British pension funds are questioning Shell board’s ability to transition to a sustainable business model with one scheme considering selling the stock.
Oil major Shell says it has met its oil reduction targets ahead of schedule and is now seeking to provide “essential oil resources for the world” – much to the dismay of UK pension funds invested in the company.
Shell confirmed last week that it is ditching a previous commitment to slash oil production annually by 1 to 2 per cent against its 2019 levels by 2030, jettisoning the approach of previous chief executive Ben van Beurden. The oil major said that this was roughly equivalent to an overall reduction of 20 per cent by the end of the decade, compared with 2019.
Current CEO Wael Sawan said that Shell had met its output reduction targets ahead of schedule last year, and that production levels will now remain flat as the company seeks to provide “essential oil resources for the world”.
Three pension funds have told Sustainable Views, however, that they were disappointed with Shell’s change in tack on oil production.
The Church of England Pensions Board said it is reviewing its investments in Shell, while London CIV, which manages £48bn in pooled pension assets, said that the decision confirmed that Shell “is poorly equipped to deliver the energy transition at the required speed”.
Protecting shareholder value
At a capital markets event on June 14 that was heavily couched in the language of reducing emissions, the oil major pivoted to a strategy designed to maximise shareholder value in the short term. Shell is slashing costs and will lower its annual capital spend to a maximum of $25bn for 2024 and 2025.
The company is looking to convert its leaner approach into higher cash generation, and reward shareholders accordingly. It increased its dividend for the second quarter of 2023 by 15 per cent and announced share buybacks of at least $5bn for the second half of the year.
Sawan said that Shell wants to participate across the different types of energy production, including oil, gas and renewables. “We are not going to do that by destroying value for our shareholders,” he said.
“It might appease a few in the short term,” he continued. “But in the long term, it would actually be bad for the energy transition, because the only way you can attract the $4tn to $5tn that you require on an annual basis in the infrastructure that’s going to enable the transition is to create returns that attract the capital.
“Our biggest contribution to the energy transition is going to be to discover these business models that are going to be profitable and scalable.”
Reviewing investments
Sawan told analysts that the company’s decision to “preferentially allocate” capital to buybacks was linked to its belief that the business remains undervalued.
He later faced media questioning as to whether Shell’s push towards higher margins indicated that it was seeking to attract a different profile of investor. “I wouldn’t say we’re actively looking to go to different investors. We’re trying to sharpen our story,” the CEO said.
Shell’s decision to slow down the reduction of its oil output, may, however, be at odds with the demands of institutional investors with longer time horizons, such as pension funds, which do not subscribe to Sawan’s interpretation of how to best fund the transition to a more sustainable business model.
“As we feared, the new CEO has set a path that will increase Shell’s absolute emissions and goes against the previous path the company was pursuing,” Laura Hillis, director for climate and environment at the Church of England Pensions Board, tells Sustainable Views.
“This works against the interests of long-term institutional investors that want an orderly transition. We are reviewing our remaining investments in the company.”
One expert questioned the rationale behind investing in Shell for the long haul. “It’s odd to make a long-term investment in a company which is so dependent on buying back its own shares,” a spokesperson for shareholder advisory company Pensions & Investment Research Consultants tells Sustainable Views.
‘Poorly equipped’
While the Church of England Pensions Board is reviewing its Shell shareholding, other UK pension funds are understood to be in favour of engaging with the company — for now.
It is understood that London CIV sent a letter to Shell in October 2022 asking whether the board intended to change its approach to reducing its impact on the climate.
The fund did not receive a response. It wrote a further letter of support for a claim filed in February by non-profit ClientEarth — a Shell shareholder — against the oil major’s board, which accused the company of taking too long to move away from fossil fuels.
The claim was dismissed by the High Court in May, although ClientEarth was granted an oral hearing where it will ask the court to reconsider its decision.
“Striding backwards towards oil and gas and the prioritisation of dividends over renewable investment smacks of short-term investing,” says London CIV head of responsible investment Jacqueline Amy Jackson.
“This confirms a critical lesson,” she tells Sustainable Views. “Shell is poorly equipped to deliver the energy transition at the required speed whilst its incentives and purpose dangerously misalign with the needs of people, planet and long-term investors.”
Jackson says that it is time “to accelerate engagements on the demand side”, stressing the importance of engaging with the transport sector — a significant oil consumer — as well as property and industrial companies, which are big gas consumers.
Nest disappointed
The UK national employment pension scheme Nest has also expressed its disappointment. It has previous form in divesting from energy companies over climate, having removed ExxonMobil, Imperial Oil, Kepco, Marathon Oil and Power Assets from its portfolio in 2021 over the issue.
The companies had lost the confidence of Nest and UBS Asset Management — one of the pension scheme’s fund managers — in their transition to a low-carbon economy, and had been unresponsive to Nest’s demands.
“We’re seeing more and more short-term business decisions from oil and gas companies when they should be ramping up their resilience to climate change,” says Nest senior responsible investment manager Katharina Lindmeier, following the oil major’s announcement.
“Nest will continue to exert pressure on Shell to change course,” she adds. “We’ve already supported litigation against Shell directors for failing to manage climate risk, and will be repeating our concerns directly in meetings we have with management.”
The master trust is understood to be one year into an engagement process with the oil major that typically lasts three years.
Nest still believes that avenues exist for effecting change at Shell, according to a spokesperson, who adds that if the pension scheme felt it had exhausted its stewardship options, it would consider divesting from the company.
Stephen Beer, senior manager for sustainability and responsible investment at Legal & General Investment Management, notes that per LGIM’s analysis, around a third of oil companies “fail to meet minimum standards on climate change”.
“Shell will be one of the better companies but still has some way to go,” he says. LGIM is a Shell shareholder.
“LGIM wants to see oil and gas companies outline clear plans to align with net zero by 2050, with short and medium-term targets set and met before then,” Beer continues.
“While we may not specify exactly what transformation we want oil and gas companies to make, we do want them to align their strategies with net zero.
“We also do not expect companies which put transition plans to a vote to make material changes soon after.”
Legal pressures
While Shell’s approach to climate change has attracted criticism from some shareholders, it also courted legal attention in 2021, when the district court of The Hague told the company to slash its reported global net carbon emissions, across Scope 1, 2 and 3 emissions, by 45 per cent by 2030 compared with 2019 levels.
The case was filed by Dutch non-profit Milieudefensie in 2018. Shell filed its appeal against the decision last year.
One asset manager shareholder, which did not wish to be named, says that “these legal actions will be beneficial to investors’ engagement efforts as they apply additional pressure on management to deliver on its net zero target”.
“However, one potential unintended consequence from the legal pressure on the board could be management being less ambitious on the transition,” they continue, though “this has not yet materialised”.
Shell’s capital markets presentation “revealed disappointing developments for its net zero energy ambitions”, the asset manager says.
The manager adds that it will continue to engage with Shell over its energy transition plan. Its areas of focus will include pushing for better disclosure of the oil major’s long-term decarbonisation strategy and its low-carbon investments.
“In the future, if progress is not concrete, this could prompt investors to escalate through voting such as by supporting shareholder proposals or opposing management’s climate transition plan,” the asset manager says.
“Overall, however, it’s recognised that the company is balancing a wide shareholder base with different outlooks on the climate transition.”
In a written statement for Sustainable Views, Sawan reiterated his message that Shell “need[s] to continue to create profitable business models that can be scaled at pace to truly impact the decarbonisation of the global energy system”, and that the company “will invest in the models that work — those with the highest returns that play to our strengths”.