Are ESG investors letting Big Oil off the hook?

Posted 27 June 2023

Responsible investors espouse stewardship to encourage firms to embrace sustainability, but it seems either too weak or non-existent when it comes to fossil fuel firms

The notion that good intentions and profits are mutually exclusive has eroded in recent years, but it seems the oil companies are no longer so sure.

Both BP and Royal Dutch Shell have stepped back from their ambitious carbon reduction plans as elevated oil and gas prices prove too tempting to ignore.

Russia’s invasion of Ukraine led to significant ructions in global energy markets, with oil prices skyrocketing amid sanctions against Moscow, and gas price hikes  fueled by Vladimir Putin’s move to cut off supplies to Europe.

Shell made first-quarter profits of $9.6bn (£7.6bn) in the first quarter of 2023, trampling analysts’ predictions of $7.96bn and even outstripping the firm’s previous record quarterly profit of $9.1bn set in 2022.

And BP posted an equally impressive $5bn (£4bn) profit for the first three months of the year , having just secured record annual profits for 2022 of $27.7bn – almost double that of the prior year.

With such huge windfalls, many might have expected them to ramp up investment in their renewables divisions. However, that’s not necessarily the case.

Waning ambition

It was BP’s former chief executive, now Lord John Browne, who declared in a speech at Stanford University in 2002 that his company needed to go “beyond petroleum “.

This phrase even became embedded in the firm’s branding, but just over 20 years on from that bold statement, it seems that the proverbial scales are tipping back in favour of fossil fuels.

In February this year, BP rowed back from its 2020 pledge to decarbonise its business by cutting oil and gas production by 40% from 2019 levels by 2030 down to just 25% by the end of the decade .

And the firm also lowered its projected annual spending on renewables to up to $5bn by 2030 out of a total group budget of up to $18bn, from $6bn out of $16bn in its 2022 update, according to analysis by Reuters .

Similarly, Shell this month dropped its target to cut oil production by 1-2% per year until the end of the decade, instead stating that it would remain stable.

And it pledged to invest $40bn in oil and gas production between 2023-2035, compared with between $10bn-$15bn in low carbon products[u6]  – at the same time as it promised to ramp up investor returns by vowing to deliver 30-40% of cash flow to shareholders, up from 20-30% previously, alongside a proposed 15% hike in the dividend.

While neither company is stepping away from renewables, critics might question their transition credentials when the emphasis remains on fossil fuels and shareholder returns, above amplifying investment levels in renewable energies.

All talk

Investors now face a key question: Do they believe that oil companies like BP and Shell are committed to the transition to clean energy and net zero; or are they simply paying it lip service, and doing only the minimum required?

Most accept the dream and the reality of a net-zero world are inevitably on different time trajectories; there simply isn’t the supply of clean fuels to allow us to ditch oil and gas tomorrow.

Nevertheless, fund managers – particularly those espousing ESG credentials – have a moral duty here to push for the most expedient outcome.

Many managers that run funds with an ESG overlay have convinced investors that it’s better to remain shareholders of notionally ‘bad’ firms rather than punish them by divesting.

The logic goes that this allows those fund managers to engage in stewardship; having a seat at the table is viewed as better than having no seat at all.

But if there has been an attempt at stewardship by investors, including efforts to nudge Big Oil to invest more in renewables and to cut its carbon footprint faster, the executives clearly aren’t listening.

Or, even worse, perhaps there has been no attempt at stewardship.

After all, the amplified profits from oil and gas have resulted in relatively attractive share price returns for investors, with BP and Shell delivering more than 13% and 8%, respectively, in the past year.

Forcefulness required

This is short-termism at its worst, though.

Healthy fund returns pale into insignificance when compared to trying to maintain the health of the planet.

Particularly concerning is that even before the recent cuts to climate-related targets by oil firms, a study by Climate Analytics and Imperial College London , found that fossil fuel companies’ projections would not meet the Paris Agreement climate goals set in 2015.

The researchers said that the decarbonisation scenarios produced by BP, Shell and Equinor were “incompatible” with the Paris targets, and that the energy companies showed “delayed reductions in fossil fuel consumption” and “ran the risk of overshooting vital climate goals”.

Dr Robert Brecha, co-lead author of the study from Climate Analytics, said: “Most of the scenarios we evaluated would be classified as inconsistent with the Paris Agreement as they fail to limit warming to ‘well below’ 2 degrees Celsius, let alone 1.5 degrees Celsius, and would exceed the 1.5 degrees Celsius warming limit by a significant margin.”

That should be the utmost concern for every Big Oil investor, and should prompt harsher and more visible stewardship of these companies that have a vital role in helping the world achieve its net-zero aspirations.