Catherine Howarth: Implications of the 2°C limit for BP, Shell and their major investors

The ShareAction head is a Young Global Leader of the World Economic Forum

As some of the world’s brightest minds gather in Davos for the 2016 World Economic Forum, there will be much discussion regarding what the companies of the future will look like.

Key to answering this will be how corporate actors respond to the greatest economic threat of our time: climate change. There is no space in tomorrow’s markets for companies that are not part of the solution. Industries premised on business models inconsistent with limiting global temperature rises to below 2°C, with an ambition for 1.5°C – a goal now enshrined in international law following UN negotiations at COP21 in December – must urgently begin to adapt.

As this existential cloud hangs over sectors such as fossil fuels and mining, investors are increasingly taking action to ensure these questions are being considered at board level. Last year, ShareAction worked alongside the ‘Aiming for A’ investor collaboration to file shareholder resolutions at oil giants BP and Shell. In the UK, these types of initiatives are very rarely brought about, not least because of the significant legal and logistical hurdles involved in getting resolutions successfully filed under the rules of the 2006 Companies Act. With the backing of management at Shell and then BP, the resolutions were duly passed with votes of over 98%. Both firms are now legally required to include additional reporting on climate risk from 2016 onwards.

There was much discussion at the time about whether these resolutions were really a climate success or not. Did the companies consider a tick-box exercise to falsely reassure shareholders that “some was being done” about climate change?

In our view, it is wrong to try and measure their ‘success’ as defined by a static moment in time. The act of filing a resolution at a FTSE100 company is a substantial milestone within a period of intensive investor engagement, invariably on a topic of strategic significance or risk.

Resolutions do not mark an end-point of engagement, but rather set the scene for future dialogue.

Thus, the question of whether these resolutions can be considered a success has not yet been answered. It will depend on how the companies report back to shareholders in 2017 and beyond about their strategy for addressing climate risk. This process is ongoing, and is likely to develop and mature as understandings of the different pathways available to these companies come to light. Indeed, there is no one set pathway for adaption.The boards may decide to move into renewables, or they may not. They may wish to wind-down assets and return substantial amounts of capital to shareholders. They may choose corporate reinvention and move into different markets entirely.

The future of the fossil fuel sector is unclear, but one thing is certain: if these companies wish to be part of tomorrow’s economy, they need to transform their business model for consistency with the 2°C goal.

To deny the need for a 2°C limit in temperature rises is to show a startling lack of concern for the global economic and societal turmoil that will otherwise occur.

The World Economic Forum’s Global Risks Report 2016 has, for the first time this year, placed a failure of climate risk mitigation and adaptation as the highest ranking global risk in terms of impact. Indeed, even if we succeed in limiting climate change to 2°C, we have still condemned many vulnerable coastal and low-lying societies to desolation. Of course, this is not just a challenge for the fossil fuel industry, but the entire Western model of consumption, including sectors such as agriculture that often remain woefully under scrutinised in respect of climate vulnerability.

Nonetheless, to deny individual corporate responsibility is to continue to contribute to humanity’s most pressing and tragic collective action problem. We owe it our children that we don’t allow this to happen.

Whilst acknowledging that transition will be hugely perplexing, investors need to be tough on companies that don’t share this outlook, and can’t match words with actions through clearly demonstrating that these challenges are being properly addressed. In BP and Shell’s enhanced reporting in 2016, we would thus very much expect this 2°C goal to be the focal point for climate risk strategizing.

This is how the success of the shareholder resolutions will be measured. To kick off this discussion, ShareAction has published a discussion paper on what 2°C reporting might look like in practice.

We don’t claim to have all the answers, but do we hope to provide new questions for investors to ask – and for companies to answer.

Catherine Howarth is Chief Executive of ShareAction.