European oil & gas companies spend just 1.3% of capex on low carbon assets

Channels: SAA/ALM, Managers, Outsourcing, Risk, Governance

Companies: Aegon NV, Aviva Investors, Axa Investment Managers, Legal & General Investment Management, M&G Investments, NN Investment Partners, Old Mutual Global Investors, Old Mutual Investment Group

Oil and gas companies have invested $22bn in alternative energy since 2010, according to a survey of 24 firms by environmental data organisation CDP.

However, the spend on low-carbon assets for the sector as a whole is expected to account for only 1.3% of total 2018 capital expenditure (capex), says the organisation’s Beyond the cycle report.

The report ranked 24 of the largest and highest-impact publicly listed oil and gas companies on readiness for a transition to a low-carbon economy.

CDP expects total capex for 2018 for the 24 companies to be approximately $260bn, 1.3% of which will be for low-carbon assets such as smart energy technologies, biofuels and power generation from biomass, waste, geothermal, marine, wind and solar.

Jeanne Martin, senior campaigns officer at ShareAction, said:  “This 1% figure pales in comparison with the amount of money Big Oil spends blocking climate initiatives and regulations, and invests in fossil fuel projects that have no place in a well-below 2°C world."

Last week, big oil spent more than $60m to defeat US-state level democratic initiatives to protect the climate, including proposals for market-based measures that most of these same companies claim to support, She continued. "This raises questions about the industry’s true commitment to "advance the low-carbon transition", to use BP's words, and tackle one of the worst crises of our time."

Martin added: "Investors need to step up their engagement and tell fossil fuel companies to align their business models with the goals of the Paris Agreement - or get out of the way.”

Insurers are invested in half of the 24 companies surveyed, namely: Equinor, Marathon, Exxon Mobil, ConocoPhillips, Occidental, Chevron, Apache, Anadarko, Hess, Noble, BP and Shell.

Although CDP said it wasn’t at liberty to say which insurers are invested in which companies, last May some insurers and affiliated asset managers were amongst 60 institutional investors to sign an open letter in the FT demanding oil and gas companies to intensify their efforts on climate change.

Insurance-related companies amongst the signatories were: Aegon NV, Aviva Investors, Axa Investment Managers, Legal & General Investment Management, M&G Investments, NN Investment Partners, Old Mutual Global Investors and Old Mutual Investment Group.

“We will continue our oversight and dialogue with oil and gas companies to better understand how the investments we make on behalf of our clients are aligned with a sustainable future,” the letter read in reference to shareholders engagement powers.

When it comes to the oil and gas sector, investors, and insurers in particular, have been more prone to use engagement rather than divestment tactics to address climate issues – unlike coal where many firms have divestment policies.

The letter was published just a few days before Royal Dutch Shell's annual general meeting and referenced a resolution set forth by a group of responsible shareholders in Shell, called Follow This.

Follow This requested Shell to set and publish targets aligned with the goal of the Paris Climate Agreement to limit global warming to well below 2°C.

Despite the letter, not all of its signatories voted in favour of the resolution.

The CDP’s report findings seems to highlight the shortcomings of the institutional investors’ ‘engagement approach’ when it comes to the oil and gas sector.

Investors might not carry all the blame: only last month the State of New York filed a lawsuit alleging that Exxon was deliberately misleading its shareholders on carbon disclosures.

In October NN Group announced it will divest from companies where the share of oil from tar sands represents more than 30% of the total average oil and gas production, measured in barrels of oil equivalent per day.

The decision taken with the group’s investment unit, NN Investment Partners, will apply to NN’s own assets as well as all funds managed on behalf of clients.

Dailah Nihot, member of the NN Group management board said at the time: “Although our preferred approach is to engage with companies to support them in the transition to a low-carbon economy, we also want to direct our efforts to those sectors where we believe that our engagement can be most effective.”

A spokesperson for Aegon said reducing the carbon impact of oil and gas companies’ products is the most effective strategy to transition to a low-carbon world.

“The capital allocation decisions they make today are important to determine how likely they are to survive such transition,” the spokesperson said. “Therefore in our engagement and voting activities, we strongly encourage all companies in this sector to clarify how they see their future in a low-carbon world.”

The spokesperson continued: “We will continue our oversight and dialogue with oil and gas companies to better understand how the investments we make on behalf of our clients are aligned with a sustainable future.”

Asked if the CDP report was a sign that engagement didn’t work, Steve Waygood, chief responsible investment officer at Aviva Investors said: “Without government engagement from investors, policymakers may not come under enough pressure to correct the market failure of climate change. And without company engagement, energy companies could simply continue burning fossil fuels, using their own lobbying activities to ensure policymakers let them do so. Over time, shareholder pressure can push these companies towards more-sustainable energy sources.”

We have already seen clear evidence that engagement works in the energy sector, he continued. “Italian multinational electricity firm Enel, for example, pledged never to build another coal station following our engagement; nor will the company spend any more money on nuclear. Half of Enel’s £18 billion growth investment over the next five years is going into solar and wind energy, which currently provide just seven per cent of its electricity.”

The following companies were contacted for comment: Axa Investment Managers, Legal & General Investment Management, M&G Investments, Old Mutual, MetLife and Prudential.

Vincent Huck