The road to net-zero — this carbon-emissions goal has become an investment priority, requiring investors to chart a course that addresses today’s climate change priorities. For many investors, this starts with the decarbonization of the energy sector, and in particular the oil and gas (O&G) industry. Market participants need not look any further than the May 26 boardroom fights at ExxonMobil and Chevron, coupled with the courtroom decision rendered to Shell, to witness how public opinion on climate change is demanding quicker and more decisive action from the biggest O&G producers.
These events may be a tipping point for heightened investor activism, ushering in change. However, as investors look to make portfolio adjustments, I believe it is important not to treat the O&G sector in a monolithic way. Rather, the sector is complex, with significant differentiation among the various players. Investors should evaluate O&G companies individually to make informed, climate-aligned investment decisions while meeting fiduciary responsibilities.
My company is a mission-driven investment firm, and we know the importance of carefully examining the independent and integrated segments of the O&G industry and assessing individual companies for their readiness in transitioning to a net-zero economy.
A Look At The O&G Sector
Independent companies are those singularly focused on exploring for, and extracting, oil and gas reserves. The limited nature of their business models suggests that most of these companies have neither the resources nor expertise to pivot and participate in the energy transition. While these companies may experience a short-term boost as energy demand picks up post-pandemic, my view is that on a longer-term basis, they will face headwinds as the demand for fossil fuels is replaced by renewables.
On the other hand, integrated companies engage in upstream, midstream and downstream activities and include the oil majors with business segments spanning exploration, production, transportation and refinement of petroleum and gas products. I believe these companies are in a position to shift gears, and included among them are six “super majors”: BP, Shell, Chevron, Total SE, Eni and ExxonMobil. While it is relatively straightforward to group characterize the independent companies’ approach to climate change, the integrated companies have all taken different approaches. This is most obvious when comparing the various activities of the European and American companies.
The European “super majors” have more aggressively announced plans to meet net-zero goals and have put billions of dollars into clean energy projects. Total SE plans to achieve net-zero across all worldwide operations by 2050 or sooner. Eni also plans to move to net-zero emissions and has reorganized its operations into two areas: one focused on traditional energy and the other on renewables. BP plans to be net-zero by 2050 and to reduce emissions and scale up renewables in addition to creating an alliance with Volkswagen for electric vehicle charge stations, advancing their wind strategy, and developing plans for blue hydrogen plants. And lastly, while Shell committed to be net-zero with a 100% reduction in carbon intensity by 2050, a May 26 court ruling upped the ante, ordering the corporation to make a net 45% cut in its emissions by 2030.
Conversely, the American giants have resisted adopting net-zero plans. Instead, they continue to bank on fossil fuel demand and rely on investments in biofuels, carbon capture and negative emissions technology to address climate change demands. While science indicates it is essential to reduce atmospheric CO2, the questionable scalability of these technologies supports the view of critics who see these investments as nothing more than a greenwashing distraction to allow for increased fossil fuel production.
The May 26 “climate-crisis takedown” as it was termed by Bloomberg, looks to be changing all that. Engine No. 1 showed the world a climate-minded activist playbook, as ExxonMobil learned the hard way that significant change is now mandatory. The O&G behemoth was forced to make room for two Engine No. 1 members on its 12-person board (a third seat was awarded in early June) following divestment pressure from Blackrock and the New York State Common Retirement Fund. On the same day, Chevron had a similar awakening. At its shareholder meeting, investors defeated management by voting 61% in favor of a proposal to cut Scope 3 emissions. While this is a major step forward, Chevron fell short of setting any official net-zero targets.
The Importance Of Clear, Unbiased Views
These dynamics make clear that individual analyses are needed to determine if an O&G firm has an executable strategic plan that will allow it to prosper in a net-zero world. Since I anticipate integrated oil companies will be the subject of increased shareholder activism, those that do not make energy transition progress could be candidates for divesting or shorting to eliminate risk. Alternatively, if an O&G company makes significant efforts to restructure and has invested in green energy, it may be a long-term investment that aligns with an investor’s net-zero objectives. This itself raises questions: Are these activities real or just greenwashing? And if activities are real, are they doing enough?
It’s important to evaluate a number of variables, including short-, mid- and long-term announced emissions reduction targets that include Scope 3 (GHG) emissions; announced low carbon R&D efforts; recent low-carbon M&A activities; internal policies and the tying of executive compensation to sustainability-related targets; as well as recent fossil fuel production and related activities. Using this data, investors can assess whether intermediate plans to reduce carbon intensity are sufficient and ascertain if green energy efforts are actually meaningful.
There is little doubt that recent events have only heightened investor focus on fossil fuel holdings. Additional diligence that focuses on the transition preparedness of individual oil and gas companies can lead to more informed decisions. The road to net-zero is long, but in order to get there, I believe O&G companies need to get on board now.
Source: Forbes