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Oil companies: On “green” change

Any CEO of a large oil and gas company needs nerves of steel these days. For one thing, the pandemic wrecked oil multinationals’ income statements last year: the five largest publicly traded (Western) petroleum groups – Royal Dutch Shell, BP, Exxon Mobil, Total and Chevron – alone registered combined losses of almost USD 60 billion in 2020. Moreover, pressure from investors is steadily mounting. They are increasingly calling for climate risks to be taken fully into account in corporate strategies and for CO₂ footprints to be drastically reduced, preferably sooner rather than later. Aviva, one of the biggest British asset managers, even threatened in January to use its “ultimate sanction” of fully divesting its shareholdings and placed 30 companies in the systemically critical oil, gas, mining and utilities sectors on its watchlist. The oil multinationals issued a response, at least on paper or in investor presentations. Royal Dutch Shell, BP and Total announced that they would cut their greenhouse gas emissions to net zero by 2050. But getting the world’s largest oil and gas groups in shape for the unquestionably necessary energy transition is akin to braking an oil supertanker to a standstill on the high sea – it takes quite some time.

Because even if “green” momentum is currently swelling in policymaking circles (and among investors), the reengineering of oil multinationals’ capital-intensive business models cannot keep pace with it. For, after all, money for investments in businesses with a more promising future – be it renewable energy or the storage and distribution of electricity – first has to be earned. And this is where those companies’ traditional business, which is mainly the production and trading of petroleum and natural gas, continues to generate the necessary cash flow. Provided that the price of crude oil holds fairly steady, this core business remains very profitable and forms the basis for billions in dividend payouts.

Like braking an oil supertanker to a standstill on the high sea.

These big corporations have to dare to attempt a balancing act in order to please all stakeholders. Some of them are braver than others in this endeavor. What’s not surprising, in any case, is that some industry giants like Royal Dutch Shell continue to allocate around 60% of their investment budget to their traditional oil and gas exploration and production business.

 

Divestments won’t solve environmental problems 

Sustainable investing has numerous facets to it. Strictly ruling out investments in “brown” companies is the most radical option. But divestments, particularly in the oil and gas industry, won’t solve underlying environmental problems because while Western oil multinationals are under acute observation by the public eye, their counterparts in Russia, China and the Middle East aren’t. If BP and cohorts were to exit their current core business overnight, other oil and gas companies could step in to fill the resulting vacuum, which wouldn’t help our environment. And let’s not forget that petroleum products don’t just fuel transportation, but have countless other uses and are not easy to substitute everywhere.

We therefore believe that other ESG strategies are preferable to blanket exclusions. One possibility is to favor best-in-class companies that are pursuing the most compelling transformation strategies. Actively executing shareholder voting rights and engaging directly with the management of companies (active ownership) also rank among the better alternative courses of action to take.

 

 

This article was originally published in the “Green Economy” special of the Handelszeitung on 01.04.2021.

The original publication in German is available here (login required).

 

Oliver Hackel, CFA Senior Investment Strategist

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