headlines all around the world when they defeated the management of ExxonMobil and forced them to report on the measures they were taking to keep climate change at 2°C. Similar shareholder actions followed at investor meetings of other energy companies.

But as these companies committed to reducing their carbon footprint and increasing their investments in green-energy projects, they have been continuing to spend big on traditional activities in recent months.

Shell is among those global businesses to have faced sustained pressure from investor groups, including some of the world’s largest asset managers and pension funds. The lobbying of these groups in 2017, resulted in the company agreeing to change its climate policy.

However, an announcement from Shell CEO Ben van Beurden this month, showed that the company is very much committed to its traditional business areas.

“Even headlines that are true can be misleading,” he said. “They might even make people think we have gone soft on the future of oil and gas. If they did think that, they would be wrong. Shell’s spending on new energies is, indeed, huge. But it is $1-2 billion out of total annual capital spending of around $25 billion.”

 

Regulatory interest

News that big oil is pressing on with its fossil fuel intensive activities will come as little surprise to those investors who have been lobbying for change. However, investor activity may soon become even more coordinated.

Earlier this month, the UK’s Financial Conduct Authority, waded in, inviting investors, fund selectors, asset managers and asset owners to participate in a new discussion paper on the impact of climate change on financial markets.

The news comes as investors become increasingly concerned that if oil majors fail to change their approaches, billions of assets may become “stranded” in investments which rapidly lose their value.

The regulator’s discussion paper is seeking input in four areas: climate change and pensions, enabling competition and market growth for green finance, quality of disclosure in capital markets, and the scope for new rules that will require financial firms to report on climate risk management.

Andrew Bailey, the FCA’s chief executive, said the regulator had decided to get involved in the debate because it considers climate change to present a “disruptive” and “irreversible threat”.

He said: “The impact of climate change on financial markets is uncertain but legal frameworks – at a global, European and UK level – have already begun to adapt to reflect a move to a low carbon economy.”

That may be so. But major global energy giants are transitioning at a glacial pace and this is making for stark predictions for the future.

 

Stark predictions

Research published by the Intergovernmental Panel on Climate Change in October echoed suggestions that global warming is continuing at a pace, and will likely exceed the Paris Agreement’s 2°C target. So, what more can be done?  One answer is to hike carbon prices still further, according to Schroders’ Andrew Howard.

He says: “The rise in carbon prices has given the carbon credit market more teeth in its intended purpose to incentivise efficiencies and investment in clean technologies. Carbon prices are on the agenda of many of the discussions our analysts and fund managers are having.

“There remains much further to go – we estimate prices will need to rise as far as $100 per tonne to meet long-term emissions reduction targets – and carbon pricing represents one piece in the puzzle of climate action.”

Of course, the effectiveness of this approach will only become clear over time. Unfortunately, if current assessments are to be believed, and energy giants continue to refuse to change tack, investors may find themselves saddled with stranded assets far quicker than they originally anticipated.

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