A serious conflict appears to be emerging between the international political consensus reflected in the Paris Agreement and the corporate policies of Big Oil. Charity investors need to start thinking about what to do if it becomes clear that investor engagement will not lead to a fundamental shift in corporate business strategies within an adequate timeframe.
At the COP21 meeting in Paris in December 2015, governments agreed a new demanding target to limit global temperature rises to below 2°C, with an ambition for 1.5°C. The scientific consensus is that a failure to keep global temperatures within these limits risks dangerous climate change, with significant risks of serious adverse social and economic consequences for people and planet.
If we wind the clock back to May 2015, a shareholder resolution directed Royal Dutch Shell to disclose and report on its preparations for a world with temperature rises of less than 2°C and its related transition plans. The resolution – known as ‘Aiming for A’ by reference to an independent ratings system for companies in the extractive industries operated by CDP and backed by £160bn of funds under management – called for Shell to report on the resilience of its asset portfolio to post-2035 low carbon scenarios and on the relationship between these scenarios and its remuneration policies, plans to transition R&D investment, manage emissions and engage on public policy.
On 24 May 2016, Shell had its AGM and in its annual report disclosed its approach to the categories set out in the 2015 shareholder resolution. Analysis from ShareAction creates the impression of a company on a different trajectory to that set by governments in Paris. Shell has said that it has “no immediate plans to move to a net-zero emissions portfolio over our investment horizon of 10-20 years”, even though the consensus view is that full decarbonisation of the energy sector will be needed by 2045-2055 if we can be confident of keeping global temperatures below 2°C. In short, there seems to be a relative lack of action on the part of Shell to prepare for strategic resilience in a below 2°C world – its business model seems to be on a collision course with the Paris target.
What does this mean for charity investors? On 16 November 2015, in a ground-breaking legal opinion, Christopher McCall QC, a pre-eminent legal expert on the hotly debated topic of ‘fiduciary duty’, raised the prospect that a wide range of different charities may be legally required to re-evaluate their approach to carbon intensive investments. According to McCall, where there is a clear conflict with the charitable objects of a charity, charities must divest from carbon intensive investments, “regardless of the financial consequences”. This may come as a surprise to trustees, who tend to think that they have a licence to divest and not, in certain circumstances, a duty.
However, McCall suggests that there will be various cases where a conflict is “patent” and “clear-cut” and other cases where the conflict is “latent”, although he notes that trustees will need in each case to look at the evidence and take advice to decide whether a conflict exists. Given the apparent conflict between the goal of a below 2°C world and the trajectory of the business models of the oil and gas majors, it seems that there is an increased risk of conflict with the missions of a variety of charities.
Charity investors should be thinking about how to use all of their assets to realise their missions and to deliver public benefit. This includes influence with intermediaries, such as investment managers, many of whom are behind the curve on the management of climate risk within investment portfolios. In egregious cases, there could even be a conflict between the missions of certain charity investors, such as those with environmental and health objects, and the use of investment managers who have significant holdings in carbon intensive investments and which lack adequate positions on climate change risk management. Investment managers will need to adopt new ways to manage these risks.
And charity investors are already asking questions. The Ethical Investment Advisory Group (EIAG) of the Church of England, which advises the Church Commissioners, a charity, is currently consulting on a new ethical investment policy for the extractive industries. Perhaps a good starting point would be to ask whether there is a patent or latent conflict between the charitable status and objects of the Church Commissioners and support for companies whose current business models threaten efforts to make an orderly transition to a low carbon economy? Some might take the view that it is too early to tell whether Big Oil is able or willing to work within the limits of the Paris Agreement. Others might believe that, in reality, Big Oil has no real intention or even ability to fundamentally shift its business model.
In any event, charity investors should be thinking about the long term reputational and other risks associated with support for companies whose business models are not aligned with the Paris targets. After all, unless Big Oil starts to change course pretty quickly, we will all be picking up the pieces.
Luke Fletcher is Partner and Head of Social Finance at law firm Bates Wells Braithwaite. This piece was also posted on their blog.