Investors worried that the oil and gas major’s backtracking on climate may “set precedent” for the sector.
BP’s backtracking on climate commitments raises questions on how much weight can be placed on oil and gas firms’ transition plans, the extent such plans are grounded in science and the “direction of travel” for asset owner engagement, Patrick O’Hara, Director of Responsible Investment at UK pension scheme LGPS Central, told ESG Investor.
The oil and gas major plans to scale back its ambition on greenhouse gas (GHG) emissions by 2030, prompting some of the UK’s largest pensions funds to vote against the reappointment of its Chairman Helge Lund at the company’s AGM today.
“BP was arguably the leader of the pack in terms of their climate ambitions and its transition plans,” O’Hara said. “I didn’t pick up on any warning signs and I’m not aware of any dialogue with the asset owner community.”
LGPS Central and other schemes pre-declaring their opposition to Lund are sending a broader message to the sector about its responsibilities to shareholders.
“I don’t think Nest, the Universities Superannuation Scheme, Brunel Pension Partnership, or Border to Coast were aware that this decision was coming,” he added. “BP had been very willing to be transparent and to enter into dialogue with investors.”
O’Hara underlined that the decision by BP may set a precedent, impacting climate-related investor engagements with high emitting companies.
Setting a precedent
In February, BP cut back on its industry leading commitment to reduce its oil and gas output by 40% by 2030 compared to 2020 levels which received 88% shareholder approval at the firm’s 2022 AGM. The company is now just targeting a 25% reduction.
Colin Baines, Stewardship Manager at Border to Coast, said the pension partnership is “concerned” about BP’s backtracking on its climate targets which received an “overwhelming mandate” when put to a shareholder vote last year.
O’Hara said the revision seems to be “based on modelling of what demand would be at this point in time rather than any kind of deeper analysis or consideration of their climate plan”. He added that BP have also rowed back on plans to sell certain carbon intensive assets.
“I think the concern is this now sets a precedent,” O’Hara added. “Stepping back on a transition plan that had been approved at an AGM, I think that’s significant.”
Investors have actively engaged when oil and gas companies submit transition plans and put them to a vote at their AGMs, he said.
O’Hara said the decision by BP to backslide on climate represents a failure of governance at the company.
LGPS Central is one of five pension schemes, alongside Nest, Border to Coast, Universities Superannuation Scheme and Brunel Pension Partnership, which oversee a combined £244 billion (US$304 billion) in assets that will all be voting against the reappointment of its Chairman on Thursday.
“If you have concerns around corporate governance matters ultimately it’s the chairman that we feel should be held responsible,” O’Hara added.
Lindsey Stewart, Director of Investment Stewardship Research at Morningstar, said: “There’s clearly very deep frustration on the part of the pension funds who intend to vote against Helge Lund’s re-election as chair. Many shareholders are dissatisfied with BP’s actions to adopt less ambitious net– zero goals without offering shareholders the opportunity to vote again on the topic.”
O’Hara said LGPS Central will also vote against BP’ CEO Bernard Looney due to the lack of climate-related disclosure in its reporting. “In the absence of a vote on the transition plan, we think a vote against supporting accounts is appropriate. In the absence of a vote on the transition plan, there’s an inevitable response from investors as to look to where they can express concerns,” he added.
O’Hara highlighted that he is concerned the move by the oil and gas giant is a “response to short term opportunities” brought about by the Russian invasion of Ukraine and the impact that has had on the energy markets, leading to record profits for oil and gas companies like BP.
BP posted a record US$28 billion in profits in 2022, while fellow oil giants Shell made US$40 billion and Exxon Mobil’s profits totalled US$56 billion.
“My concern is that short–term considerations are outweighing longer term considerations,” said O’Hara. “BP is already posting healthy profits and paying healthy dividends. Do they really need to do this? Its opportunistic in that sense.”
He also said that BP’s actions call into question the extent to which transition plans are science–based or take full account of current energy market modelling.
“It’s important that we understand the direction a company is going in on climate change and how seriously they’re taking it,” O’Hara said. “The best indication of that is what they’re doing now, and what plans and targets they’re putting in place. So if you don’t have confidence in that then you don’t necessarily have confidence in the long-term transition of the company.”