One of the ongoing debates in ethical investment is over divestment vs engagement. The divestment movement holds that it is immoral to profit from fossil fuels, and that investors should withdraw their funds. The engagement counter-argument is that by holding shares you get to influence the company and potentially change it for good. One of the big advocates for shareholder activism is the Church of England, much to the disappointment of many within the church.
The choice isn’t an either/or. They can actually work very well together: use shareholder activism to present your demands, and let the company know that you will divest if there is no change. This approach seems to have worked with Shell. Over the last couple of years there has been mounting pressure from investors to respond to the Paris Agreement, leading Shell to announce that it would try to halve the carbon footprint of its products by 2050.
Investors asked for something more specific, with a number of groups and coalitions working together to push the company to be more ambitious. Among them are the pension funds for the Church of England and another for retired California public employees, asset managers Robeco, Legal & General, and activist investors Follow This. It’s been organised by the instutional investor network Climate Action 100+, whose members control $32 trillion in assets. Shell’s CEO said just last year that he didn’t want to set carbon targets. But when that kind of money talks, you have to listen.
These groups have been ‘in dialogue’ with Shell over the last few months, and this month Shell announced an industry first: they would set carbon targets over 3-5 years. They would then link the target to executive pay, incentivising leadership on climate change right from the top.
This is an interesting development. It shifts the normal logic of executives seeking maximum profits in order to deliver shareholder value. The shareholders, for once, want something more than money. Or perhaps some of them recognise that the legitimacy of their investments is being eroded by the divestment movement, and they’re protecting their stake. Either way, it’s a significant move from Shell.
What are Shell going to do about it? They’re already investing in renewable energy. They’ve been trying to shift the dirtiest fossil fuels off their books, investing in gas and ditching tar sands. They’ve been adding EV charging points at petrol stations. But make no mistake – they’re still very much an oil company. They’re careful to talk about carbon intensity rather than absolute reductions in their impact. And in the introduction to their transition plan, they state that “we will continue to sell the oil and gas that society needs, while preparing our portfolio to move into lower-carbon energy, when this makes commercial sense.”
And that’s where investor engagement seems to hit its limits. Shell aims to match its carbon reduction plan to society, without recognising that as a fossil fuel company, it bears a lot more responsibility than that. It wants to wait for ‘commercial sense’, without acknowledging that cheap oil actively holds back the transition to lower carbon energy. It’s core product is the problem, and it cannot claim to be acting on climate change while still being an oil company.
So, a big step in the right direction from Shell, and a victory for the shareholder activism – but it’s not likely to settle that divestment vs engagement argument any time soon.