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Scope 3 or not Scope 3? Investors face crucial question at oil major AGMs

Mark van Baal and Brynn O’Brien argue there is only one Paris-compliant answer

A year ago, sixty of the world’s largest investors urged the oil and gas industry to “take responsibility for all of its emissions” in an open letter published just a few days before Shell’s 2018 AGM. A year later, Shell is the only oil major to take up the challenge of setting targets for “all emissions” — meaning emissions from its operations (Scope 1 and 2) and its products (Scope 3).
The stage is set for the 2019 AGM season, when investors have the opportunity to urge other oil majors to follow Shell in setting comprehensive targets for all emissions.

This year, resolutions that ask oil companies to set targets for “all emissions” are on the ballot at AGMs of three oil majors: Equinor (15 May), BP (21 May) and Chevron (29 May).

In these resolutions, shareholders support oil and gas companies to accept responsibility for emissions from their own operations (Scope 1 and 2) and, crucially, for the emissions created by the use of their products such as natural gas, petrol and diesel (Scope 3), since about 80–90% of the emissions of most oil and gas producers are caused by burning their fuels.

The resolutions ask that the companies set targets aligned with the goal of the Paris Climate Agreement, to limit the rise in global temperatures to well below 2°C above pre-industrial levels, with an aspiration to limit global warming to 1.5°C.

All three companies have urged their shareholders to vote against these climate resolutions. Their arguments leave no doubt as to why: these companies do not want to take responsibility for emissions from their products (Scope 3). BP states that they oppose the resolution because it “calls for Scope 3 (end user) emissions that BP does not control”. With support from like-minded investors, BP has proposed an alternative resolution (page 4), while Equinor issued a joint statement. Both steer clear of Scope 3 targets.

In the coming weeks, investors have an opportunity to leave no doubt that Scope 3 targets are a crucial component of meaningful climate action by voting for these climate resolutions. Conversely, there is a clear and present risk that voting against these climate resolutions will legitimise companies’ stalling on taking responsibility for Scope 3 emissions.

The precedents for responsible investors to vote in support of these climate resolutions are compelling:

● Investors that voted for the 2018 climate resolution at Shell included the majority of the largest Dutch investors, Aviva (page 18), EAPF and the Church of England. These investors also pledged to “proactively support appropriately worded shareholder resolutions calling for companies to set targets”.
● Six large Dutch investors indicated last month that they insist on Scope 3 targets in their Statement: Investors’ expectations of the oil and gas industry.
● It would be reasonable for the sixty signatories of last year’s letter to vote for the climate resolution, especially because the boards of these companies refuse to take responsibility for Scope 3.
● Investors have gone public with a move to vote against the board of ExxonMobil for rejecting a similar climate resolution from inclusion on its AGM ballot, as first reported by RI. For these investors, it would be logical to vote for the same climate resolution on the AGM ballot of Equinor, BP and Chevron.
● A 2018 resolution to Origin Energy calling for Scope 3 targets to be set received 12% support, including the votes of major Australian investors AustralianSuper, HESTA and VicSuper.h6. Global question

Company responsibility for Scope 3 emissions was the topic of pointed discussions at AGMs of Australian oil and gas companies Santos and Woodside Petroleum last week, when the companies were questioned by the Australasian Centre for Corporate Responsibility (ACCR). Santos acknowledged that it may need to undertake Scope 3 “tracking” in future, while Woodside responded that it was “too early” to set emissions targets.

There is a clear and present risk that voting against these climate resolutions will legitimise companies’ stalling on taking responsibility for Scope 3 emissions.

Follow Shell

That Shell is the only oil major to date to include Scope 3 in its targets is a reflection of investors’ engagement and support for the same climate resolution. Shell now has to take the next step by aligning these targets with the Paris Climate Agreement. Institutional support for the 2019 climate resolutions at other oil company AGMs would send a clear signal to these three companies and to the entire fossil fuels sector to follow Shell in setting targets for Scope 3.

Failure of an oil company to set a target for reduction of Scope 3 emissions is incompatible with the goals of the Paris Climate Agreement and will allow them to continue to increase Scope 3 emissions. This was displayed last week when BP announced financial results with the claim “Emissions down while production up”.

Shareholder support

Most institutional investors are reluctant to vote against management, often for good reason. We believe that these climate resolutions are an exception. Our motivation is not to punish companies but to support leading oil and gas companies to rapidly scale the energy transition from fossil fuels to renewables.

We live in extraordinary times. Within the next few years, the oil and gas industry can make or break the goal of the Paris Climate Agreement. Oil and gas companies need the support of their shareholders to change course.

Among financial institutions, a growing international consensus is emerging that achieving the goal of Paris is essential to risk management and responsible stewardship of the world economy. Institutional investors foresee that they cannot make a decent return on capital in a world economy disrupted by devastating climate change.

AGM season

Now is the time to call fossil fuel producers to account. Not tomorrow. Not in some more convenient AGM season, when Big Oil has bought itself time to conjure up their own terms and conditions to measure action on climate change. This AGM season is the time to answer the crucial question for the entire oil sector: Scope 3 or not Scope 3. There’s only one Paris-compliant answer.

Mark van Baal is an engineer and Founder of Follow This, a group of shareholders in the oil and gas sector focused on climate change. Brynn O’Brien is the Executive Director of the Australasian Centre for Corporate Responsibility (ACCR).

Follow This and ACCR filed the climate resolution at Equinor and BP.