One of the world’s biggest pension funds and the main Netherlands’ pension funds, Pensioenfonds Zorg en Welzijn (PFZW) (1), has announced that it is divesting €2.8 billion (2) from 310 companies in the oil and gas sector. The reason: PFZW no longer believes in the ability of companies like TotalEnergies, Shell and BP “to adapt their business models to the Paris Agreement”. While some have applauded this announcement, others see it as an act of resignation, as by selling its portfolio holdings, PFZW loses any chance of influencing them. Between strict divestment and complacent commitment, Reclaim Finance is proposing a third way: halting the purchase of new bonds while using power as a shareholder to block companies’ climate-wreaking strategies.
PFZW’s announcement – which affects its asset management subsidiary PGGM (3) – follows the 2021 decision by ABP, the Dutch civil servants’ pension fund (Europe’s largest pension fund), to divest €15 billion from the fossil fuel sector (4) (i.e. 3% of its €460 billion in assets (5)), and the more recent decision by the Church Commissioners for England (€12 billion in assets) to divest from companies that do not have a strategy that is aligned with the objective of limiting global warming to 1.5°C, including de facto developers of new oil and gas projects (6).
Each of these decisions is motivated by the failure of shareholder dialogue conducted over several years with companies in the oil and gas sector such as BP, Shell and TotalEnergies. They (finally) realised that it was pointless to expect these companies to change their business model. And the facts show that they are right.
The oil and gas industry has no transition plan
Claiming to have a transition plan does not mean they are in transition.
By analysing the 26 public methodological frameworks relating to the design and assessment of transition plans, Reclaim Finance has identified the indicators that are essential for guaranteeing they are credible, as well as the key signs warning of their shortcomings (7). For example, in the energy sector, one of the warning signs is the continued expansion of fossil fuels. According to the NGO Urgewald, 96% of oil and gas producing companies are continuing to open up new fields (8). This includes the oil and gas majors, who are accelerating the development of LNG.
And breaching the red line drawn by science is just one example. At a time when efforts to reduce greenhouse gas emissions must be stepped up as a matter of urgency, BP, followed by Shell and TotalEnergies, have all backtracked on their climate ambitions (9). The French supermajor even had the audacity to raise its oil and gas production targets (10), just 4 months after an unprecedented 30% of its shareholders had voted in favor of a resolution calling on it to do more for the climate (11).
Is divestment the only solution if dialogue fails?
While the quality and scale of efforts to engage may still be questionable (12), it seems more unjustifiable than ever to provide companies in the oil and gas sector that persist in their climate-wrecking strategies with new money, particularly through the purchase of new bonds. Indeed several French investors have already decided as much (13). But does this mean that investors should throw in the towel?
Cleaning up their portfolios seems reasonable, given the risk of being deemed complicit in the irresponsible behavior of these companies. But while divestment would have an impact on a company’s value (14), it would take many years or a critical mass of divestments before this would inflict sufficient financial pressure on companies in the oil and gas sector to force them to abandon their climate-wreaking strategies. This timeframe is incompatible with the rapid transformation required to meet the objective of limiting global warming to 1.5°C.
We need to do everything we can now to halt fossil fuel expansion and speed up the energy transition. However, strict divestment deprives investors of the levers of influence offered by their shareholder power.
Using shareholder power to obstruct fossil fuel expansion
Obstructing fossil fuel expansion is not only an act of solidarity with the millions of people affected by climate change, it is also a way of defending the interests of investors, in particular pension funds and insurers, whose investments depend on the long-term health of the economy.
Take insurers, for example. Their business model has already been severely destabilized by climate change (15), to the point where, in the long term, it could be no longer viable (16). They have no real choice, if they want to limit these risks as much as possible, but to block the primary cause..
For pension funds, the devastating impact of climate change could destabilize the economy to the point of eroding the value of investments over the long term and jeopardizing the retirement of millions of people (17).
It is therefore the responsibility of institutional investors who serve the interests of their clients to use their shareholder power to seek to obstruct fossil fuel expansion by companies in the oil and gas sector.
In practical terms, this could involve voting to sanction the climate-wreaking strategy adopted by company directors. This means going beyond votes on resolutions that only concern the climate, whether they are submitted by the management (Say on Climate) or by shareholders. Climate issues must be integrated into routine votes that have the greatest influence on corporate governance and strategy.
What should be done with dividends?
Without necessarily calling into question the legitimacy of any shareholder remuneration via dividends and share buybacks from companies without a transition plan, it is clear that we need to question the proportion of profits allocated to shareholders and fossil fuels compared with the amount allocated to solving the energy transition.
Since the recovery post-pandemic, far more of the record profits made by oil and gas companies have been allocated to shareholder remuneration (18) and to fossil fuels and their expansion (19) than to reducing greenhouse gas emissions by developing sustainable energy, decarbonizing or investing in the closure of existing infrastructure (20).
Every euro received by a shareholder is de facto a euro that does not go towards the energy transition. An investor who claims to want to work towards reducing greenhouse gas emissions while receiving such remuneration is demonstrating inconsistency – if not hypocrisy…
Reclaim Finance is calling on climate-responsible investors to sanction oil and gas companies that have not committed to halting the development of new fossil fuel projects and to allocating the majority of their profits to the energy transition. This would mean voting against the re-election of directors, voting against increases to manager remuneration and against the distribution of dividends at the companies’ 2024 annual general meetings, as well as halting new investments, in particular buying new bonds. In addition, any remuneration received as a shareholder should be paid back into solidarity projects and the fight against climate change.
