Seat at the table

As the fossil fuel divestment movement has accelerated globally, many personal and institutional investors have resisted it on the grounds that engagement is a more effective strategy. The argument goes that, if responsible investors divest, then their shares will simply be taken up by less scrupulous investors. They say that divestment is simply a way to walk away feeling moral without putting in the hard work required for change. The argument against divestment says that by staying put, investors have a seat at the table which they can use to direct the company to a low carbon future.

Engagement practitioners have three tools at their disposal to change corporate behaviour:

proxy voting,

2. direct dialogue and

3. shareholder resolutions.

Using these tools, engagement has a long history of success in persuading corporations to adopt environment, social and governance practices. However, engagement with the fossil fuel industry has been going on in earnest for 20 years. So far, success has been limited to pressuring companies to publish emissions data and climate risk statements. This level of action fails to acknowledge the scale of the problem. A report published in the scientific journal Nature in 2015, calculated that Canada could only utilize 25% of its oil reserves if the world is to stay below 2^oC warming. Appropriate action on climate change is in direct opposition to the survival of the fossil fuel industry.

Investors taking the engagement approach need to think very clearly about the corporate changes they are advocating for. Are they enough to make the company compliant with the Paris climate agreement? If so, then by what timeframe do they need to happen? Too often, concrete goals and deadlines are lacking. Are companies engaging realistically, or are they assuming in their climate strategies that they will be the sole supplier of the world’s oil in 2050? Any engagement strategy needs to adopt a carrot and stick approach: the threatening stick in this scenario being divestment. Investors need to be ready follow through on that threat if engagement is not working.

Investors also need to be wary that they are not simply being used as part of a greenwashing exercise, lending moral legitimacy to fossil fuel companies. In this vein, some companies have started to welcome shareholder resolutions for emission reporting and climate risk assessments. Notably, in 2015 Shell backed an activist resolution to assess the company’s climate change risk to widespread media acclaim: the company did so on the same day it announced renewed drilling in the Arctic.

“The shareholder engagement process increasingly looks like a cynical exercise through which shareholders and fossil fuel companies talk instead of act, the urgency of climate change is denied and real questions of fossil fuel profitability are ignored.”
Tom Sanzanillo, IEEFA Institute for Energy Economics and Financial Analysis

However, if engagement is the strategy you wish to adopt, it is worth noting that many investors that favour engagement with fossil fuel companies specifically exclude oil sands and coal, regarding them as ‘beyond the pale’. These are the most carbon-intensive fuels, which we can afford to burn the least amounts of. A spokesperson for Robeco, a Dutch asset management firm that recently divested from the oil sands, put it succinctly: “Although the preferred approach is to engage with companies, we believe it is very difficult to drive significant change at companies whose portfolios are skewed to coal or oil sands. Therefore, we prefer to put our efforts into sectors and companies, where we have more confidence that our engagements will be effective.” You can find many more examples of institutional investors taking this approach on our divestment timeline.

We do not believe engagement is an effective strategy in relation to the fossil fuel industry. Engagement can drive improved corporate behaviour relating to peripheral activities and governance structure. But it is not going to change the core business activity of a company. Engagement is a time-consuming activity; it is better directed towards industries in which it can make a real difference. Banks, automobile manufacturers or other companies that are heavy consumers of fossil fuels are the places that engagement has the potential to have a positive impact.

Some might argue that engagement can fundamentally change the business models of oil companies. Many large international oil companies have some investment in renewable energy and now market themselves to investors and potential recruits as the green energy providers of the future. They argue that their experience in large infrastructure projects positions them best to build green energy infrastructure.

In reality, oil majors direct on average 3% of their capital spending towards renewable projects, which puts the sincerity of these green commitments into question. Worse, Canadian oil sands companies are doing substantially less than this. Of the big 5 oil sands companies, only Suncor has investments in renewables. Suncor has wind generating renewable facilities with around 100MW capacity. To put this in perspective, a dedicated medium-sized Canadian renewable energy company like Innergex has 2,700 MW of renewable capacity. At the time of writing, Innergex has a market capitalisation of $4.5 billion. Suncor’s market cap is $26.5 billion. Clearly Suncor are not credibly positioning themselves as the green energy providers of the future.

Oil Sands Divestment

Seat at the table