For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Under investor pressure
Can you be determined to act on climate change and continue to invest in oil and gas majors such as BP and Shell? I believe you can if you believe in the power of engagement. As an investor, do you have a bigger positive real-world influence by investing only in low carbon energy companies, or by investing in companies which are improving their carbon footprint?
Oil and gas companies have very large budgets for investment into new technologies and projects and by directing just a small portion of this investment into greener, low carbon technologies they can have a big positive impact. Investor pressure has already had a hugely positive impact on reducing the emissions of these companies and here we highlight our recent engagements with both BP and Shell and subsequent investor voting decisions.
In 2022, Shell spent $8.2bn or 33% of their $25bn capital expenditure budget on low-carbon energy solutions and non-energy products. These included biofuels, hydrogen, EV charging and renewable power. BP similarly spent $4.9bn in 2022 in their ‘transition growth investments’ and have committed to increase this to $7-9bn pa by 2030.
For the world to limit warming to +1.5 degrees Celsius above preindustrial level, we believe the level of investment in low carbon technologies needs to be higher. However, we do recognise that many low carbon energy technologies still have low returns, which naturally limits the amount of capital they want to commit. We understand this position. A company that consistently invests at returns below their cost of capital is unlikely to be a worthwhile long-term investment.
We continue to push them to spend more on research and development and pilot projects where better returns may be available and to focus on encouraging governments to create low carbon economic incentives and to work with customers to better understand the impact of their consumption choices.
Progress in scope
Top five low-carbon investors vs top five carbon emitters:2015 – H1 2021
Source: Bloomberg NEF. Carbon emissions in million metric tonnes and low carbon investments in $bn
Carbon emissions related to company operations such as energy used to extract oil and gas, emissions associated with shipping product around the world and emissions from gas leaks are called Scope 1 and 2 carbon emissions.
Shell have already reduced the absolute level of scope 1&2 emissions by 30% between 2016 and 2022, while BP have achieved a 41% reduction in the absolute level of scope 1&2 emissions since 2019. They are both on track to halve carbon emissions by 2030. Reducing to zero by 2050, as they plan to do, still represents a challenge but one they look well placed to deliver.
Methane emissions are a good example of an area of meaningful improvement. Methane is a powerful greenhouse gas which traps 25 times more heat than CO2. Shell has managed to reduce methane emissions from 123,000 tonnes in 2017 to 40,000 tonnes in 2022. That is a 67% fall over 5yrs.
BP have driven an even more impressive fall from 111,000 tonnes in 2016 to 28,000 tonnes in 2022, a fall of 80%. Both Shell and BP are working hard to end routine burning of excess gas and have committed to end this by 2025.It is important that the focus now shifts to methane intensity. This is the amount of methane emitted per unit of oil or gas produced. We would like to see the companies go further in the methane standards they set for their suppliers. In our recent letter to them we asked if they would consider setting a minimum methane intensity on the gas that they bought from third parties. Their response was that they are working closely with partners to reduce emissions. We hope that in the future they will reconsider a minimum standard for gas they purchase.
How did we vote at 2022 annual general meetings?
Shell AGM – May 23, 2023
For the Premier Miton Monthly Income and Optimum Income funds we decided to vote in favour of management on Shell’s progress on its climate strategy and against the ‘Follow This’ resolution to set an interim scope 3 target. This contrasts with last year when we voted against management on both counts.
The ‘Follow This’ movements goal is to commit big oil companies to the Paris agreement. They aim to do this by uniting green shareholders.
We believe Shell are making better progress on their plan but will reassess our position next year when we have an opportunity to view their new climate strategy. At the AGM 19.99% voted against the Shell Energy Transition progress and 20.19% voted in favour of the ‘Follow This’ resolution. Due to these high votes against, Shell have committed to explain their actions on consulting with shareholders.
BP AGM – April 27, 2023
We took a different view on BP and chose to vote against management and in favour of the ‘Follow This’ shareholder resolution. We believe BP’s change in 2030 production guidance has increased the risk of stranded assets. We also voted against the Chair to voice our disapproval in the change in strategy and because we weren’t offered a chance to vote on their climate strategy progress. At the annual general meeting, 17% of shareholders voted in favour of the ‘Follow This’ resolution and 10% voted against the Chair.
Stranded assets in this context are fossil fuel resources that cannot be burned and fossil fuel infrastructure (e.g., Pipelines, power plants) that are no longer used and may end up as a liability before the end of their expected economic lifetime – these are termed ‘stranded assets’.
Where we want additional focus
Customer disclosure: We requested both companies start to print the associated carbon emissions on invoices to customers.
Business travel impact: We also asked both companies to disclose their Scope 3 business travel related emissions and sustainable travel policy. Shell currently promote biofuel use in trucking and carbon offsets for petrol customers. We hope to see this disclosed in next year’s strategy.
Working with Governments: We want BP and Shell to lobby industry organisations and governments to introduce long term frameworks to incentivise investment. We are delighted that Shell have just produced a ‘Climate and Energy Transition lobbying report’. We hope BP will follow suit.
The final warning has sounded – what next?
The scale of the energy transition now needed to prevent a climate emergency is huge. The IPCC has released a ‘final warning’ that to limit warming to 1.5 degrees Celsius above pre-industrial levels, we need a peak in carbon emissions before 2025 and a reduction of 43% by 2030.
In 2020 when planes and cars ground to a halt due to covid lockdowns, the global emissions fell by just 6%. They quickly bounced back and grew to a new high in 2023.
As active and engaged shareholders at Premier Miton we think we have a critical role to play both engaging with companies through letters and meetings and through our voting. For now, we continue to see oil and gas companies providing both affordable and secure supplies of energy and being a positive force in the transition. We will continue to engage with them directly. However as active managers we are also happy to sell our positions should we see an increase in the risk of stranded assets or if they do not keep driving forward their energy transition.