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Big Oil Investors Mandate Action On Climate Change

 

This year’s proxy voting season brought a clear message: Investors want to see greater ambition on climate change. This was especially apparent within the oil and gas sector, where three large companies were mandated to do more to accelerate change.

Andrew Logan, Senior Director, Oil and Gas at Ceres, joins Sustainability Leaders host Nalini Feuilloley in a discussion that recaps the recent outcomes for Big Oil during proxy voting season and what it may mean for corporates around the world. Plus, Andrew discusses why it might be a greater risk for companies to be too slow on addressing climate change than moving too quickly.


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Andrew Logan:

In a way, of course, the Shell decision was narrowly focused on a particular company in a particular place. But I think it does have broader ramifications, both for the oil and gas industry and I think for industry more broadly. Among many other things, I think it underscores the idea that for companies in this new era that delay is really dangerous and that not moving fast enough is perhaps a greater risk than moving too quickly to address climate change.

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic, and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices, and our world.

Disclaimer:

The views expressed here are those other participants and not those of Bank of Montreal, its affiliates, or subsidiaries.

Nalini Feuilloley:

Hi there. My name is Nalini Feuilloley, and I'm a Director in the Responsible Investment team at BMO Global Asset Management. I'm pleased to have Andrew Logan with us here today, Senior Director, Oil and Gas at Ceres, to discuss some of the recent developments in the oil and gas sector globally with regards to certain players and outcomes that we've seen at the end of proxy voting season.

Nalini Feuilloley:

So Andrew, thanks for being with us today. I'd love to dive in, given that you have a key role with one of the largest investor coalitions, Climate Action 100+, and I know you work on behalf of institutional investors to advocate for best practices with regards to environmental and climate change concerns with companies across a wide spectrum of industries. So outside of this initiative of Climate Action 100, where the goal is to bring down emissions from the largest emitters globally, where do you think the general population is with regards to environmental expectations of corporates? Do you think that they are indirectly impacting movements like this one and the recent news that we're actually here to talk about today?

Andrew Logan:

Great. Well, first of all, thanks, Nalini, for having me on, and yes, I mean, I do think that growing public concern about environmental issues and in particular about climate change has not just indirect, but really a direct impact on many of the recent items that we're here to talk about today. I mean, investors have to be responsible to the people whose money they're investing. For asset owners, that's their beneficiaries. For asset managers, it's typically their asset owner clients. So as we've seen growing public concern and growing urgency, I would say, about climate change and the need to address climate change, there's been growing pressure from those clients and from beneficiaries on the [inaudible 00:03:15] investors to do more and to do more with their portfolios to address climate change directly.

Andrew Logan:

Of course, there's also been a strong and a growing effort focused on divestment, certainly here in the US, but I know also in Canada and in Europe. Certainly for investors who don't want to divest or don't see the value of divestment, it becomes more important to show that engagement has teeth and that there is real progress to be had from engaging companies and using your ownership in a positive way.

Andrew Logan:

So I think all of that sort of combined has created the moment we're in now, which has really made for maximum momentum when it comes to moving corporates on climate change. I mean, and the corporates, obviously, are made up of people, too. We saw a big announcement recently out of the oil sands in Alberta of a group of companies coming together and committing to bring their operational emissions down to net zero by the middle of the century. Interestingly, one of the quotes that I read was focused not so much on the environmental benefits of that effort, which are certainly quite profound, but the fact that it made it easier for the CEO, the CEO of MEG Energy, to go home and face his kids at the end of the day, which I thought was a really human sort of response and just shows that these dynamics really translate from public concern about an issue to action by CEOs and large investors.

Nalini Feuilloley:

Yeah, absolutely. That's a great point, bringing up the recent news around the coalition of operators right here in Canada and the commitments that they're making kind of together to move the needle. I think it was obviously a great step forward. I think there's a lot to unpack with that announcement and kind of the bilateral expectations of those corporations from the local government. But I'll digress, and maybe we can save that conversation for another time.

Nalini Feuilloley:

But I would agree with you that I do think that the urgency and the concerns behind the impacts of climate change are really kind of trickling down to the general population, that I've been seeing more and more of it make the headlines of general mainstream news outlets. So I do think that this kind of collective action we're seeing is really what's moving the needle.

Nalini Feuilloley:

So Andrew, just a few weeks ago, we hit a turning point with respect to big oil and the impact investors are having on their go-forward business models. Three of the major oil players were actually handed outcomes against their wishes, and by wishes, I mean management's wishes, all related to tackling climate change. Namely, Shell, Chevron, and ExxonMobil all made the headlines. Can you share with us some background on the outcomes of each of those situations and the weight that they respectively carry by way of knock-on effect on the broader industry?

