Investing in Climate Change

Report Asks How Shareholder Engagement Can Support Paris Agreement Goals


The Paris Agreement has called for reining in greenhouse gas emissions to limit the rise in the earth’s temperature and mitigate climate change, but so far the global economy remains largely dependent on fossil fuels. One recent study estimated that if the world does not begin transitioning to renewable energy by 2035, meeting Paris Agreement goals will be virtually impossible. In this scenario, shareholder engagement aimed at putting oil and gas companies on a path toward sustainable energy production could take on new urgency.

Shareholder advocacy organization As You Sow is taking this challenge seriously. As You Sow’s recent report, 2020: A Clear Vision for Paris Compliant Shareholder Engagement, outlines a plan for leveraging shareholders’ power to work with oil and gas companies to reduce greenhouse gas emissions.

Shareholders Have Successfully Called Attention to Climate Change

Shareholders have filed numerous resolutions related to climate and sustainability since 2012. In that time, 24 oil and gas companies have received a total of 160 filings addressing a range of climate-related concerns. According to As You Sow, various resolutions have asked companies to curb methane emissions, report on greenhouse gas emissions targets, and report on climate change risks and stranded assets. They’ve also urged companies to nominate a board member who is knowledgeable about climate change and stop linking executive pay with oil reserves.

Some shareholders have seen small but promising results. For example, ExxonMobil agreed to improve its climate risk reporting in 2017, and several other companies have disclosed information about climate risks. Some companies have also reconsidered executive compensation incentives or adopted targets for reducing greenhouse gas emissions in their operations. Still, there’s one step that has so far eluded shareholders—convincing companies to set emissions targets for the full life cycle of their products.

The Risks of Ignoring Carbon Constraints

According to As You Sow, oil and gas companies persist in making capital expenditures for exploration and development of reserves, even though the potential emissions would almost certainly cause warming above the limits set by the Paris Agreement. Continuing production as usual could have serious consequences for the environment and the economy, and regulators may step in and attempt to prevent that scenario.

At the same time, oil and gas companies contend that continued exploration is needed to keep up with growing demand for energy. The US Energy Information Administration projects that global energy consumption will go up by 28% by 2040 and that use of both petroleum and natural gas will rise during that period.

Nevertheless, some countries have passed regulations in an attempt to reduce greenhouse gas emissions. China has announced plans to ban internal combustion engines, and the United Kingdom and France have said that by 2040, they will prohibit the sale of new petrol- and diesel-consuming vehicles. If other countries follow suit, oil and gas companies could find themselves burdened with excess reserves.

As You Sow points out that fossil fuel stocks have underperformed the S&P 500 over the last five years and argues that the market is sensitive to this risk of stranded assets. A test of the New York State Common Retirement Fund’s portfolio found that if it had divested from fossil fuel stocks 10 years ago, it would have gained $15.6 billion in potential returns. That said, it’s important to note that As You Sow’s research doesn’t explicitly link the underperformance of fossil fuel stocks to increased shareholder engagement or the production of fossil fuels. Past performance information doesn’t guarantee future trends, especially given the influence of other industry and corporate factors on firm performance.

Shareholder engagement successes show that investors do have the power to raise awareness.

As renewable energy becomes more affordable and feasible to deploy, the shift away from fossil fuels could accelerate. Oil and gas companies could anticipate this risk by investing in renewable energies. In 2018, large oil producers invested 1 percent of their budgets in renewable energy. Some see this as a path for oil producers to become a crucial part of a clean energy solution, while others claim that these investments are too small a part of oil and gas companies’ operations to significantly offset climate risks.

In addition, As You Sow’s report notes that uncontrolled climate change poses risks to the global economy as a whole. Droughts, severe storms, and rising temperatures are predicted to cause crop failures, drinking water shortages, and floods of coastal areas—all or some of which could disrupt supply chains and destabilize political regimes, destroying value in many sectors.

A Unified Strategy for Shareholder Engagement

As You Sow’s approach is not the only possible strategy for mitigating climate change. For example, it’s been suggested that purchasing carbon reserves and then holding on to them and refraining from developing them could be a more effective method for reining in emissions than trying to persuade producers not to drill.

Some have also suggested that overly drastic warnings and proposals to counter climate change could be counterproductive if they make people feel helpless and apathetic. Economist Paul Romer has commented, “Many people think protecting the environment will be so costly and so hard that they just want to ignore the problem or they want to deny it exists” and recommends a more optimistic attitude toward climate policy.

And not everyone agrees that shareholder engagement on climate is worthwhile. A study sponsored by the National Association of Manufacturers found that climate-based shareholder resolutions do not affect a company’s equity value, suggesting that climate-based resolutions do not mitigate risks or bring meaningful information to light. According to this view, shareholder engagement is more focused on political statements and does not have a sound basis in protecting value.

However, As You Sow’s report advises that shareholders’ impact could be greater if they were to present a unified demand rather than a patchwork of different requests. As You Sow recommends that shareholders join together and back a single resolution asking for a Paris Agreement–compliant business plan.

This plan would have three components:

  1. Companies would take stock of their reserves and capital expenditures in light of global carbon constraints.
  2. Companies would examine scenarios consistent with the Paris Agreement and address the management of assets that are likely to become stranded.
  3. Companies would commit to ending all capital expenditures that would drive emissions beyond the limits set by the Paris Agreement.

As You Sow encourages investors to push for the adoption of sustainable business plans over the next two proxy seasons, with the goal of achieving commitments by 2020. As You Sow predicts that if all concerned investors voice a common demand for Paris Agreement–compliant business plans, they can help oil and gas companies to take action on climate issues. That could put companies on a path toward sustainability as carbon demand falls, allowing them to continue generating profit for shareholders and contributing to a safer future for the planet.

Stay in the know on the latest in Investing in Climate Change.

Explore more of our latest articles on Investing in Climate Change or subscribe today to receive personalized articles in your inbox every month.

Subscribe View all Investing in Climate Change Articles