ESG Pressure Shifts as Energy Crisis Bites

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Energy security concerns and soaring commodity prices are contributing to a significant shift in environmental, social and governance (ESG) pressures on the oil and gas sector. With international oil companies (IOCs) putting in place transition strategies over the last couple of years, mainstream investors now seem inclined to give them breathing room to implement — while ensuring that they stay on track. That’s created a disconnect with activist investors seeking to up the game with demands for stronger action. The result is weaker support this year for radical shareholder proposals that would hasten the transition away from fossil fuels at the risk of destabilizing the global economy.

BlackRock, the world's largest money manager with $10 trillion in assets, illustrates this trend. The US-based investor said recently it is less likely to vote in favor of climate-related shareholder proposals this year due to their more prescriptive — and potentially value-destructive — nature.

For oil and gas, this means being “mindful of the current geopolitical context, energy market pressures and the implications of both for inflation,” with the world likely needing higher production of both hydrocarbons and renewable energy in the wake of the Russia-Ukraine crisis. BlackRock instead favors initiatives that focus on enhanced disclosure so that investors can assess whether companies are sufficiently managing climate risk.

US Investor Resolutions

Climate resolutions have been a more critical tool for US investors. The number of these proposals has surged under the administration of Democratic President Joe Biden after the regulatory Securities and Exchange Commission loosened rules on allowable resolutions. That has seen more radical climate resolutions make it to a vote, but investors like BlackRock have signaled they will remain cautious.

BlackRock flagged particular concern with shareholder resolutions that seek to halt fossil fuel financing; push for the decommissioning of hydrocarbon assets; and demand strategies that adhere to a singular 1.5°C climate scenario (often the International Energy Agency’s net-zero by 2050 scenario) or absolute Scope 3 (end-use) emissions reduction targets.

The willingness to deem existing strategies as sufficient appears to extend beyond BlackRock. Shareholders in ConocoPhillips, Occidental Petroleum and Valero Energy recently struck down resolutions demanding strategies that set Scope 1-3 emissions reduction targets. Caution may also be influenced by moves by Texas and other conservative/producing states to punish financial firms perceived as discriminating against fossil fuels.

Shareholder pressure to date has focused heavily on hydrocarbon supply — where IOCs have been the primary target — but demand is now gaining more attention. The Church of England Pensions Board, an influential activist investor that has slashed its oil and gas exposure to just 0.28% of its assets, has shifted its engagement from supply-side oil and gas toward demand. The rationale is that it will be hard for IOCs to produce future fuels such as hydrogen while large industrial consumers are still using equipment fired by oil and gas.

European Investor Focus

Mainstream investors, particularly in Europe, look content with the progress they have made in recent years in changing IOC strategies to reflect climate risk — notably targets to reduce Scope 3 emissions. While they will continue to consider reasonable shareholder proposals, their emphasis now is on direct engagement with IOC management teams to make sure they stay on track with their capital spending plans to achieve decarbonization targets.

This suggests IOCs' current transition plans could be safe. And indeed, shareholders at BP and Equinor recently rejected calls for larger reductions in Scope 3 emissions “consistent with the goal of the Paris climate agreement" while endorsing both companies' transition strategies.

Keen to not “micromanage,” BlackRock says it is “increasingly inclined” to support management-led shareholder proposals that put company energy transition strategies up to a vote, including in cases where alternative shareholder models are on the ballot. Similar resolutions will feature at Chevron, Exxon Mobil, Shell and TotalEnergies during their annual general meetings this week.

Investor pressure to decarbonize has always been more intense in Europe than in the US, but the gap seemed to be narrowing. It could widen again now as calls mount — even from the climate-minded Biden administration — for US producers to increase output to reduce high prices and help Europe kick its reliance on Russian imports. 

The flipside is that financial institutions on both sides of the Atlantic are working through their own net-zero targets — and the implications for oil and gas. Essentially, the upshot is that all IOCs may have greater leeway to increase near-term oil and gas production, so long as projects align with long-term decarbonization goals. 

Paul Merolli is the editor of Petroleum Intelligence Weekly, in which a version of this article originally ran.

ESG, CO2 Emissions, Corporate Strategy , Equity and Debt Markets, Majors, Independent E&Ps
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