Andrew Logan:

Sure, and I would even broaden that out a bit to include a few smaller companies, like ConocoPhillips and Phillips 66, which also saw very large votes against management on climate change right around the same time. So really a wave moving across the industry. At Chevron, we saw a strong majority vote for a shareholder proposal that called on the company to set up a greenhouse gas reduction target that includes its so-called Scope 3 emissions, which are the emissions related to the use of its product, which are really the bulk of the emissions of an oil and gas company and which are something that Chevron has fairly vehemently refused to address so far.

Andrew Logan:

Now, at ExxonMobil, we saw three board members lose their jobs, in part because of investor perception that the company wasn't doing enough to manage the risks of climate change, which was certainly a watershed moment. But Shell, we saw a Dutch court come out with a ruling that said that the company has a legal obligation under Dutch law to reduce its greenhouse gas emissions by 45% between now and 2030, which is a much faster pace than the company was planning on.

Andrew Logan:

All of these things actually happened on the same day, which I think in retrospect is the day that everything began to change for big oil. I think we saw a series of legal and financial trends, all of them long in the making, come together to send a message that even the companies seen as leaders in this sector, like Shell, aren't doing enough, given the scale and scope of the climate challenge.

Andrew Logan:

I think I certainly take away a message that investors are clearly losing patience and are now willing to support increasingly ambitious shareholder proposals and even contemplate shaking up boards in the most extreme cases. I think what happened on that day in May is important. But I think just as important, perhaps more important, is what happens from here on out. I think how these companies and how the industry as a whole chooses to respond to what seems to me like a clear signal will go a long way toward determining which companies thrive through the coming low carbon transition and which don't.

Nalini Feuilloley:

Right. So I think the situation with Shell specifically, as you mentioned, that outcome was not necessarily related to a shareholder proposal, but actually an outcome that was handed down from local courthouses. A lot of people are wondering, is that precedent that we expect to move the industry forward? I know there has been observations in the news that Shell plans to appeal that ruling with regards to the pace of reducing emissions in their net zero strategy. Wonder what you think about this. Is this similar to the era that big tobacco went through? How likely is it for there to be more top-down government intervention, internationally speaking, on the private sector to ensure that they do their part to meet the Paris Climate Accord, and specifically given that we're sitting here in Canada, when do we expect the ripple effect of that decision to hit organizations based here?

Andrew Logan:

Sure. I think, in a way, of course, the Shell decision was narrowly focused on a particular company in a particular place. But I think it does have broader ramifications both for the oil and gas industry and I think for industry more broadly. I think among many other things, I think it underscores the idea that for companies in this new era that delay is really dangerous and that not moving fast enough is perhaps a greater risk than moving too quickly to address climate change. I mean, Shell, for all its leadership on this issue, is now going to be forced by a court to fairly dramatically speed up the pace of change internally. One might argue that if Shell had started this process a couple of years earlier, they would be in a much better position to do what the court is asking. In fact, maybe the court wouldn't have had to ask them to do anything whatsoever.

Andrew Logan:

I think this decision will have important ripple effects globally and across a variety of sectors. I think maybe a major takeaway for companies is that society as a whole is not going to allow businesses to take us to a future where climate change is essentially out of control. We're not going to head toward a three, three and a half, four degree future. Whether we'll get to one and a half degrees, two degrees, perhaps harder to say, but there is sort of a growing global consensus that climate change is a big enough threat to the global economy, to the health of the planet that we will take important steps to bring emissions down, ideally in a moderate way over a period of time, but if not, then abruptly, if we need to. So it's certainly in the interest of companies and in the interest of their investors to take steps now and act ahead of time so that they can avoid these fairly draconian decisions, whether from a court or from policymakers or from their own investors, as we saw in the case of ExxonMobil.

Andrew Logan:

I think legal risk is something that is maybe particularly salient in the US context, where we have a very tenacious and creative legal bar. I was reminded recently that with the tobacco industry, it was over 40 years from the filing of the first lawsuit against the tobacco industry alleging harm to smokers to the first legal decision that went in the plaintiff's favor, which is an incredibly long period of time to maintain legal momentum, and yet the legal bar was willing and able to do that. It was just a matter of finding the approach that worked. I think compared to that, climate liability is sort of in the second or third inning of a nine-inning game. Again, I think companies should not underestimate the tenacity and creativity of lawyers and, again, better get out ahead of the problem than wait for lawyers to find the right way to bring a suit in court.

