Industry

Shell U-turn Prompts Closer Investor Scrutiny

Writing is on the wall for oil and gas majors, as investors go public with climate-related concerns. 

Investors are increasingly prepared to publicly challenge oil and gas companies on their lack of climate-related ambition by co-filing shareholder resolutions, an expert has told ESG Investor. 

Earlier this month, 27 institutional investors with €4 trillion (US$4.6 trillion) in AUM co-filed a climate resolution at Shell, calling for the European oil and gas major to align its medium-term Scope 1 to 3 decarbonisation targets with the Paris Agreement. The investors collectively own around 5% of Shell’s stock.  

“More investors are beginning to use their voting power,” said Mark van Baal, Founder of activist group Follow This, with whom the investors filed the resolution. “Whenever we have previously asked investors to co-file with us, the answer was always no, as this was considered too big an escalation. The fact that 27 investors are now ready to escalate and go further is a sign of the times, as 2030 gets closer.”  

One of the co-filing investors was UK pension scheme Nest, which had an ongoing engagement with Shell on climate and voted against its management in 2023.  

“In previous years, energy companies appeared to be heading in the right direction, even if there were only marginal changes,” said Katharina Lindmeier, Senior Responsible Investment Manager at Nest. “But last year saw a reversal of targets, which we hadn’t really seen before.” 

Following the reaction of oil and gas firms like Shell and BP to the energy crisis and the subsequent rollback in climate ambition, Nest is now prepared to be more forceful and escalate its engagement efforts, she explained. One of the ways it has chosen to do so is by co-filing the Follow This climate-focused shareholder resolution. 

Last year, Follow This filed a similar resolution at Shell, receiving support from 20% of the company’s shareholders. 

“We are not asking for anything radical,” said van Baal. “We are only asking for Paris-aligned targets, which is a fair ask.” 

The Follow This resolution for the 2024 proxy season urges Shell to take more ownership of its Scope 3 emissions, which refers to all indirect emissions that occur across the upstream and downstream activities of an organisation.  

When Nest engaged with Shell on the issue, the group argued it had no influence over the demand and use of its products, according to Lindmeier. “While we do understand the challenges around demand, we don’t agree that Shell has absolutely no control over this,” she noted. 

Shell is due to publish the first update to its 2021 energy transition plan this year, which will be brought to an advisory vote at its 2024 annual general meeting (AGM). 

Hold or fold? 

While some investors have chosen to draw a line in the sand and divest from fossil fuels, both van Baal and Lindmeier continue to see the value in remaining invested and engaged. 

“Selling your shares will have no influence over the oil and gas company,” said van Baal. “It may clean up the portfolio, but it doesn’t clean up the world.” 

Nest also views climate change as a systemic risk. Even if the pension scheme divested from all its oil and gas holdings, emissions from those companies would continue to have a negative impact on the planet and on Nest’s beneficiaries, Lindmeier said. 

“We want to stay invested and engage with the companies, but we do have a potential end point [for divestment] in sight, which is considered on an individual company basis,” she added. 

Last year, Adam Matthews, Chief Responsible Investment Officer at the Church of England Pensions Board (COEPB), and former Climate Action 100+ engagement lead for Shell, argued that investor engagement with the oil and gas sector was at a crossroads. He suggested that more investor focus be placed on engagement efforts with the demand-side to reduce dependence on those resources.  

The COEPB subsequently announced that it would divest from Shell and other oil and gas companies that had failed to show sufficient ambition to decarbonise, in line with the goals of the Paris Agreement. 

“[Divestment] is the easy way out – it’s a one-time signal,” said van Baal. “At the last AGM, when the Church of England explained that it would sell its shares, the Shell board rightfully responded that it was surprised, but I doubt any board member would lose sleep over the divestment of shares. Boards are happy to have less critical shareholders.” 

The COEPB has previously voted in favour of Follow This resolutions filed at Shell. 

Climate-focused engagement with the demand-side alongside the supply-side is becoming an increasingly important part of driving whole-system changes, Lindmeier insisted. In that spirit, Nest has been involved in the Net Zero Engagement Initiative, launched in 2023 by the Institutional Investors Group on Climate Change. The initiative aims to extend the reach of investor engagement beyond Climate Action 100’s company focus-list to big clients of the fossil fuel industry, which are among the biggest contributors to the global demand for carbon-intensive products.  

“We don’t see supply and demand as completely disconnected,” Lindmeier said. “Having conversations with both sides helps us to have more productive engagements, as we better understand the [transition-related] challenges they are facing.” 

Empire strikes back 

Meanwhile, some oil and gas majors are beginning to push back against climate-focused shareholder resolutions. 

Exxon has filed a complaint in a Texas court in a bid to prevent a proposal co-filed by Follow This and Arjuna Capital from going to vote at its AGM in May. Exxon argued that these repeated challenges did not serve investors’ interests or promote long-term shareholder value. 

“We don’t know why ExxonMobil took this remarkable step,” said van Baal. “Maybe they see the writing on the wall.” 

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