Green-minded Investor Activists – 5/25/16

Oil firms are finding it harder to ignore environmental activists nowadays, especially when they represent trillion dollar pension funds.

Recently, ExxonMobil and Chevron came under pressure from the California state pension fund to assess climate-change policy risks to their business plans. ExxonMobil has argued that cutting back on fossil fuels runs counter to economic growth while claiming that technology and carbon taxes are enough to negate the environmental impact of its operations. But shareholders have more than a few reasons to distrust and resent the managers giving those excuses. Many see the constant drive of companies to expand their oil reserves and tap new resources as wasteful spending. After all, in a world where affordable electric cars are coming out in less than five years, buying up new reserves looks more like a corporate governance failure benefiting the managers who want a bigger company rather than a good investment for shareholders who would prefer the safety of dividends.

Institutional investors in the U.K. successfully prodded Royal Dutch Shell and BP into revealing how stringent climate-change policies would affect their projects. In America, however, weaker shareholder rights make it harder to challenge boards. Managers will not be able to ignore those shareholders for long, even if investor activism is relatively weak in America. If times ahead are going to be as tough for oil and gas as expected, then they little sympathy from the people they ignored.

In a growing trend, large shareholders are seeking the right to nominate board members and install “climate-competent” boards at major companies like ExxonMobil. Though managers continue to reject such measures, trends in public opinion are not in their favor. American’s are as worried about climate change as they were before the 2008 financial crisis, an eight year high.

US worry

Yet even when firms are forced to disclose risks, the results are often unsatisfying if not purposely misleading. When Shell issued a report on its assessment of climate-change risks, shareholders found that the report was full of barely relevant pictures and revealed little about how climate policies would alter future plans for developing oil- and gas-fields. At best, the report is appeasement and, at worst, a distraction from the very real threats to the long-term value of the company.

The same day the report was published, Shell announced that it was creating a “New Energies” business to invest in green technologies.

Still, Shell insists that hydrocarbons will still account for at least 75% of the world’s energy for decades to come and, inexplicably, the report shows oil demand rising significantly between 2030 and 2060. That could have made sense in the context of rising demand from emerging markets, but 70% of crude oil consumption goes to transportation and Bloomberg expects hundreds of millions of electric vehicles will be on the road by 2040. Yet, Shell’s reports seem to come from a fantasy world where threats from technological change don’t exist.

rise of electric cars

Total SA is one of the few companies that has provided satisfactory plans to develop an energy mix consistent with Paris-style global-warming limits, including a pledge to invest $500m a year in renewables and to increase them from 3% to 20% of its portfolio by 2035. The company acquired SunPower, an American solar-energy company, in 2011, and launched an offer this month to acquire Saft, a battery company.

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