Nalini Feuilloley:

Right. No, I think that those are all fair observations. From an investor's perspective, I think the expectations are warranted, thinking about the resiliency of portfolios over the long-term. But from a corporate perspective, I think there's a lot of nuance that goes into these kind of sweeping expectations. So when we think about some of these outcomes that happened at the end of May on these kind of larger players in this space and where they're situated, right, we know Shell is situated in Europe, in the Netherlands, where they have a little bit more of a progressive agenda with regards to sustainability than necessarily other regions around the world, like here in North America, in the US or Canada.

Nalini Feuilloley:

So I wondered your view on the knock-on effect of these types of outcomes on the big oil players vis-a-vis the mid tier to smaller regional players in regions like Canada and the US. Is it realistic to expect some of these smaller organizations to make the same type of commitments on net zero? If so, how should investors tackle regional nuances, like with what we see in Canada, where the economy is largely dependent on the energy sector?

Andrew Logan:

Yeah, that's a really critical question, and I think one could probably argue that investors have focused too much on the really biggest global oil companies, who, big as they are, still represent a minority of the industry. I think a key takeaway for me is simply that every company in the sector and really in almost any sector needs to have a plan for managing climate risk, but they don't all need to be the same plan. In fact, they probably shouldn't be the same plan. A mid-sized E&P in Saskatchewan doesn't need to have the same approach as a Shell or BP and actually probably shouldn't have the same approach. They are very different companies. They have very different core competencies and resources to bring to bear and, frankly, different roles to play in the low-carbon transition.

Andrew Logan:

All I would say is that every company at the end of the day does need to figure out how it's going to prosper in a world that is headed toward net zero. That's particularly important in places like Alberta or Texas, where the economy is so dependent on energy production and where a failure to plan for an orderly transition could lead to real economic dislocation. I think this industry still has time to plan for and to make a transition. It isn't the coal sector, but that time is not limitless. It really needs to act now.

Andrew Logan:

So that's a long way of saying that I think investors shouldn't have the same expectations for smaller companies or companies with a more regional focus, but that doesn't let them off the hook, either. I think one of the real gaps right now in the energy sector is we don't have great examples to point to, though that is maybe changing with recent events of companies, particularly independent E&Ps, who have set out a really comprehensive and holistic approach to managing the low-carbon transition. It may not be net zero. It may not be focused on Scope 3 emissions, but I think there are approaches that fit with the realities of that business that ultimately are about making those businesses more financially sustainable over a longer period of time.

Nalini Feuilloley:

Yeah, I think that's actually a really interesting point you make. It's just really the runway that different shapes and sizes of these organizations actually have when it comes to their performance over the long-term, right? Like you said, there are some that can be paving the way because of the scrutiny or the magnifying glass that they're under, globally speaking, like the big oil players we're talking about today. But as you mentioned, the regional, smaller players obviously have different considerations to weigh, and I think for them, inaction is probably going to be more detrimental to their future prosperity than to just the advocacy of the general population and investors like ourselves. So I definitely agree with that perspective.

Andrew Logan:

Yeah, and I think it also underscores the potential benefits of collective action for some of these small players, right? I think there is value in scale, particularly around some of the solutions like carbon capture. So it's been encouraging to see the news out of Alberta recently, right? With the number of companies both committing on their own to bring their emissions down, but then also committing to work within their own industry and ultimately across the industrial sectors, right, to build out a network of infrastructure to help capture and sequester CO2. This is going to take a broad industry-wide approach, and this is not an industry that is necessarily comfortable doing a lot of collaboration and cooperation. So it's going to take sort of companies being willing to be uncomfortable and working with companies that they see as their competitors, but ultimately toward a common goal of making the industry viable for longer.

Nalini Feuilloley:

Exactly. No, I really like that kind of scale and efficiency reasoning to that announcement that we heard in Alberta. I think it makes a lot of sense. Now that you mention carbon capture, I wanted to talk a little bit about some of the US oil majors. I know they are heavily betting on carbon capture and storage technologies. So I'd love to hear from your perspective where you see innovation happening right now, and what type of investments are oil and gas companies making in different types of energy to diversify? Are there any particularly interesting, innovative developments that we should be aware of?

