Oil and gas: to divest or not to divest?
As some oil and gas companies have backtracked on their net zero commitments in the past year is now the time to divest?
Over the past year, oil and gas companies have made record profits, resisting shareholder engagement and rolling back on net zero commitments, actions which were front and centre of investors concerns at the Pensions and Lifetime Savings Associations' ESG conference in London.
At the conference, there was a sense amongst asset owners that they were at the end of their tether when it comes to engaging with the sector, suggesting that the next few years will be “make or break” in regard to divestment.
Five months ago, supermajor Shell abandoned its plans to cut its oil production each year for the rest of the decade, with the company also backing a “leaner” approach towards investing in the energy transition. In addition, fossil fuel company BP backtracked on its aims to reduce emissions, changing its target to reduce the Scope 3 emissions from its oil and gas production to 20-30% by 2030 (from 35%-40%).
Speaking at the conference, Diandra Soobiah, head of responsible investment at Nest, highlighted that the £30bn defined contribution pension fund has been engaging with Shell and BP over the last five years and recently “escalated” is approach with both companies.
Soobiah explained that Nest has been pushing Shell to set scope 3 targets for a number of years, but “they’re still not doing enough on the transition”. After the dismissal of Client Earth’s lawsuit against Shell’s board of directors, which was backed by Nest, the master trust is now “considering” co-filing a shareholder resolution against Shell, she said.
However, when questioned by a member of the audience on how long Nest anticipates waiting to see action from Shell on shareholder engagement. Soobiah stated that: “If we think that by 2030 the company is not interested in changing then we wouldn’t hesitate to divest. So, I think the next few years will be make or break.”
Earlier in the day, Jacqueline Jackson, chief sustainability officer at £26bn London CIV, also shared Soobiah’s frustration when it comes to engagement with Shell. Alongside Nest, the Local Government Pension Scheme (LGPS) pool also backed Client Earth’s lawsuit against the fossil fuel supermajor and is currently drafting a shareholder resolution against the fossil fuel company.
“They [oil and gas companies] are going to be responsible for impacting global biodiversity, which is going to impact most of global supply chains, cutting out huge amounts of economic benefit and wiping out huge amounts of GDP.
“So these are issues that these companies need to be held accountable, whether you're invested in them or not. The investment community needs to be taking action on these companies before they affect portfolios across the board,” she said.
When asked whether divesting from Shell was on the table, Jackson responded by stating that these companies have the capital to drive the global energy transition and by divesting the LGPS pool would not be able to influence them in shifting their focus to renewables. However, Jackson added that despite this, the pool has reduced its investments in Shell.
The sense of whether it is the end of the road in engaging with oil and gas companies and consequently divesting was also picked up by Julius Pursaill, strategic advisor at £1.7bn Cushon. A pension fund which has recently been in the headlines for overhauling its net zero strategy.
He told delegates that Cushon might be looking at a broader exclusion policy of oil and gas companies if the pension fund continues to see a lack of improvement in engagement with the sector.
Some asset owners have recently fully divested from oil and gas companies. At the conference, Laura Hillis, director, climate and environment (responsible investment), noted that in June, the £3.2bn Church of England Pensions Board offloaded its stake in Shell as it declared that it was looking to end all its investments in the oil and gas sector.
Speaking about the pension fund’s decision to do this, Hillis stated that divestment is still a “last resort” for the fund, however following on from five years of engagement with the sector and continued misalignment with its net zero ambitions it chose to divest.
Ultimately, only time will tell whether more asset owners choose to ditch engagement and divest from oil and gas companies, but the direction seems that it will be sooner rather than later.