Time is up for Big Oil’s business model

Shareholders are crucial to unlocking energy transition

Opinion piece in The Financial Times.

Mark van Baal is the founder of Follow This.

Every so often, the CEO of a big oil company invites me for coffee. I enjoy this courtesy, the swoosh of the lift, a seat at that big boardroom table — never mind the intention, I tell myself. Perhaps all this is a signal of respect.

Afterwards, I’m exhausted. Every time. The conversation goes like this: one of the executives will ask my organisation, Follow This, to withdraw our shareholder resolution from their company’s AGM. My colleagues and I reply that we’re seeking a shareholder mandate that will support management to lead the energy transition.

A short moment later, we shake hands — as if to confirm our disagreement. Then I make my way down the plush C-suite corridors back to the elevator.

Follow This is a movement of 9,000 shareholders in oil and gas companies. Our climate resolutions express support for oil majors — Shell, BP, TotalEnergies, Chevron, and ExxonMobil — to align their CO₂-emissions reduction targets with the Paris Agreement on climate change and invest accordingly.

Investors’ support for Follow This resolutions has grown from 2.7 per cent in 2016 to about one-third of AGM votes in 2021. This is a logical trajectory. Any investor contemplating the economic and environmental damage from carbon emissions needs to take a longer view of their fiduciary responsibility.

In 2022, the oil empire struck back. War in Ukraine triggered a surge in oil prices. Super profits for Big Oil and fears of growing energy insecurity lifted the defensive mood in those boardrooms. A sense of delayed vindication among oil industry executives was almost palpable when, last year, support for Follow This’s resolutions slumped.

Oil companies have claimed — defying logic or responsibility — that increasing investment in hydrocarbons is an imperative made more urgent by the energy crisis. A short-term panic in commodity markets eclipsed the larger catastrophe of climate crisis.

Of course, oil executives, experts in the intermittently lucrative business of turning hydrocarbons into petrodollars, are reluctant to lead the energy transition.

In the past year, we’ve met executives at 11 oil majors, every one determined to stick with what they know best — for as long as possible. Emboldened by their windfall profits, more than one has answered my entreaties with a simple question: how could he make the same profits from renewables?

That’s the wrong question. Time is up for Big Oil’s business model. Today’s profits should be funding exploration of new business models. My argument — that the business case for oil will collapse, just as soon as fossil fuel producers are held liable for climate damage — falls on deaf ears.

Today, investors know that the climate crisis poses a material risk to their entire portfolios. The consequences of floods, droughts and extreme weather have to be paid for. That’s why many institutions make public commitments of support for the Paris Agreement, which requires the world to almost halve emissions in this decade.

Others talk about constructive engagement and transition pathways, but to little effect. The right to vote at AGMs is the only meaningful power wielded by shareholders. Why then is it so difficult for the same institutions to vote in favour of resolutions that align with their announced policies to achieve the Paris goals?

I’ve heard many answers to that question. In 2016, when Follow This filed our first climate resolution at Shell, we were told that it was unusual to vote against the company’s board; unreasonable to ask for cuts in (so-called Scope 3) product emissions; and that it was unnecessary because oil companies had agreed to set Scope 3 targets — in the very distant future.

These excuses have worn thin. By 2022, the 10 largest investors in the Netherlands all voted in favour of our resolutions. In the UK, two of the four largest institutional investors (HSBC and Schroders) voted for the Follow This proposal last year.

The others, Abrdn and Legal General Investment Management, voted against. This allowed investors to “continue building on the constructive engagements” with oil companies, said LGIM. But as the Church of England pension fund has acknowledged, constructive engagement and voting for the Follow This resolution are not mutually exclusive. They’re codependent.

Asset managers, whose performance is measured quarterly, worry that setting medium-term Scope 3 emissions reduction targets would lead to a decline in short-term profits. In short, they prioritise short-term profits over long-term risk. This line of argument is a fallacy. Developing new oil and gas projects can take a decade or more. Investments made now to increase capacity herald climate disaster.

As long as investors allow Big Oil to do what they know best, oil and gas companies will stick to their strategy of investing more in new fossil fuels capacity far beyond the boundaries of the Paris Agreement, while lobbying against climate legislation, and even largely ignoring court rulings to curb all emissions in this decade.

Big Oil needs to change, or Paris will fail.

That’s a decision for shareholders.

Mark van Baal in The Financial Times