Andrew Logan:

Yeah, so it's an interesting picture, right? I mean, to me, part of what's so interesting about the sort of current landscape in the oil and gas sector is how different the approaches are of the large oil and gas companies. Even within the peer group of IOCs, if you look at what, say, Shell is doing versus BP versus ExxonMobil, they're taking fairly radically different approaches to the same problem, right? BP is really focused on building scale in clean energy and ultimately being a generator of electrons, which is certainly a new business for it, and there's lots of discussion around whether that's something a company with BP's background is good at. Shell is really focused more on leveraging its customer relationships and ultimately being a provider of sort of soup to nuts energy, clean energy, to big business. Of course, ExxonMobil is really focused on carbon capture and sort of what it sees as its engineering capabilities.

Andrew Logan:

I mean, carbon capture is an interesting problem, because I think, in a way, it doesn't need innovation so much as it needs a lot of capital. For capital to flow to that part of the sector, I think what we need is the right regulatory framework, which we're beginning to get in the US and elsewhere. But I think we still have a long way to go. I think on carbon capture in particular, where the innovation is happening and where it needs to happen is really on the sort of separation aspect of carbon capture. I think the sequestration part, we have down pretty well. Oil companies are really good at managing reservoirs and injecting fluids and gases and keeping them where they belong. The engineering and chemical challenge is how do you take a diffuse stream of CO2 and concentrate it in a way that is economically viable, that you can then put into a pipe and send somewhere to store underground?

Andrew Logan:

So we are seeing some interesting kind of movement on that side of things, on the chemistry, I would say, of carbon separation and capture, but I think still a long way to go for CCS to be a really big wedge in the low-carbon transition. That, I think, to me is the big question with carbon capture, is how big of a piece of the solution will it be? I think for companies like Exxon, it really has to be a big wedge, because they're depending on it being successful to sort of let the rest of their business continue to flourish. I think the only future in which the oil and gas still have a large role to play is a future where we're able to capture and sequester a lot of their emissions.

Nalini Feuilloley:

Great. So if we could turn back to just in general shareholder proposals, [inaudible 00:22:09] season, in tracking these proposals brought forth by investors to corporates at their AGMs related to environmental issues, we did see a spike in 2021 with regards to the number that actually garnered positive outcomes. Is this a trend that we can expect to continue, and should companies across these sectors expect more demand or information related to environmental topics?

Andrew Logan:

Yeah. Shareholder proposals, in a way, represent a failure of the engagement process. The goal of investors, at least most investors, is not to have to file these proposals in the first place, and if they are filed, the aim is to reach an agreement with the company involved before the proposal has to go to a vote. So while I'm quite certain that we'll see continued demand for disclosure and for improved disclosure on environmental and also on social issues and also increased interest in target-setting on issues like climate change, it doesn't necessarily mean that we'll see more votes. In fact, I hope we see fewer votes in the future because companies are willing to set these targets and improve their disclosure voluntarily.

Andrew Logan:

I think one clear message for companies from this year's proxy season is that investors really want to see greater ambition on climate change in particular. The proposals that got majority votes this year were much more ambitious in what they asked than proposals that we've seen in the past. Historically, shareholder proposals on environmental issues have only focused on disclosure, whereas this year, they actually asked companies to set targets, and those proposals asking for targets got majority support at a number of companies. So I think we are really seeing that investors are raising the bar for what they want companies to do, and they'll provide majority support to proposals that ask you as a corporation to do more. Ultimately, as we saw at ExxonMobil, they are willing to hold the board accountable if companies refuse to engage.

Nalini Feuilloley:

Yeah, I find that so fascinating that the year in which we see the most positive outcomes related to shareholder proposals brought forth on environmental issues is also the year in which you say that they were more ambitious and progressive versus disclosure, which in the past have not necessarily garnered the same amount of support. I find that really interesting.

Andrew Logan:

Yeah, and I think it also flows from the fact that the proposals filed asking for disclosure didn't, in the end, I don't think achieved the impact that investors were hoping for. I think investors filed a lot of proposals focused on disclosure because that was what they thought would get good votes, and they thought that improved disclosure will lead to action by companies, which is certainly true in some cases, but not true universally. So I think investors have run out of patience and are now just asking for what they think is needed, which in this case is targets.

Nalini Feuilloley:

Absolutely. No, I think that's a trend that I'd be interested to follow on a go-forward basis. So switching gears to boards in general, from your experience and looking at what happened with Exxon's situation that you described earlier, how prepared are these boards in general, not just Exxon's, to get to net zero? Do the directors have the right competencies needed to make these kind of business shifts that we want to see to get us to a place of net zero and alignment with the Paris Climate Accord?

