If only carbon emissions could plummet as precipitously as share prices. The traditional oil majors have diminished as a proportion of the global equity universe, with some clean-energy stocks beginning to surpass them by market capitalisation, but of course this does not mean their environmental impact has been lessened in parallel.
Nor does it mean that we as investors should pay them any less attention, or that oil companies themselves should focus any less on the carbon intensity of their businesses. The problem of investors being exposed to CO2 in their portfolios is really only a subset of the far greater challenge of the greenhouse gases in our atmosphere.
At the beginning of 2020, around a third of global emissions were subject to a net-zero target; by the end of the year, it was 54%. Amid this fast-emerging consensus on the importance of achieving net-zero emissions, it is therefore encouraging to see a dramatic shift in the approach of the energy sector.
Not so long ago, we really had to push the industry to take these matters seriously. In 2015, we supported successful shareholder resolutions at BP* and Shell*, calling on these companies to improve their reporting on the risks and opportunities of climate change. In 2017, we commissioned research revealing that, while many energy companies publicly acknowledged the urgency of climate change, it was not clear how this influenced their plans to keep exploring for new oil and gas reserves. And then in early 2019, for the first time we put forward a shareholder proposal asking BP to explain how its strategy is consistent with the Paris Agreement on climate change.
Today, attitudes are different. All the UK and EU’s oil majors have now adopted net-zero targets, which include not just emissions from their own operations but also some or all of their products. We’ve engaged actively with many of these companies, notably BP, where we led engagements under the Climate Action 100+ collaboration.
Change is afoot beyond Europe, too. Last year, ConocoPhillips* in the US adopted a Paris-aligned climate risk framework to meet net-zero operational emissions. Occidental* is the first US oil major – and an erstwhile candidate for divestment under our Climate Impact Pledge – to include its products in a net-zero target. PetroChina* is also notable for having set net-zero targets for its operations.
We can’t credit such progress to our campaigns alone. There have been suggestions that the world’s oil demand may already have peaked during the pandemic, forcing explorers and producers to reckon with their role in the low-carbon future. Indeed, a little over a year ago we argued that oil and gas firms should think seriously about going ex-growth.
Yet persuading energy companies to embrace net-zero objectives is only one milestone on this journey – an important one, but not the destination. We must therefore continue to engage the industry as vigorously as ever on this issue. Many more details remain to be resolved: making sure targets are credible, for example, and making sure remuneration is structured to reward the execution of the strategy.
We will simultaneously continue to develop our modelling – and support third-party initiatives – to help bring greater scrutiny and transparency. Companies offering an annual ‘say on climate’ vote to shareholders may be a useful tool in this process.
We have long advocated engagement before divestment in the energy sector. While we understand the desire of some investors simply to walk away from hydrocarbons, an option that has become easier as the sector has shrunk, we have maintained that this may not be the best course of action – not least because it deprives investors of the ability to exert a positive influence and have the kind of impact on boards and management teams documented above.
We therefore remain committed to engaging oil companies on this topic that has the potential to define the course of the next century. We believe it is in the interests not just of their shareholders or even of investors in general, but of every single one of us.
*For illustrative purposes only. Reference to a particular security is on a historical basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.
 My colleague has also recently highlighted the growing awareness of climate risks among energy companies’ bondholders as well as shareholders.