Influence from the inside: the role of investor activism in oil and gas majors

JP Casey 13 November 2019 (Last Updated November 13th, 2019 11:02)

Shareholders at the world’s biggest oil and gas companies are exerting ever more pressure to ensure firms improve their environmental performance. Leading the way is Mark van Baal, founder of Dutch activist shareholder group Follow This, which has successfully petitioned Shell to update its emissions policy. JP Casey speaks to him about the unique investor activist model, and how important it could be in ensuring the world reaches its climate change goals.

Influence from the inside: the role of investor activism in oil and gas majors
“Shareholder support is crucial, because they are the only entity these boards listen to,” said Mark van Baal. Credit: Follow This

The last decade has been characterised by increasingly urgent action to reduce the world’s environmental footprint. From international projects such as the Paris Agreement to bottom-up movements such as Extinction Rebellion, the world is beginning to address the existential threat of climate change more directly.

In 2017, a report from non-profit charity CDP found that since 1988, 100 companies had been responsible for more than 70% of the world’s greenhouse gas emissions, refocusing the debate surrounding the role of multi-national companies – and oil and gas majors in particular – on climate change, and what they can do to limit harmful emissions. With these companies wielding significant influence over the future of the Earth’s climate, those with a stake in these firms are increasingly vocal about the direction of their policies, leading to a relatively new type of stakeholder: the activist investor.

Dutch group Follow This has led the way in this new field, successfully petitioning Shell to alter its climate change policies to include “scope three” emissions, those produced by its customers, in its total emissions figures. This is an important step in ensuring oil and gas majors take responsibility for the wider impacts of their work, and the activist group is optimistic that despite the dramatically shrinking window of opportunity for companies to act, this model of activism could lead to significant changes in the sector.

Shell successes and scope three emissions

“As an activist shareholder, you just need a few percent of the shared enormous influence,” said Mark van Baal, founder of Follow This when describing the group’s model of activist investors. “Everybody could join with their own shares in Shell or by buying one symbolic share with us, so I could go to the shareholder meeting.”

This model gives a voice those who would typically not be involved in the company’s decision-making process, and has yielded significant results in an industry that is historically resistant to change. The group was founded in 2015, and within a year had around five million shares, and submitted the resolution to force Shell to consider scope three emissions in its climate change targets by the end of 2016.

“Shell [needed] to set and publish targets that are aligned with the Paris Climate Agreement, and these targets need to cover all emissions, not only operations, but also products,” said van Baal.

Scope three emissions can have a significant impact on overall emissions, with CDP reporting in 2016 that the use of sold products – that is, oil and gas – accounted for over 10 billion tonnes of carbon dioxide equivalent, with all scope three emissions responsible for more than double that. These emissions can also significantly undermine a company’s otherwise sound environmental policies, with Refinitiv Data reporting that BP’s scope three emissions reached 437 million tonnes (Mt) in 2018, up from 412Mt the previous year, and contributed to the company’s highest annual emissions total in six years, despite BP’s direct emissions falling year-on-year since 2016.

“[Shell] has a scenario which says the energy market will grow by 40%; so if you take into account that growth of 40%, and you’re going to halve your relative footprint, you will end up with 17%, which is a reduction of -30%,” said van Baal, highlighting the importance of including scope three emissions in climate change targets. “If you look at the efforts for the immediate scenario, for well below two degrees, you need 70% [reduction] to get to two degrees, 100% to get to one degree.”

For the majority of proposed resolutions, van Baal said, shareholders are encouraged to vote “with management”, that is in whichever direction would benefit the company, which would have typically resulted in around 99% of voters siding with Shell. However, when the Follow This resolution was proposed to Shell shareholders in 2016, 6% voted in favour of the change, while 5% abstained; the percentage of voters who supported the resolution was around ten times higher than expected.

