Investors to Keep Up Pressure Despite Weakened Resolve

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Investor Climate Demands Still Rising

With the energy and Ukraine crises, many in the oil industry feel that environmental, social and governance (ESG) pressure on companies is easing. Indeed, investor support to climate-related shareholder resolutions is weaker this year than last, and some asset managers, especially in the US, are getting pushback from clients on climate and net-zero commitments. But climate-minded investors remain committed to increasing pressure on oil companies despite nuances and evolutions, Energy Intelligence found.

One important nuance is between the majority of investors that favor engagement and those that are open to divestment. Fossil fuel divestors notably include Dutch pension funds ABP and PME, which together have $630 billion under management. But most large asset owners believe divestment is too risky as it involves giving up ownership of companies, thus taking the bet that somebody else will address climate issues, says the Carbon Tracker Initiative's (CTI) Henrik Jeppesen. One notable exception is investors trying to match their long-term liabilities with long-term assets and not believing there is enough longevity in fossil fuels, he adds. Quebec's CDPQ for example announced it would exit oil production holdings by end-2022, citing bearish views on future oil demand.

Another nuance between activist climate investors relates to oil companies' diversification. One European investor tells Energy Intelligence that having carbon intensity reduction targets is "very important." Those typically involve wind and solar investment. But another North American institution believes oil companies are "over-equipped" to succeed in renewables, citing the size and complexity of upstream oil and gas projects versus "straightforward, box-standard renewable projects."

A recent evolution in engagement strategies relates to the value chain approach to address fossil fuel demand and producers' Scope 3 emissions from products sold. "We could ask a company to get completely out of a product segment, but if that product is still demanded by society and still depended on by society, we wouldn't be doing a good service by asking for that," says Patrick Peura, ESG engagement manager at German insurer Allianz. "We need to get society to stop demanding that product."

This also involves engaging with governments and regulators to accelerate reduction in final demand, notes Pauline Lejay, head of ESG at French pension fund Erafp. The energy transition is a long-term process requiring "a combination of investors, private sector and governments in order to get where we all want to go," US giant asset manager BlackRock tells Energy Intelligence. But there is a sentiment among investors that governments have been unwilling — or unable — to legislate on climate, leaving the financial sector with too much of the responsibility to drive the transition, the Church of England Pensions Board's Adam Matthews recently said.

Investors' increasing focus on demand does not mean they will ease pressure on supply, warns Aurelie Baudhuin, French asset manager Meeschaert's head of ESG research. "On the contrary, we need to push on demand to increase pressure on supply." European majors have made considerable progress in just two years but still have a long way to go before they are 1.5°C compliant, says Baudhuin. Engagement is effective, she adds, citing TotalEnergies for which Meeschaert is a lead investor for the Climate Action 100+ (CA100+) alliance. Recent progress includes the introduction by the French major of a global net-zero Scope 3 target for oil, on top of a similar European target for oil and gas. “We're now pressuring for a global net-zero Scope 3 including gas."

Another evolution is that the energy crisis may give oil companies greater leeway to increase near-term oil and gas production. Investors may be more open to some capital expenditure in new resources in spite of the International Energy Agency's (IEA) net-zero scenario suggesting this would play against the world's carbon neutrality target. "We know the IEA net-zero scenario is very ambitious and we don't expect companies to completely change business models from one day to the next, but they need to show year-on-year progress," says Bas Bijleveld, senior responsible investment adviser at Dutch asset manager MN, another one of TotalEnergies' CA100+ lead investors. "I wouldn't be surprised if the IEA came out with some kind of an update to the net-zero scenario later this year which violates some of the initial conclusions as some capacity probably needs to be brought in to replace Russian oil and gas," notes CTI's Jeppesen.

ESG, Equity and Debt Markets, Low-Carbon Policy
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