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Take Five: What a Waste of a Windfall

A selection of this week’s major stories impacting ESG investors, in five easy pieces.

Oil majors are digging their heels in against windfall taxes, but their case would be stronger if they had a clearer and cleaner plan for putting their profits to work.

If the capex fitsRecord profits announced this week by oil and gas firms reopened the debate about windfall taxes. The profits are certainly staggering, with Shell recording the highest profits in its history and ExxonMobil’s US$55.7 billion profits – doubling 2021’s figure – described as “outrageous” by the White House. The latter recently launched legal action against Europe’s plans for a windfall tax. BP CEO Bernard Looney also reignited the debate about the pace of energy majors’ net zero transition by contrasting returns on the firm’s renewables investments with those from its more traditional activities, as it looks to maximise profit to shareholders. New Shell CEO Wael Sawan is also seeking to please investors with a 15% dividend increase, but was pressed in a media briefing about whether he was acting in their long-term interests. Despite the record profits, Shell is sticking to last year’s capex range of US$23-27 billion, with around a third going to renewables, a figure contested by reporters, suggesting the true figure was closer to 14%, noting that gas capex was being lumped in with expenditure on wind and solar. Sawan blamed Shell’s structural complexity for any confusion, insisting “sustainability is at the core of our energy provision” and that the firm had made a “real pivot to energy transition investment”. Claiming to be pursuing “the right balance” in capex, he nevertheless admitted the “world is not moving fast enough” and that “significant change” in government policy was required. One could hardly disagree. But already the latest IEA World Energy Outlook is predicting peak fossil fuel demand in the mid-2030s, well within the 10-15 year investment horizon cited by most energy firms. As Carbon Tracker CEO Mark Campanale noted recently: “There’s going to be an awful lot of oil refinery capacity the world doesn’t need in a 1.5°C world, that’s going to have to be written down.”

Carbon markets’ culture clash – Is the problem with carbon offsets as much cultural as scientific? A number of recent press exposés have challenged the claims of those who create and trade carbon credits, typically suggesting they over-estimate the carbon sequestered or the acreage of forests protected. Putting a stop to such fraud also potentially calls a halt to a key channel for finance flows to the Global South. This would be bad news for the financial markets professionals seemingly eager to use their market-making expertise to address systemic environmental risks, as well as governments and communities in Africa, Asia and Latin America urgently seeking funds to protect themselves from such risks. According to experts in the field, greater communication and cooperation between these two parties, currently barely on speaking terms, would help to ensure the projects that generate the credits genuinely make a difference on the ground while also removing the basis for scepticism. This is much needed at a time when nature-based solutions are being much touted to address nature and climate crises simultaneously.

Fast track to court – Lawyers have been opining this week on the implications of the Delaware Chancery Court ruling in a case brought by shareholders against David Fairhurst, formerly Chief People Officer at fast-food group McDonald’s, following allegations of sexual harassment against ex-CEO Steve Easterbrook. The ruling essentially puts corporate officers on the same level as board directors in terms of responsibility for oversight of a company’s operations and culture, with one lawyer telling the Financial Times it would increase pressure on boards and management “to have systems in place to detect bad conduct and then do something about it”. While the flood of litigation predicted by other legal experts remains to be seen, it seems likely that longstanding investor calls for greater transparency on workplace policy and process will only increase during this year’s AGM season.

Workers right – India’s Adani Group, which invests in both fossil fuels and renewable energy, has long vexed investors and index providers. But its latest travails stem not from environmental but governance concerns, with fraud allegations calling a halt to a US$2.5 billion share sale, with the firm also losing US$92 billion of its market cap. While regulators explored the allegations and banks froze funding lines, most telling perhaps was the detail that Adani employees “bid for barely half the shares reserved for them” in the planned share offer.

Home truths – The need for adaptation finance is quite rightly focused on the low-lying island states and EMDEs most exposed to the physical impacts of climate change. This week, the UK’s Climate Change Committee provided a timely reminder of the need for comprehensive national adaptation plans for all economies, putting the cost of UK preparations at £10 billion per year at the least. Adding to existing pressure on the UK government for stronger climate leadership, the committee’s recommendations included clearer resilience mandates for regulators and action to lower barriers to private investment in adaptation.


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