Oil Majors’ Windfall Casts Shadow on Climate

As BP and Shell post bumper profits from oil and gas production, their commitment to the net zero transition has come into question.  

“Cooked, choked and taken to the cleaners” – this was the angry reaction from British environmentalist Chris Packham to oil giants BP and Shell announcing their highest profits ever as UK energy bills surge and catastrophic global warming looms.  

Investors, on the other hand, will likely be pleased with the results. They’ve enjoyed £12 billion in dividends and share buybacks since Q4 2021 from BP, which reported £23 billion in profit yesterday.  Shell, which made £32 billion in profit last year, distributed £22 billion in dividends and buybacks over that period. 

But there are rumblings that the mood is shifting amongst some influential investors. Aviva Investors, said yesterday that it will look “unfavourably” on attempts to protect profitability and returns through disproportionate transfer to stakeholders, including customers.  

It’s hard not to assume the eighth largest investor in the UK is alluding, at least in part, to the fortunes of energy companies as households struggle to pay fast rising bills in a cost-of-living crisis.

Social issues notwithstanding, oil majors have long been in the sight of climate-conscious investors wanting them to transition to a low-carbon business model. For some this means large-scale emissions reductions, for others a move to renewable energy, such as that implemented by Danish energy firm Orsted.  

BP’s results yesterday won’t provide much comfort. It said it will drop its 2030 goal of cutting oil and gas production from 40% to just 25%, 10% of which will come from its divestment of Russia’s Rosneft.  

Tessa Khan, Executive Director at climate NGO Uplift, called the news “an unequivocal reminder that this is an industry driven by profit and clinging to incumbency”.  

Underscoring this, BP CEO Bernard Looney is reportedly disappointed in the returns from renewable investments and plans to pursue a narrower green energy strategy. Shell CEO Wael Sawan has also indicated a cautious approach to renewables investment, saying its energy transition will be “balanced” and it “intends to remain disciplined while delivering compelling shareholder returns”.  

Managing the decline 

Mark Campanale, Founder of climate think tank Carbon Tracker, says he appreciates the strategic reasoning behind these comments. An oil and gas company, dependent on commodity price fluctuations, is making huge amounts of money now, he notes.  

“They are being asked as CEOs of companies to swap a very high margin, very lucrative business model [oil and gas] for a very low margin business model, which is renewables.”  

Hard figures vary, but in general experts say that internal rates of returns (IRRs) – which measures an investment’s profitability – are around 15% to 20% on hydrocarbons and around 5% to 10% for renewables.   

The large difference in the economics between oil and gas and renewables means rather than diversifying, fossil fuel companies should realise they are in long-term decline, says Campanale.  

Carbon Tracker explored this thesis in a report released last December 2022 which says “oil and gas companies will need to wind-down the legacy parts of their businesses, while choosing what to do with earnings that would historically have been reinvested in new production”. 

Commenting on this, Campanale says: “You don’t invest in any more new projects. And instead, all the cash you generate, you pay out and you think of yourself as a self-amortising bond that pays out a coupon until it liquidates itself. And there’s no more. I think that that has far more logic and appeal to both the investors and the companies.”  

The industry is far from this reality however, with Carbon Tracker regularly reporting on huge spending on new oil and gas production that if matched by demand will push global temperatures beyond 2.5°C. 

Lagging shareholder pressure 

It’s not surprising that no oil major is Paris-aligned, according to the Climate Action 100+ (CA100+) Net Zero Company Benchmark which assesses large emitters on their net zero transition.  

The massive engagement programme on net zero led by CA100+ members has had a mixed reaction from market observers with many saying it needs to be more ambitious – the news from BP and Shell, not to mention other oil and gas firms globally, over the past five days will only add pressure.   

ESG Investor contacted the lead investor engagers, as part of CA100+, for BP and Shell asking for comment on recent developments. Legal and General Investment Management (LGIM), Federated Hermes EOS and PGGM did not respond to enquiries. Fellow Dutch asset manager MN declined to comment. 

Mark Van Baal, Founder of climate pressure group Follow This, feels CA100+ has slowed progress on climate action in the past, but he is optimistic with MN and PGGM now acting as lead engagers with Shell. Both investors voted in favour of a resolution tabled by Follow This at Shell last year calling for the group to pledge more stringent short-, medium- and long-term emissions targets, he says. 

Follow This’ Shell resolution won just 20% of the vote, as compared with 30% a year earlier – a similar downward trend was seen in ‘Say on Climate’ votes held at other oil majors. Van Baal predicts a “tough year”, reacting to BP’s results. “We have to regain momentum, or these companies will keep on saying they can continue with oil and gas because the majority of shareholders want them to do that.” 

He says recent news that Shell is subject to a US Securities and Exchange Commission (SEC) complaint that it overinflated its renewable investment spend by adding gas signals it wants to be an oil and gas major as long as possible and only invest a small percentage in renewables.  

International NGO Global Witness, who filed the complaint, says Shell is misleading investors scrutinising its energy transition efforts. Shell in response has said its “renewables and energy solutions” are defined as including gas-related activities.  

Barbara Davidson, Head of Accounting, Audit and Disclosure at Carbon Tracker, says: “It would be better for investors if Shell (and other O&G companies) separated out renewables from gas in its segment reporting.” 

Shell’s Sawan acknowledged that the firm’s complex structure could cause confusion in a recent media call, when challenged by reporters suggesting that the firm’s investment in renewables was far lower than the headline one-third figure flagged in its recent results statement. 

However, the EU defines gas as a transitional fuel under its sustainable finance taxonomy.

Anna van Niekerk, Legal Fellow at Global Witness, says the International Panel on Climate Change, and the International Energy Association, which has not been a radical organisation on these issues, have said fossil fuels need to be phased out, including gas.  

“Regardless of what it is being called in the EU taxonomy. We do not think gas should be included in a segment called renewables and energy solutions”.  

With BP also including gas in its reporting on low carbon, the debate looks set to continue.   


The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2023 ESG Investor Ltd. Company No. 12893343. ESG Investor Ltd, Fox Court, 14 Grays Inn Road, London, WC1X 8HN

To Top
Share via
Copy link
Powered by Social Snap