Andrew Logan:

Yeah. I mean, the success of the effort at Exxon this year is really shining a light on the skills and competencies that a board needs to have if it's going to be positioned to help management navigate the low-carbon transition. I think what's interesting, as we see sort of conversations following the Exxon vote, is that what investors are looking for is not really a board with climate expertise, per se. They're not looking to have a scientist on every board. It's really about making sure that boards have, at the collective level, the experiences and expertise that will help prepare a company for a different kind of future. At Exxon, those gaps were around business turnaround experience. They were around clean tech and clean energy. They were around capital allocation.

Andrew Logan:

Those skills and experiences will be different at other companies and in other sectors. But I think a clear through line for all companies is that climate change and the response to it is changing the economy in profound ways, and boards need to change along with that. So I think by and large, boards are probably not prepared at this point for helping their companies get to net zero, but that's because the world is changing quickly. So I think we're going to see a lot of interest from investors in having conversations with nominating committees, not necessarily looking to run activist slates, because that's a lot of work and a lot of money and brings an adversarial tone to a relationship that may not be ultimately constructive. But I think there will be much more interest from investors in putting forward names of qualified directors who might bring some of these skills and fill some of these gaps at a wide range of companies.

Nalini Feuilloley:

Yeah, and I think it's a good thing, right? I think it's a good thing for corporate as well to be aware at the pool of talent that is out there in terms of filling these gaps on their board and trying to, like you said, get ahead of some of these expectations that are going to become table stakes in the near future.

Andrew Logan:

Yes. I mean, I think it's interesting. One of the real impacts of the Exxon campaign this year with the show that there are extremely well-qualified people out there in the corporate world who have impeccable skills as directors and also bring real skills around the low-carbon transition, and they're willing to serve on boards. So I think if companies start looking around, they're going to find that there are lots of people like this available to serve, and hopefully we'll see more of them joining boards at some of these companies.

Nalini Feuilloley:

Absolutely. So one last question for you. We've talked a lot about the risks to oil and gas companies related to climate change and how their practices are mitigating those risks for not only their investors, but for society as a whole. I think the flip side to climate change action is expectations around creating a just transition. I understand that Climate Action 100+, the initiative that we mentioned earlier on, their benchmark has added this just transition characteristic as one of their future KPIs. So I wanted to just see what your view was with regards to fitting in the concerns around the social impacts to local communities and employees in these sectors.

Andrew Logan:

Yes. No, I think just transition is an area that has not gotten nearly as much attention as it deserves from investors and from companies as well. The low-carbon transition is going to bring a lot of change and disruption, and some of it will be positive and welcome, new jobs created, new industries created, but a lot of it will hurt real people in real places. You look at a company like Shell that is going to go in the span of a decade from having 50 some refineries to having six. Then some of those refineries, it will sell to other operators, and they'll keep going, but many of them, it's going to close. That has huge implications for those workers, but also for the communities that those facilities reside in.

Andrew Logan:

I think that that issue has not gotten a lot of attention. People like to focus, understandably, on the positive story, on the opportunities, but we can't leave people and we can't leave communities behind as we're pushing to remake companies and sectors and the economy as a whole. So certainly there's a role for government in this process, and we need better support and better safety nets for workers and for communities. But I think companies and investors have obligations as well to bring their employees along with them on this journey and hopefully to bring the communities that they operate in along as well. So we're going to be building these expectations into how we engage as Climate Action 100, going forward, and how we score companies on their process.

Nalini Feuilloley:

That's so great to hear. It's so great to see it fit into a model like what Climate Action 100 has developed, because we need to have some balance with regards to this entire transition and what it means for all stakeholders. So thank you for that. I'm at the end of this conversation by way of questions. I don't know if you had any last thoughts or comments, but I really appreciate you taking the time to discuss some of these latest developments with me.

Andrew Logan:

Yeah, no, I mean, thank you for having me. It's been a really thoughtful and interesting conversation. So no, there's nothing else I would bring up. I mean, it's an endlessly interesting topic, at least to me, so I'm glad you're focusing on it.

Nalini Feuilloley:

Absolutely. Well, with that, thanks again for your time today, and to our audience, I hope you learned a little bit about the recent developments and the knock-on effects to the industry at large.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider, and we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

Disclaimer:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates, or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy, or security. This presentation may contain forward-looking statements. Investors are cautioned not to place undue reliance on such statements, as actual results could vary. This presentation is for general information purposes only and does not constitute investment, legal, or tax advice and is not intended as an endorsement of any specific investment product or service. Individual investors should consult with an investment, tax, and/or legal professional about their personal situation. Past performance is not indicative of future results.

Nalini Feuilloley Head of Responsible Investment, BMO GAM

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