“The response of Shell was to advise their shareholders to vote against it because we cannot take responsibility for scope three, [saying] we don’t know what the customers do with our products,” said van Baal, joking: “I sometimes say: ‘I think they burn it.’”

Environmental and financial benefits

While the environmental benefits of companies being held properly accountable for their emissions, this presents a unique opportunity for financial gain, as oil and gas majors can set themselves apart from industry rivals by embracing more proactive solutions to climate change.

“If you don’t change, you will become the Kodak of the 21st century,” said van Baal. “I still think that’s the best analogy with what’s going on with these companies: they’re too slow in responding. Not [in terms of] technology, because Kodak invented the technology, digital photography, but they didn’t dare to look for new business models.”

These new models could take advantage of shifts in consumer behaviour, such as an increased demand for low-emissions products and services. CDP noted in its 2019 climate change report that “climate-related opportunities” could see the world’s largest companies realise over $2.1tn in value.

With this in mind, the Follow This model could be particularly effective in changing company behaviour; if oil and gas majors are fundamentally interested in turning a profit, and their financial performance is to an extent dictated by the involvement of shareholders, those shareholders can wield a significant amount of influence with regards to company policy.

The CDP report went on to conclude that the potential financial gains of embracing low-carbon technologies and solutions would exceed the initial costs of this change. For example by shifting to alternative forms of power such as renewables, the eventual financial gains could be seven times the initial cost. There is a clear alignment between short-term economic interest and long-term environmental interest that van Baal thinks could be critical if the world is to meet the Paris climate goals.

“Now morality and financial goals and obligations are fully aligned, and the businesses [and] big investors start changing their position,” he said.

“The end goal is to reach the Paris Climate Agreements, and we are convinced that the oil industry can make or break the agreement. They are responsible for an awful lot of CO2 emissions, so if they don’t change, we will never get to Paris. If one of them breaks ranks, and customers and shareholders reward this, which I’m sure they will, then the others will follow.”

Accountability and other companies

Follow This aims to expand this emphasis on responsible investment to other companies, with the group filing similar scope three resolutions at the AGMs of BP and Equinor in May this year.

“From these two companies, we [have already] received the same response that Shell put out in 2017: ‘We will advise our shareholders to vote against it because we cannot take responsibility for scope three,’” said van Baal.

“Of course, the [BP] board advised shareholders to vote against, so normally 99% votes against. 8.4% voted for and another around 7% abstained. If you look at the free-floating votes, the votes from the investors, this was an even stronger signal than from Shell in 2017 that they need to set a scope three target.”

While the company has not followed Shell’s lead in setting scope three targets following these votes, the groups which supported the resolution are hopeful that the oil major will change its policies soon. Recently 99% of shareholders voting in support of a separate resolution to align the company’s business model with the Paris Agreement, signalling a clear support for environmental policies among shareholders.

Both this resolution and the scope three emissions item were proposed by Climate Action 100+, an international group of investors with ownership of assets worth more than $33tn in a number of multi-national companies, of which Follow This is a member, and van Baal points to activist projects such as these as examples of programmes which can make tangible and dramatic change.

“It shows that transparency can be very effective,” he said. “There are two schools [of thought]: one is the engagement in behind closed doors discussions, but what we do is share our resolutions, which makes them very visible and transparent.

“Shareholder support is crucial, because they are the only entity these boards listen to.”

Van Baal was also eager to stress that an increasingly collective approach to influencing climate policy should not come at the expense of ensuring those responsible for emissions acknowledge their role in climate change. A holistic approach of reform, with companies and shareholders working together, is effective, but should not distract from the fact that it is the companies who are largely responsible for harmful emissions, and the companies who will be able to make a difference.

“The boards have proven to be change-averse and they lack a sense of urgency and imagination beyond oil and gas, and that’s the biggest problem,” he said. “They need outside pressure from shareholders to change; and the good thing is that these big investors, one by one, realise that they cannot make a decent profit in a world devastated by climate change, and that’s really the key driver.”