Oil companies and the challenge of net zero

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Personal Investing

12 April 2021

Is it unreasonable to expect oil companies to drastically reduce their carbon emissions by 2050? As investors, we don’t think so.

The race to achieve net-zero carbon emissions (in other words, becoming carbon neutral) by 2050 has to some extent already been reflected in stock markets. While company share prices of traditional oil giants have reduced in value over the last five years, those of clean-energy companies, such as groups involved in wind power production, solar energy or hydrogen have risen dramatically. But, we believe, that doesn’t mean investors should pay them any less attention, or that oil companies themselves should focus any less on the carbon intensity of their businesses. Indeed, the willingness of oil companies to talk about carbon emission reduction has grown markedly.

This is a far cry from even four years ago. In 2017, we commissioned research1 revealing that, while many energy companies publicly acknowledged the urgency of climate change, it was not clear how this influenced their plans to keep exploring for new oil and gas reserves. And then in early 2019, we took an even bolder step and, for the first time, put forward a proposal asking *BP to explain how its strategy was consistent with the Paris Agreement on climate change2. The agreement, signed in 2016, aims to limit global warming to no more than 1.5° above the pre-industrial age.

Change is afoot
All the UK and EU’s oil majors have now adopted net-zero targets, which cover not just carbon emissions from their own operations but also some, or all, of their products.
Change is afoot beyond Europe, too. Last year, ConocoPhillips* in the US adopted a Paris-aligned climate risk framework to meet net-zero operational emissions. Occidental* is the first US oil major to include its products in a net-zero target. PetroChina* is also notable for having set net-zero targets for its operations.

Yet persuading energy companies to embrace net-zero objectives is only one milestone on this journey – an important one, but not the destination. We must therefore continue to engage with the oil industry as vigorously as ever on this issue. Many more details remain to be resolved: making sure targets to achieve net-zero emissions are credible, for example, and making sure director remuneration is structured to reward the execution of the strategy.

We have long been in favour of talking with companies before taking the more radical step of selling them in any of our funds. While we understand the desire of some investors simply to walk away from oil-producing companies we believe this may not be the best course of action - not least because it deprives investors of the ability to exert a positive influence over the management teams.

We therefore remain committed to engaging with oil companies on a topic that, we believe, has the potential to define the course of the next century. Let’s not just do this for the sake of the shareholders – let’s do it for the planet.

1 Source: A joint study between the Carbon Tracker Initiative and the Principles for Responsible Investment, 2017.

2 Source: BP, annual general meeting (AGM), May 2019.

Remember, the value of any investment is not guaranteed. The value of investments and any income received from can go down as well as up and you may not get back as much as you had originally invested.

* For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.