- $1.4trn of oil and gas assets will be stranded by 2036, but pensions like USS continue to invest in Shell in the hope active engagement works.
- Already this year, Shell has spent $1.98m lobbying for oil and gas in the US, indicating where its priorities lay.
- Shell admits that 2050 net zero targets are outside their “planning period”. So, what justification do asset owners have in thinking they are on target?
When is enough, enough? For the Church of England (CoE), it’s after half a decade of failed engagement. At the end of June, an exasperated Church pension board and the Church Commissioners exiled oil conglomerates Shell and BP from their portfolios.
“We’ve given them ample time,” says Olga Hancock, head of responsible investment at the Church Commissioners for England. The engagement had been “very long, well thought through, and thorough…There’s not much more we could have done.”
In 2018, the Church set a five-year deadline to divest from fossil fuel companies not aligned to the Paris Agreement. Shell is one of 31 that has been ousted, as the investment bodies do not believe it will meet its goals.
Just £1.35m was divested from Shell, a modest sum. But the signal it sends around the world is hopefully not so modest.
“The soft power aspect of it is incredibly significant,” Hancock elaborates. As a spiritual leader, the CoE has influence. And when the church condemns a stock, it gets noticed. “Normally what we do, other investors and asset managers follow along in the years to come,” she adds.
Head of sustainable investment for Quilter Cheviot, Claudia Quiroz, agrees. She comes across clients and organisations whose “criteria need to be aligned with the Church of England criteria”. Could the CoE divestment trigger a spiritual snowball?
How will other pension funds react?
So far, Shell’s stock has remained buoyant, but it’s been a shaky period for the oil and gas company. To the best of Capital Monitor’s knowledge, no pension fund has yet publicly followed CoE’s path.
The biggest pension fund in the UK is the Universities Superannuation Scheme (USS). With £82.2bn in assets under management (AuM) it’s nearly eight times the Church Commissioner’s fund, and over 25 times the CoE pension. The USS currently has 0.05% of its AuM, £50m invested in Shell. Taking away that kind of money would hurt.
So, will the USS follow the CoE? For now, it seems not. The USS continues to invest in oil conglomerates like Shell and BP (which it also has a £38m stake in). “The sector offers the knowledge and infrastructure for several potential solutions to drive a speedier climate transition,” a spokesperson tells Capital Monitor.
However, Shell is not out of the woods. Like the Church, the USS has been actively engaging for some time now.
If it doesn’t see progress, Shell will get kicked to the curb. “We will use divestment as a tool if, following our active engagement, it becomes clear that a sector or company still can’t, or won’t, transition to Net Zero,” the spokesperson adds.
Inaction speaks louder than words
This all sounds reasonable. But what exactly are asset owners like USS waiting for?
Shell understood the catastrophic effects of climate change some 35 years ago. In 1988, the firm conducted confidential research into global warming. The leaders uncovered the “fast and dramatic changes” that would harm “the human environment, future living standards and food supplies” long before it was mainstream.
Chillingly, the paper also warned, that “by the time the global warming becomes detectable, it could be too late to take effective countermeasures.”
Had Shell acted upon this knowledge and invested in green energy, we could be living in a very different world right now. Instead, the company doubled down on oil production. In 2007, Shell dabbled in solar power as part of a wider campaign to address climate change, but quickly sold the plant again. It wasn’t until 28 years after the confidential paper was published that Shell created its New Energies division, which looked into other energy sources. The division was allocated less than 1% of the money £30bn budget for oil and gas.
Today, Shell is still expanding its oil operations, vowing to keep output steady or higher into 2030. At the same time, the company seems to be using delaying or silencing tactics to slow the transition. Already this year, Shell has spent $1.98m lobbying for oil and gas in the US, ($57m since the Paris Agreement in 2016). And is currently suing climate activist group Greenpeace for £100,000.
This behavior is becoming harder for some pension funds to justify. After all, who wants to inherit a pension on an unlivable planet?
Could Shell be the new Kodak?
In the first quarter of 2023, Shell enjoyed profits of $9.6bn. It follows the company’s record-breaking $39.9bn in 2022. For Hancock, it was a “prime opportunity to invest capital into the transition.”
“We’re very disappointed that didn’t happen,” she stresses. “That was very short-sighted.”
Shell sold fossil fuel assets last year, which CEO Wael Sawan counts as lowering the company’s carbon emissions. And despite relatively few sustainable investments – accounting for just 1.5% of revenue according to Global Witness research – the oil conglomerate is keen to stress that it is on track to meet its 2050 commitments.
But progress is limited. Shell’s own investor documents contain this cautionary note: “Shell’s operating plans cannot reflect our 2050 net-zero emissions target and 2035 NCI target, as these targets are currently outside our planning period.”
Speaking to a public audience in London on 11 July, former governor to the Bank of England, Mark Carney, commented, “Major oil companies – virtually without exception – are not investing enough in the transition”. He points out that, “this is common behaviour in industries being disrupted”. In the same way that Blockbuster fell to streaming platforms, and Kodak lost out to smartphones, fossil fuel companies could soon become stranded assets.
Researchers estimate that $1.4trn of oil and gas will become stranded by 2036. For pension funds invested in fossil fuels, this would be disastrous. Research by Make My Money Matter found that the average person’s UK pension pot has £905 invested in Shell.
To divest, or not to divest?
With mounting regulatory and investor pressure, it seems inevitable that pension funds will need to pull money out of fossil fuels at some point. But doing so comes with its own risks.
“You need to have exposure to certain sectors”, Quiroz emphasises. Energy is one such industry. It’s an asset that can prop-up a portfolio during recessions. After all, we all switch on the lights and heat water, no matter how depressing the stock market. Another valuable characteristic for retirement funds is how quickly the stocks can be converted to cash.
Investing in renewable energy will not cover this need for retirement portfolios, explains Quiroz, as the sector generally brings less liquidity and higher risk.
“Do the withdrawals need to come from income?” asks Quiroz. “Or can they come from a combination of capital and income?” These are some of the questions managers need to grapple with. Finding an equally liquid sector, without leaving gaps in the portfolio is challenging.
Perhaps at this juncture, the government should step in. Tax the record-breaking profits of fossil fuel companies and pass the yield onto pensioners. In the meantime, use the divested proceeds to power-up renewable energy innovation.
But we seem to be a long way from any such climate interventions. For now, the future lies in the bravery of asset owners.
[Read more: On divestment versus engagement]
