Activist Investors Force Shell to Act on Carbon Emissions

Royal Dutch Shell set the Intertubes abuzz last week when it became the first global company to propose linking executive pay to new carbon emissions targets. That made for some good headlines, but what really makes the announcement significant is the role of company's institutional investors.

Investor activism was the force motivating Shell to take this groundbreaking step. Now the question is whether or not the new policy will achieve tangible results -- if and when it goes into force.

Shell links executive pay to carbon emissions...maybe

To be clear, Shell's executive pay announcement is a proposal, not a done-and-done policy. It won't become official until a shareholder vote at the company's Annual General Meeting in 2020.

Even if it is approved, the new policy may not necessarily provide significant motivation for executives to push the envelope on carbon emissions.

As it exists now, the proposal is still simply a pledge to include an undefined "Net Carbon Footprint-related measure" into a package of other performance measures. The specifics have yet to be nailed down, and that could be a problem.

The 2020 meeting date leaves plenty of time to negotiate the performance package into a platform that lacks any significant motivation to reduce Shell's carbon footprint.

For example, the "other measures" included in the performance metrics could be weighted to counterbalance any significant negative impact on pay, should executives fail to meet the company's carbon emissions goals.

Institutional investors take action

That's the worst case scenario. The good news is that Shell has already outlined an "energy transition" strategy to sustain itself as the world moves to a low carbon economy. Partnering with its institutional investors, instead of fighting them, is part of that strategy.

In a press release announcing the new proposal, Shell forthrightly states that the new executive pay policy is the direct result of "engagements with shareholders and other relevant stakeholders." The company also expects to stay engaged with shareholders as details of the proposal are worked out:

The final plan design is being discussed with shareholders, including details relating to the appropriate remuneration structure and appropriate measures and metrics.

The institutional investors behind the new policy are not hard to find. The Shell announcement was expressed in a joint press release with the organization Climate Action 100+. Under the CA100+ umbrella, Robeco and the Church of England Pensions Board spearheaded the engagement process. Other CA100 members involved in the process were Eumedion, the European Institutional Investors Group on Climate Change, APG (acting for ABP), the Environment Agency Pension Fund and the Universities Superannuation Scheme.

As for whether or not the executive pay plan will have any real teeth, this statement from the Church of England pensions board makes it clear that CA 100+ expects to play a hands-on role:

“Investors like ourselves will be able to track Shell’s performance through the Transition Pathway Initiative (TPI), an independent academic tool at the London School of Economics which is supported by funds with $11 trillion in assets..."

Climate Action 100+

Climate Action 100 demonstrates how institutional investors are assimilating the central message of green investor groups like Ceres: human induced climate change is creating new risks now, it is a significant future risk -- and investors need to act aggressively when corporate leaders fail to plan for the long term.

In a press statement, Ceres CEO and President Mindy Lubber, who co-chairs the CA100+ global steering committee, emphasized that the Shell agreement is just the beginning of a broader effort:

“The Shell agreement is an important step in the right direction as it ties executive compensation to the company’s efforts to reduce greenhouse gas emissions, including emissions related to product use. This commitment demonstrates the power of collective global investor engagement. Climate Action 100+ investors will now use the commitment to raise the bar for the oil and gas industry as a whole.”

Moving the climate emissions needle on an entire industry is an ambitious undertaking, and CA100+ has an additional tool in its toolkit.

Rather than focusing narrowly on Shell's carbon emissions, CA100+ has also enlisted the company to throw its weight against trade and lobbying organizations that are not in accord with investor goals on carbon emissions. Here's the Church of England again:

“Shell have also made important commitments to review the corporate climate lobbying of trade associations in line with the investor expectations we had developed with Sweden’s AP7 and the Institutional Investors Group on Climate Change. The review will be published early next year and Shell should be applauded for this step.”

If that review sparks a shift in corporate lobbying dollars, it is all but certain to have an impact on the willingness of government agencies to set goals and accelerate change.

Shell itself has a notorious track record in that regard. Last year evidence emerged that the company was well aware of the need for strong action on climate change and the role of natural gas in greenhouse gas emissions decades ago. Nevertheless, according to a 2015 report in The Guardian, Shell was instrumental in weakening the 2014 EU targets for renewable energy and energy efficiency.

Initial talks involved the idea of binding targets, but that was watered down by the time the final deal was announced.

The Guardian article ran under the headline "Shell lobbied to undermine EU renewables targets, documents reveal" with the subheading "Weak renewable energy goals for 2030 originated with Shell pitch for gas as a key technology for Europe to cut its carbon emissions in an affordable way."

According to The Guardian, Shell lobbyists made their pitch for natural gas as early as 2011. As a result, binding targets for renewable energy and energy efficiency did not make it into the final EU agreement. Here's the key passage:

At the 2014 meeting, heads of government agreed a 40% overall target for the bloc’s emissions cuts, but in the run-up to the deal there had been disagreement between member states about how best to achieve that.

The UK and others had resisted binding targets for individual member states on energy efficiency and renewable energy and these did not make it into the final agreement. Proponents of renewable energy say this was a key missed opportunity to give a strong signal to investors that the EU was serious about clean energy.

Yes, what about natural gas?

That bit about natural gas should send up some red flags. In the recent past, natural gas was touted as a "bridge fuel" to a low carbon economy, with the expectation that transitioning from coal and petroleum to natural gas would help curb overall carbon emissions.

However, this scenario is proving to be a false hope. Methane, the primary ingredient of natural gas, is a powerful climate change agent. Natural gas does burn "cleaner" than coal and oil, but a growing body of evidence indicates that methane leakage throughout the natural gas supply chain is playing a role in global greenhouse gas emissions.

It remains to be seen to what extent Shell will continue to lean on natural gas as it diversifies into a more sustainable portfolio. The company's new "Sky" scenario describes pathways for decarbonizing the global economy through electrification, but that includes at least a nominal role for natural gas through 2070.

In the meantime, Shell has a long way to go if it is serious about recasting its image. The company's web page for its U.S. business emphasizes a continued focus on fossil fuels, and its online media gallery directs journalists to a group of flickr.com accounts populated almost exclusively by fossil projects. The lone exception is a small album on biofuels.

Shell is beginning to ramp up its renewable energy portfolio, though. Here in the US, the company's investment in wind power has yet to scale up to the gigawatt level, but one recent development with significant implications for solar power is Shell's acquisition of the Tennessee-based solar developer Silicon Ranch.

Another pair of U.S. acquisitions involves the microgrid and net zero buildings specialist GI Energy and the energy storage company Axiom. Technically speaking, Axiom's technology is a source neutral load-shifting solution (it is aimed at reducing refrigeration costs), but the decarbonization angle will grow will factor in as more clean energy enters the grid.

Image credit: Roy Luck/Flickr.