Climate strategies put BP and Shell shares under pressure

After recording record bumper profits in 2022 as a result of the war in Ukraine, BP and Shell are facing fresh pressure from shareholders and pension funds to accelerate their green transitions. Outside of the oil and gas industry, companies could lose the support of investors and wealth funds if they don’t take the carbon transition more seriously.

• Two of the UK’s biggest pension funds plan to vote against the renewal of Shell and BP directors.
• Sweden is banning non-ESG funds from pension pots.
• Both BP and Shell are held by the Direxion Hydrogen ETF.

Two UK pension funds are to vote against the renewal of the contracts of some of the top directors at oil giants BP [BP.L] and Shell [SHEL.L].

The Universities Superannuation Scheme (USS) and Borders to Coast, which manage a combined £129.3bn in assets, are likely to vote against the management of BP and Shell—unless they accelerate their work on climate change.

“Taking a more personal approach to voting is more likely to drive change,” David Russell, head of responsible investment at USS Investment Management, told the Financial Times.

BP announced in February that it was adjusting its pledge to decarbonise its operations. It’s now targeting a 10-15% reduction in emissions from upstream production by 2025, down from a previous target of 20%. The target for 2030 has been lowered to 20-30%, from 35-40%.

The BP share price is down 8.25% in the last week and up 3.6% year-to-date. The Shell share price is down 9.5% and down 3% in the respective periods.

Shell sued for climate strategy failure

The Shell share price has come under pressure partly due to legal action brought against it by ClientEarth. The environmental law firm argues that the oil producer has failed to agree on a climate strategy that is aligned with the goals of the Paris Agreement.

Shell’s board “is persisting with a transition strategy that is fundamentally flawed, leaving the company seriously exposed to the risks that climate change poses to Shell’s future success,” Paul Benson, senior lawyer at ClientEarth, said in a statement.

Shell invested approximately $3.5bn in its renewables and energy solutions segment in 2022, although this accounted for just 14% of the $25bn total capital expenditure. And, despite its profits more than doubling to $40bn, chief financial officer Sinead Gorman said on a call with reporters that spending on renewables and energy solutions is expected to remain steady in 2023, reported Bloomberg.

While last year’s expenditure on low-carbon energy was a record for Shell, it remains less than half of what the company spent on oil and gas exploration and extraction.

Companies urged to clean up their act

Away from the oil and gas industry, the Asia Investor Group on Climate Change, which manages $39trn in assets, has been advising its members that offsetting emissions—for example, by purchasing carbon credits—isn’t the most effective way to reach net zero. Companies should instead reduce their direct and indirect emissions, a spokesperson for the group told Bloomberg.

Elsewhere, Norway’s $1.35trn sovereign wealth fund has threatened to vote against the boards of companies it holds if they fail to take climate action more seriously.

Carine Smith Ihenacho, the fund’s chief governance and compliance officer, told Reuters that it expects to vote against more companies this year. There will be a particular focus on the heaviest emitters in the cement, steel, electricity, and oil and gas sectors.

Sweden, meanwhile, is inviting international asset managers to help allocate $90bn of pension savings, but it is not accepting applications from funds that do not incorporate ESG considerations.

“Unlike in the current system, there will be a requirement that the manager systematically integrates sustainability aspects into its operations,” Erik Fransson, executive director of the Office of the Swedish Fund Selection Agency, told Bloomberg.

Funds in focus: Direxion Hydrogen ETF

Notwithstanding the criticism levelled at Shell and BP, both are held by the Direxion Hydrogen ETF [HJEN], with weightings of 7.30% and 5.04% respectively as of 20 March.

The fund “offers exposure to 30 companies leading the way towards net-zero emissions by providing more accessible, efficient, sustainable solutions”. It is up 1.5% year-to-date, though down 10% in the past month.

Shell and BP are the third- and sixth-biggest holdings in the iShares Global Energy ETF [IXC], with respective allocations of 7.86% and 4.38% as of 17 March. The fund is down 8.6% year-to-date and down 7.2% in the past month.