By Irina Slav
Earlier this month, the Securities and Exchange Commission denied requests from ConocoPhillips and Occidental Petroleum to throw out shareholder motions for voting on detailed emission-reduction plans. The move sets a precedent in the industry, which might draw more activist investors with an ESG bend to the unloved industry. “This is a breakthrough in the fight against climate change. Finally, shareholders can vote about the elephant in the room: product emissions. All our experience in Europe has shown that only shareholders’ votes for concrete emissions targets will lead oil majors to change course,” said the founder of Follow This, the environmental activist investor group. It was a Follow This resolution that Conoco tried to throw out, arguing, among other things, that it was an attempt to micromanage the company.
Peter Davies, the founder and CEO of Jigsaw Trading, calls this argument ludicrous: “Regardless of which side of the global warming fence you sit, that argument is clearly ludicrous. The shareholders are the owners of the companies and global warming is one of the hottest, potentially most significant topics humanity currently has to deal with. The SEC simply denied their request to ignore their owners.”
Indeed investor pressure on Big Oil concerning emission disclosures and reduction plans has been intensifying steadily, not least because the wider ESG investment segment has enjoyed enormous interest from both institutional and retail investors. Big Oil might sound like the last industry environmentally conscious investors would want to venture into, but this may be misleading.
“Now that the SEC allows shareholder democracy again, responsible investors who divested in the past could return, because now they can vote for change,” Follow This’ Mark van Baal told Oilprice. After all, he said, Follow This came to prominence with the slogan “Change the world: buy Shell” as it sought to force the supermajors into becoming more responsible about the environmental impact of their operations.
The push has worked with European supermajors, but American Big Oil was – until now – more or less shielded from such pressure. But as the pressure increased, it could no longer be ignored, as evidenced by the SEC’s move to deny Conoco’s and Oxy’s requests. Industry observers immediately said the regulator’s decision would automatically extend to other U.S. energy companies as well. More shareholders, then, would be free to vote on climate-related motions and resolutions.
Not all agree that this will drive more investors into U.S. oil. According to James Bradford, president of Vivid Capital Management, for instance, the SEC decision will hardly result in an influx of new investors in Big Oil.
“While there is lots of potential for oil and gas producers to reduce their operational emissions, it is unlikely that investors gravitate to the sector in search of low emissions as ultimately the product that the companies produce is emissions generative,” he told Oilprice. “In other words, they are still likely to be viewed as exacerbating the global CO2 problem, albeit at a slightly reduced rate.” The oil industry could only become truly attractive to ESG investors if they put a lot more effort into cleaning up their operations.
This would be a challenge, though, as Richard Leaper, Vice President of Milestone Environmental Services, noted in comments for Oilprice. Leaper says that emission reduction across the oil and gas supply chain is already difficult: low-carbon alternatives to their business-as-usual do carry a “green premium.” This tends to fade over time, though, and it is not always the most cost-efficient option. Yet trying to reduce emissions from the use of their products is an even greater challenge for oil companies and may be a deterrent to new investors.
Even so, there may be an upside to investing in an oil industry that is being forced to become more responsible about emissions. Taken not by itself but together with what the Biden administration has done in the energy area since January, greater shareholder say over emissions could, in fact, provide new profit opportunities for investors, according to Jay R. Young, CEO of King Operating Corporation, a Dallas-based private oil and gas operator.
“Regulatory pressures on production have historically contributed to and even accelerated higher prices in energy outputs. It’s reasonable to expect that to continue in the near future,” Young told Oilprice. “We already have evidence of this trend due in part to regulatory decisions made within the last couple of months. It’s not just about cost increasing. It also represents an opportunity for profitability because the pricing can bear more margin thanks to the increasing wave of demand, and investors inevitably want a part of that opportunity.
Whether or not the SEC move to deny Conoco and Oxy’s requests to throw out climate resolutions will lead to an influx of ESG investors in the oil industry remains to be seen. Yet it is an essential step from shareholders’ perspective: until now, companies could ignore what were essentially the demands of people who partially own those same companies. Now, at least two of these will no longer be able to ignore these demands.
By Irina Slav for Oilprice.com