Last decade at COP 21 the United Nations came together to determine targets to mitigate global warming effects of the future. This decade will be a critical period for implementing these climate actions as the severity of climate change is becoming more apparent. The oil & gas sector has higher environmental risks than other sectors since their operations produce greater amounts of greenhouse gas (GHG) emissions linked to fossil fuel production. In order to secure future funding from investors, major companies within the sector are increasing their compliance with environmental, social and corporate governance (ESG) practices. According to Ted Knutson at Forbes Magazine, investors are right to consider ESG risks as they can impact the worth of intangible assets, such as brand name and reputation, which makes up more than 80% of a company’s value. The influence of ESG on investment will be a significant commercial threat to industry leaders and stakeholders if they fail to comply. BP and Shell, the UK’s largest publicly listed oil & gas companies, have disclosed strategies and projects to align with the Paris Agreement terms. Hopefully, their practices will motivate their peers to follow suit.
BP’s 5 ESG aims are to:
1) Achieve net-zero carbon emissions within operations
2) Reach net-zero emissions within in oil & gas production
3) Halve their carbon intensity products by 2050
4) Reduce methane intensity by 50% in operations
5) Increase investment in their non-oil & gas businesses.
BP also openly supports recommendations from the Task Force on Climate related Financial Disclosures (TCFD) to develop good ESG practices. BP have already achieved its short-term goal, to reduce their GHG emissions by 3.5Mte by 2025, by already achieving a reduction of 3.9MteCO2 ahead of schedule. They also implement Advancing Low Carbon (ALC) accreditation programmes. Deloitte conducts independent assurance on these ALC activities and confirms GHG emissions reductions. BP currently have 76 programmes, up from 52 in 2018, and are continuously looking to increase this to encourage more employees to participate in becoming a more environmentally friendly company.
Shell have a net zero ambition plan to create a net-zero emissions energy business by 2050. They also aim to reduce the net carbon footprint of energy products it sells by 30% and 60% by 2035 and 2050, respectively. Shell, too, supports the TCFD and some of their more qualitative environmental performance standards include using less fresh water, preventing spills and leaks and using energy more efficiently. Shell also is also ranked highly on the CDP (Carbon Disclosure Project), FTSE4Good Index and the Dow Jones Sustainability Index showcasing its commitment to becoming a more environmentally conscious company.
BP and Shell both invest in renewable energy technologies to embrace cleaner energy solutions, including hydrogen technologies which offer lower-carbon options for power generation in transportation and electrification. BP joined the Hydrogen Council in 2019 to accelerate investment into large-scale commercialisation of hydrogen solutions, including both blue and green hydrogen technologies. Comparatively, Shell are looking to expand their hydrogen fuel stations across Western Europe with 400 hydrogen sites by 2023.
BP also wants to expand the use for natural gas over coal as it creates half the GHG emissions and fewer air pollutants. Shell, recognises that with an emerging middle class in Asia, more natural gas solutions will be needed, and so aim for 10% of China’s fuel output to be via gas in 2020 and 15% in 2030.
BP and Shell also have joint ventures. BP with Bunge and Butamaz, to develop technology to convert sugars from corn into isobutanol, respectively. Meanwhile Shell with Cosan are creating two billion litres of sugar-cane ethanol a year and hope this can reduce CO2 emissions by 70% compared to using petrol.
Executive Remuneration Frameworks
Within some Executive Remuneration Frameworks, ESG targets are built into their variable pay structure. If one’s variable pay can create up to 600% of their base salary, one would hope this incentive would be enough for Directors to try and meet ESG targets. BP’s performance shares dedicate 30% to be related to meeting low carbon targets for 3 years. The annual bonus’ environmental target weighting has also doubled from 10% to 20% since their last remuneration policy. It appears the incentive is paying off as there was an expectation in the previous tax year to reduce BP’s emissions by 1.0MteCO2 which they surpassed, slashing emissions by 1.4MteCO2. Shell’s annual bonus and Long Term Incentive Plan (LTIP) dedicate 10% of the framework to climate change measures and unlike BP, these weightings have remained the same since 2017 and their new policy does not look to incorporate a bigger dedication to climate change targets for the foreseeable future.
Whilst both companies have taken strides to reward green practices, it is concerning that both BP’s and Shell’s ESG-driven-pay weightings, compared to volume growth metrics, may not be enough to drive sustainability and combating climate change actions. For example, in Shell’s annual bonus, 55% of it is dedicated to growth measures and its LTIP constitutes two cash flow metrics. This encourages a growth-orientated approach which favours increased fossil fuel production.
So far both companies have highlighted the importance of sustainability and how this is incorporated into their business model both in writing and in practice. They both strive for net-zero emissions in the long-term, which meets one of the UN’s sustainability goals. It is difficult, however, to strive to become a more environmentally friendly company, especially within the oil & gas sector, whilst also driving growth to satisfy shareholder returns and company valuation metrics. On balance, if you were considering investing between BP and Shell, BP would be the more favourable company. They provide greater operational transparency with more in-depth sustainability reports as well as providing a greater and diverse amount of alternative fuel research and technology. They are also more open about refining their ESG targets and their executive remuneration variable pay structure than Shell, demonstrating their drive to prioritise the company’s environmental practices more now than ever before.