Should climate engagement be focused on oil companies or governments?

Exxon is suing activist investor proxy writers, US states are dropping sustainable investment managers, and the fiduciary duty joker card is being over-played. It is looking bleak for climate engagers and our planets’ temperature. Some are calling for investors to dispense with company engagement, focusing all our energy on exclusions and engaging with government. This concerns me as government’s are rowing back on climate in this political cycle.

Meanwhile, with climate-conscious pension funds divesting from fossil fuels, the new owners of those shares are not necessarily activists pushing for change, we are not seeing the desired nudge towards to improved returns or GHG emission outcomes.

How do we get the best outcomes from our limited engagement budget? The problem needs to be broken down into success, cost, focus impact, and incentives.

Success measures: A good case study for company engagement is where you successfully engage with a company to accelerate the GHG emission decline and the share price goes up. Take for example the Barclays/ShareAction on fossil fuel lending or the Engine One/Exxon engagement.

Sadly, it is less clear what successful government engagement might look like. Success is often seen in setting policies, taxes, and regulations, well before we see whether we actually meet those rules or guidelines are met or we get round to voting in elections. Policy change takes years and is too often delayed by other local political priorities such as immigration, Brexit and the cost of living. Success should be measured by GHG emission reduction for governments, companies, investors and across the broader population.

Cost: Engagement is costly and often not fully disclosed. The cost of engaging with oil companies; on GHG measurement and with governments; spending 3 days negotiating (between activists, lobbyists and governments) on a watered-down statement at COP 27 has worsened both financial and GHG outcomes.

Investors should set their own voting policy (or copy a transparent likeminded investors) and vote as cheaply as they can. Note that voting costs are often hidden, met by fund managers and included as part of your fees. Voting is a license to engage with companies where you make a real difference sharing the cost collaborating with likeminded investors (the Climate Action 100+ model). The costs of engaging with government is expensive and equally murky with the involvement of lobbyists and political financing.

Focus: If we had a global referendum right now: Should your government be enacting policies to reverse climate change? We would get a resounding “Yes” from all countries, states and energy company employees with the possible exception of the Alaska and Siberia which both have oil prospects and a bitterly cold environment.

“Yes” voters need to spend less time bickering over methods of engagement, carbon measurement, exclusion, greenwashing, fiduciary responsibility and focus on convincing companies, governments, and the “no” voters that there is a better way forward. Excluding sectors from investment encourages companies to sell offending sectors or puts the shares in the hands of investors that don’t engage on climate change. Not a good outcome.

While it is true that the cost of capital does rise slightly for excluded companies, the overall impact has been negligible.. Sadly, government engagement is even less focused as we skip between elections, COPs, new manifestos, countries and conflicting policies. The biggest GHG emitters are China, US, India and Russia where most of us don’t even get to vote or the chance to engage.

Impact: Table 1 shows the biggest emitters and oil companies are nearly all controlled by governments where most of us don’t get to vote. The first company we can engage with is Exxon which ranks about 15 in the country GHG emission rankings in line with the UK where I also get to vote though only when Rishi Sunak decides to have one.

The UK and Exxon both emitted around 650 million TCO2eq in 2022 adding 30% to the UK for imported emissions. These imported emissions include a Tesla bought by a UK citizen, where the carbon footprint ought be charged to the UK not the US/China. They make stuff and we consume it, but our planet doesn’t care.

After shareholder pressure, Exxon has started to report on its Scope 3 emissions, bringing its estimated carbon footprint to650 TCO2eq.

Let’s look at the track record of the UK, allegedly one of the better countries and Exxon, allegedly one of the less climate conscious oil companies. Using Scope 1 and 2 emissions only, Exxon has cut emissions by 2.3% p.a. and the UK by 1.5% p.a. over the last 5 years.

For reference, the US carbon footprint over the same period remains pretty much unchanged. Note that this is all well behind the estimated 7% pa reduction required to get to net zero by 2050 and the cap of +1.5 centigrade increase in temperature. In sum, Exxon has done better than the UK in terms of reducing its GHG emissions working with a similar level of engagement. I suspect this is due to more focused engagement with an entity that actually has greater control over the emissions it produces.

Incentives- In a perfect world we would have companies and countries trying to leap frog each other on the GHG downside for our custom. In practice, change is easier to generate through companies as they have much greater control over their emissions than a nation state. We would ideally encourage oil companies (public and private) to compete over price, quality and environmental impact for our custom. With governments, we should be encouraging nation states to compete with each other over policy, heat pump and EV cars adoption for our custom. Unfortunately, governments only compete for voters locally, infrequently and on many other issues apart from climate change.

In conclusion, we should be engaging on all fronts, companies, governments and with the people as consumers/investors we all have varying control over GHG emissions. I would not object to investors taking an exclusion approach following clearly articulated financial, risk and climate objectives (all part of their fiduciary responsibility). Active Investors should deploy engagement budgets where they get the best financial and GHG emissions outcomes.

How do we accelerate change? As Investors, this could be by investing in the green economy where risk adjusted return justifies it. But we should not underestimate the power of consumers on companies and governments. As consumers, if we all agreed to buy petrol/gasoline through the most carbon efficient petrol/gas station then the inefficient ones would change their approach to lobbying and climate transition sharply. Investors in the most carbon efficient petrol/gas station would make an attractive return for their beneficiaries. All power to the people.