What happened when investors interviewed Ben van Beurden, CEO of Shell, at the PRI in Person 2019 conference in Paris?
Well, not that much really…to begin with.
The oil major chief was talking to Adam Matthews, Director of Ethics and Engagement, at The Church of England Pensions Board and Sylvia van Waveren, Director, Active Ownership at Robeco, both potent movers in the Climate Action 100+ group of 360 investors with more than USD $34 trillion in assets under management, which asks companies to make emissions reductions across their value chain consistent with the goals of the Paris Agreement.
The initial, respectful chat was perhaps unsurprising given that investors are giving Shell time to work through a commitment made in December 2018 to make the business consistent with the goals of the Paris Agreement, including defined reductions of Scope 1, 2 and 3 net emissions, remuneration for its top 150 executives linked to delivery of targets, and a promise to examine membership of industry lobby groups that are not aligned in the same way. The investors called Shell’s actions “groundbreaking”. In a report earlier this year on the latter, Shell said that out of 19 key lobby memberships it had ditched one and put another nine on a watching brief.
A necessary move, given that InfluenceMap, the UK not-for-profit on corporate lobbying, had found that the five largest, listed oil and gas majors, including Shell, had invested over $1bn of shareholder funds in the three years following the Paris Agreement on what it termed misleading climate-related branding and lobbying, comprising: “carefully devised campaigns of positive messaging combined with negative policy lobbying on climate change”.CA100+ investors are keeping a close eye on Shell’s capital expenditure (Capex) in order to gauge the seriousness of its ongoing response. Van Beurden said Capex was important, but urged his interviewers to focus on overall net carbon footprint reduction based on the results of spend in areas like renewables, biofuels, nature-based solutions, and carbon capture and storage.
But Shell’s actions pose something of a financial bind in a tough market. Its Q2 results this year were lower than the expected earnings — $3.5bn instead of the forecasted $4.93bn, reflecting “lower realised oil, gas and LNG prices.” Moody’s, the credit ratings agency, views Shell’s more proactive energy transition strategy compared to peers “as credit positive in the longer term”, but notes that such investments will be unlikely to enhance Shell’s earnings and cash flow over the next five years. Investors will have to be patient. And Shell doesn’t operate in a vacuum. Van Beurden told the conference that its actions would need to be accompanied by a “decarbonisation of demand”, and economic transformation. Investors, he said, had to help bring about a sector-by-sector approach to transition in industries such as the airline business that would also have to involve governments, the broad financial sector, corporates and technical experts: “If we don’t do this, then nothing will happen,” he said. Matthews said Van Beurden sounded like he was deflecting the CA100+ engagement back towards investors – which, in effect, he was. Shell has made a commitment, Van Beurden said, while acknowledging that it needs to be “louder and more precise…even to the point of being obnoxious” in its support for carbon pricing and reduction advocacy. That, of course, is grand oil chief hyperbole. But the context of his comments was that without broad financial and policy backing for those plans: “they will not work.” It’s a big ask for responsible investors, but no doubt a realistic point.
In a separate panel at the conference – and in a slightly different slant on the same theme – Kingsmill Bond, New Energy Strategist at Carbon Tracker, suggested that policy realities would quickly make the economics of energy sufficient to change the game. He said the ‘intermittency’ problem of renewables – lack of wind and sun – was now soluble, and that in the world’s largest countries market penetration of wind and solar is still less than 10%, giving a large ceiling for scale up. Incumbency, he said, was the real impediment for change, but said the “forces of change” were powerful enough to overcome this. Broadly, he said, these included:
- Energy importers massively outweighing exporters, so that in India, China, Pakistan, etc, there are huge interests in developing domestic energy, which is also a popular policy move with voters. On the flip side, he said, the 5% of energy exporters were often oligopolies, gaining unfair political and economic leverage from their fossil fuel reserves.
- Pollution related illness kills 3.6 million people per annum and the leaders of China and India are desperate for ‘clean’ energy solutions.
- Demand growth would lead to the need to install new technology, leapfrogging incumbent energy sources.
“The transition won’t be stopped,” he said. There will be an ‘inevitable policy response’, he said, citing a new PRI project, as RI reports. “In the past policymakers had to push water uphill. Now, they just have to channel it downhill, even if it won’t be easy because the forces of incumbency will be difficult to overcome.“An audience question to Bond reflected the response you frequently hear from institutional investors: how can they shift into renewables and energy transition areas when the internal rates of return are lower than for oil and gas, which are dividend staples for investors?
Bond said: “The answer is that it doesn’t matter. There is a lot of money out there that wants to get into renewables. Returns are lower, but it’s not stopping the movement. Cost of capital in renewables has dropped from 10% to 5%, while in the fossil fuel sector it has risen from 10 to 15% in the same time period.”
In a set of economic forecasts put together for the PRI’s ‘Inevitable Policy Response’ project, Jason Eis, Executive Director at Vivid Economics, said areas where they see rapid policy action evolving included coal phase out, internal combustion engine sales bans, quick transition to low carbon power and significant scaling of that.
Those policy-driven economic shifts will be key, and investors need to coalesce to hasten them. The Inevitable Policy Response should be used as a stick to prod and cajole recalcitrant policymakers.
So what happened when the investors interviewed Ben van Beurden, CEO of Shell, at the PRI in Person 2019 conference in Paris?
Well, after the initial bonhomie, the investors and Van Beurden started circling the real discussion on whether Shell, and especially its peers, will actually be part of the ‘forces of change’ on climate, and what will genuinely be required to make that happen. And conference attendees got a glimpse of the financial and political reality check of what that could mean.