If you invest in any fund or pension that doesn’t specifically exclude fossil fuels, then you will probably have oil company stocks in your fund portfolio. These will probably include BP and Shell, two companies that make up a huge proportion of the FTSE and are popular with investors because of the reliable dividends they pay out – a form of income to people who invest in them.
This is also a reason they tend to make good pension holdings: like Theresa May’s line on her Government, “strong and stable” is the view that many fund managers take of these oil giants.
There’s a big BUT coming…
There’s a giant, low carbon global shift happening, and these companies are on the wrong side of it. By failing to embrace the shift, campaigners argue that the oil majors are jeopardising our collective savings. Some have even said their policies could cause a new financial crash – such is their dominance of our life savings portfolios.
As part of a number of activities designed to encourage large organisations, pension funds and everyday investors to divest from fossil fuels, the responsible investment organisation ShareAction is calling on investors to vote down down BP’s and Shell’s remuneration policies at the AGMs on 17 and 23 May.
ShareAction accuses the compensation frameworks of being ‘misaligned with the interests of long-term shareholders’, rewarding the delivery of corporate strategies that could put value at risk as the economy shifts towards a low-carbon energy-mix.
This shift, by the way, now seems inevitable, as electric cars begin to gain a greater share of the automobile market and new renewable technologies take off in a big way around the world. Oil will play a smaller and smaller part of our lives. Something to celebrate, certainly, but not, perhaps, if you are BP and Shell board members.
A cocktail of policy, technology and market-driven factors are brewing up a storm of uncertainty over the future of fossil fuels.
ShareAction has circulated two new briefing papers to global shareholders in both companies. The organisation has also assisted pension savers to write to their funds about voting down the remuneration policies. So far, funds with £2 trillion assets under management have been contacted by their savers – many of whom have had their life savings plonked in investment funds containing BP or Shell without them knowing.
Alban Thurston, a pension saver with Zurich and with Aviva, said: “It’s a dangerous neglect of fiduciary duty for pension providers to rubber-stamp pay policies which egregiously reward oil executives for delivering strategies that put our pension savings at risk. That’s why I’ve written to my pension providers, requesting they vote against short-term remuneration proposals.”
Juliet Phillips, Campaigns Manager at ShareAction added: “A cocktail of policy, technology and market-driven factors are brewing up a storm of uncertainty over the future of fossil fuels. To encourage oil executives to focus on ‘business as usual’ seems an imprudent approach to remuneration. Both companies seem complacent about the challenge to their commercial prospects of the action now underway at city, regional, national and international level to decarbonise economies.”
In two new briefing papers, ShareAction provides evidence to suggest that both companies are positioning themselves for climate scenarios that significantly exceed the guardrail set by the Paris Agreement, which governments agreed pose unacceptably high levels of risk.
An analysis of the firms’ demand projections, capital allocation plans, and strategic priority areas poses challenges to their resilience to low-carbon outcomes. For example, BP proposes to spend $200 million a year on the ‘venturing and low-carbon’ pillar of its strategy. This represents 1.3% of the company’s total capital expenditure, down from previous years. In 2005, BP committed to $800 million a year. Similarly, Shell’s ‘New Energies’ low-carbon portfolio is projected to represent just 3% of the firm’s capital expenditure by 2020.
Shell’s annual bonus includes a 10% weighted metric based on the reduction of operational greenhouse gas emissions. ShareAction warns that reducing operational emissions plays a limited role in ensuring portfolio resilience under low-carbon, low-demand scenarios, which requires looking at demand-side changes to the energy mix.
Furthermore, the remaining 90% of the bonus remains heavily weighted towards hydrocarbon project delivery, with the annual bonus containing a 12.5% weighting for LNG liquefaction volumes, a 12.5% weighting for maximising oil and gas production, and a 12.5% weighting for project delivery. ShareAction warns that these features could stall progress towards the adoption of a low-carbon business model.
BP has gone further than Shell to remove volume related incentives, including the controversial ‘Reserves Replacement Ratio’. BP has also included indicators related to strategic progress on renewables trading and venturing. However, similarly to Shell, the company has not set clear timelines or milestones for transitioning to a low-carbon business model.
In 2015, special shareholder resolutions on climate change were filed and passed at BP and Shell, providing a mandate to link KPIs and executive incentives to long-term strategic changes required in the context of the transition to a low-carbon economy. These resolutions passed with the support of nearly 99% of the company’s shareholders.
“These remuneration policies are the first to be put to the vote following the successful ‘Aiming for A’ resolutions,” Juliet Phillips adds. “This is an important test of investor stewardship to see whether investors hold BP and Shell to account on their lack of progress on transitioning for low-carbon resilience.”