Please see the below ESG case study article from Invesco:
The below case study pertains to engagement within our UK equities team, which are a part of the Henley Investment Centre. While guided by our central ESG team, all of our investment professionals ultimately have discretion in their ESG decisions, and do not all follow the same approach. Learn more about how we integrate ESG across our wide range of strategies here.
Responsible oil and gas companies have a critical role to play in being part of the solution to environmental problems: in helping enable the global economy to successfully transition as rapidly as possible, and in a sustainable manner, towards targets for much reduced global emissions.
This can be achieved through actions taken by companies to successfully manage down a sustained decline in output of oil & gas, while at the same time maximising cash flows from operations for investment in new low carbon energy businesses.
Investing in oil companies that set out to achieve these objectives – and holding them accountable – is we believe entirely consistent with true responsible investing, which incorporates environmental, social, and governance (ESG) criteria into the investment process.
Whatever the moral burden that should fairly be borne by UK-listed companies, such as BP and Shell, for their historical actions, what is important for investors to understand is how the oil companies themselves now fit into the global industry. Investors want to know what the impact of oil companies will be on that industry and on society, going forward: what role they have to play in the future.
How BP and Shell are transitioning towards a greener future
Although many investors focus on oil & gas producers as large Scope 3 emitters of carbon, if the world is to achieve net zero emissions in 2050 it ultimately requires reform of demand, and not just supply.
Supply in the industry (in the long run) very closely mirrors actual demand (the easiest place to store oil is still in the ground!). It is important here to also reflect that the global publicly quoted US and European oil companies only account for around 12.3 mb/d out of total current production of approximately 100mb/d, with US privately owned production around a further 8mb/d.
Put another way, state owned oil production (including Saudi Aramco) accounts for almost 80% of global production. The reality is that any cuts in production by any of the publicly quoted oil majors does not in itself affect global oil demand.
BP turning off the taps tomorrow would have a negligible effect on global carbon emissions. The same emissions will still be made but fuelled by output from another supplier who is less accountable to investors.
Responsible oil companies do, though, have a very significant role to play in accelerating a sustainable transition to low carbon alternatives that can reduce demand for fossil fuels by providing a viable substitute product.
For example, BP and Royal Dutch Shell are both actively involved in promoting the transition through defined strategies that look to maximise cash flows from existing carbon resources, and then re-allocate cash flows to low carbon alternatives.
Because of the many and varied uses for oil as a fuel, as a key component in a wide range of everyday products, and the practical limitations associated with various alternatives currently available, the process of transition is likely to be gradual. It is clearly both necessary and highly likely that demand for oil will reduce over time, however we do not foresee at any time in the next ten years at least, a “Kodak moment” for oil.
Our role as responsible shareholders will encourage positive change
An investor in BP or Shell who is willing to support, encourage and also hold the company to account during its transition period is, we believe, able to be well rewarded financially, through dividends and share buy backs, as well as by the prospect of owning a new “low carbon” and retail business whose growth has been fully funded from existing company resources.
Responsible oil & gas companies such as BP and Shell therefore have a critical role to play in being part of the solution: in helping enable the global economy to successfully transition as rapidly as possible, and in a sustainable manner.
This objective can be achieved through actions taken – with the support of shareholders – to successfully manage down a sustained decline in output, whilst at the same time maximising cash flows from operations for investment in new low carbon energy businesses.
We believe, investing in oil companies that set out to achieve these objectives, and holding them accountable, is entirely consistent with our philosophy of responsible investing, which focuses on engagement and dialogue with portfolio companies, and not simple divestment if there is something that we don’t like.
We expect big companies in this sector will be investing capital at scale in renewable energies and are well placed to manage large and complex engineering projects in hostile natural environments. Again, the sector is part of the solution rather than just part of the problem.
Our engagement and dialogue – in practice
As active fund managers, ESG integration and dialogue is an important consideration for us. Over the past three years we have regularly engaged with various members of the Boards and Management Teams of both BP and Shell, on ESG matters in general, and on carbon emissions in particular.
In the case of BP, for example, we have had meetings with the BP Chairman to discuss the risks and opportunities associated with their carbon transition plan.
We have also provided feedback to the chair of the remuneration committee to ensure management incentivisation is aligned to group strategy and their environmental targets.
Furthermore, we have engaged with independent board members and attended company strategy sessions. The enhanced monitoring of our BP position over the last three years means that we believed that the strategy and objectives the company was setting were achievable.
Our engagement enables us to measure the board and management against their strategy and objectives. We believe there are good returns to be made from businesses which transform to become fit for the future.
When it comes to ESG or socially responsible investments, its important not just to use the traditional ethical investment screening (i.e. staying away from certain companies/ sectors etc), but to engage with companies to help deliver positive change.
By engaging with companies and holding them accountable, it forces them to think about the future, their practices and operations and helps to guide them into a better way of thinking.
It’s not about steering clear of companies or disinvesting if something happens investment managers don’t like, but about engaging with them, providing feedback and guidance about how they want things to work.
Positive engagement will help everybody to learn and adapt to what seems to becoming (or will become) an industry standard in how ESG processes are embedded into companies and the industry as a whole.
Keep checking back for more ESG related content from us along with our usual market commentary, planning points and other key issues we like to keep you up to date with.
Andrew Lloyd
06/04/2021