The political rhetoric – and genuine concern – around the climate emergency has hardened in recent months.
On 20 September, there are plans for a global climate strike to build on the school strike initiated by Greta Thunberg. While unlikely to bring the global economy to a grinding halt, we can expect to see more such symbolic events, as well as direct action by groups like Extinction Rebellion.
Oil and gas companies are a likely and legitimate target, and one tactic for concerned investors is to divest shares in these types of businesses.
But how seriously should those companies take the threat?
Rebalancing share portfolios away from the offending companies on environmental grounds has so far had no discernible effect on share prices, which for UK-listed companies are primarily influenced by global oil and gas prices, the sterling exchange rate, and individual companies’ performance.
Even though the prospect of a Labour government with an overall majority is remote, there was a ripple of anxiety when shadow chancellor John McDonnell announced that companies could be penalised through delisting.
There is understandable concern in the oil and gas sector from companies based in western Europe and Canada that such proposals could become mainstream and serious.
That is what lies behind the warning, first made by Bank of England governor Mark Carney, that shares could be devalued through divestment, to the point that they become stranded and illiquid, potentially imperilling the financial institutions which hold them.
There are two distinct ways in which oil and gas companies generate carbon emissions.
The first is the emissions which occur from “well to wheels” – gas flaring and leakage, refining especially of heavy oils, and tanker transport.
Companies are, rightly, regarded as responsible for these, and will have to absorb the costs of regulation designed to reduce carbon emissions, eventually, to zero.
The second is what are described as “scope three” emissions: those generated by the consumer.
How far is BP or Chevron responsible for the fact that motorists use petrol or diesel and households switch on electricity from gas-fired power stations? The hard-nosed industry view is that they are merely delivering what our chosen lifestyles demand.
“Petrol heads” pay good money at the pumps. Similar arguments rage over sugar in the food industry (and also with tobacco, gaming, and alcohol drinks companies – though the promotion of addictive behaviour establishes a higher level of culpability).
We have, however, now got to a point where the major companies accept that they have some degree of responsibility, not least because they have access to technology and skills, and large pools of capital, which should be used in a more climate-friendly way.
So, what is to be done? The industry is nervous of being caught unprepared for governments demanding rapid adjustment to a green world, but is equally nervous of getting too far ahead of regulatory reality.
I recall being part of Shell’s scenario planning team almost three decades ago when a “sustainable world” and tough carbon taxes were seen as just around the corner. The company made farsighted moves into cleaner, greener gas. But it was ahead of its time. The slowness of government to do what the company had prepared for provoked it to regress into heavy oils.
Meanwhile, the western oil and gas majors point out that it doesn’t help the planet if they are diminished by regulation or divestment, shifting the global centre of gravity to state capitalist, environmentally indifferent companies in Russia, Venezuela, and Saudi Arabia.
“Sustainability in one country” is not a sensible strategy in any event. Nor will divestment achieve its environmental objectives if it is successful at reducing the supply of oil and gas, forcing up the price and rewarding the producers with more valuable balance sheets
The danger now is in the opposite direction: doing too little too late.
Divestment can play a useful role as the canary in the mine, warning companies that they will be in trouble if they do not adjust. But, to be useful, divestment needs to be based on metrics of performance, not a vague sense of ethical discomfort. I see that Shell has set out a series of performance targets on emissions and expert investors to judge the company against these targets.
I trust that environmentally-aware members of the investment community will make this a test case for how to make divestment a genuinely useful activity.
Others need to act too. Regulators should back up their warnings with clear guidance on how financial institutions should manage their portfolios of assets.
And governments, too. Break-through technologies like tidal power will not happen without consistent government backing. The sticks and carrots of carbon taxation and regulation will not work unless they are consistent and long-term.
Shared divestment can work and should be used by investors, but not if it is merely a gesture to satisfy a passing whim.