An oil pump and a wind turbine in Austria. Shell is navigating a narrow path to reach its net-zero goal, according to a senior executive.

Oil and gas majors are under growing scrutiny to deliver on their climate pledges, with some investors and industry analysts still unconvinced that their transition can both deliver shareholder value and make a meaningful dent in reducing the pollution caused by their products.

Royal Dutch Shell PLC presented a strengthened climate plan to its shareholders in February, acknowledging for the first time that it will need to eliminate or offset all of its emissions — including those generated when its fuels are burned, which make up the bulk — to reach its 2050 net-zero goal.

But executives acknowledge that the company is treading a fine line between building new low-carbon businesses while still investing in the oil and gas assets that will help fund the transition. For Shell and its peers, that also means courting sustainability-conscious investors looking to deploy a rapidly growing pool of environmental, social and governance-linked funds while retaining traditional shareholders who are worried about lower returns in sectors like wind and solar.

“It’s the narrow path, I think, that we can navigate this energy transition highly successfully as a company. Our job is to persuade the investors and persuade civil society at large that we have got the right strategy in order to deliver on all of those different objectives,” Ed Daniels, Shell’s executive vice president of strategy and portfolio, said in an interview. “It’s not a trivial exercise.”

Europe’s other oil majors, from BP PLC and Total SE to smaller integrated producers like Eni SpA and Repsol SA, have also stepped up their climate targets and are trying to convince shareholders of their low-carbon strategies. Both BP and Total used recent investor calls to give deeper insight into their green energy businesses, for example. Aside from buying and building large-scale wind and solar parks, the majors are also betting on everything from biofuels, batteries and hydrogen to carbon-capture technology and planting trees to reach their targets.

Most U.S. oil and gas companies, including Exxon Mobil Corp. and Chevron Corp., have also started to address investor concerns around climate change but have so far stopped short of setting the kind of comprehensive emissions-reduction targets embraced by many of their European peers.

In an industry first, Shell will put its own net-zero transition plan to its shareholders for an advisory vote at the company’s next AGM in May. The plan, first released on April 15, will be updated every three years, although shareholders will vote on Shell’s progress annually. Should they disapprove, then “of course we would have to change,” Daniels said.

“We have to take that extremely seriously,” he said. “Now, the reality is these are large, complex, multidimensional problems. And I think if there was an easy single prescription for our company or any other company to fix [the] energy transition then we would have found it by now.”

Tentative endorsement

Observers inside and outside the industry are watching the result of the vote closely as a bellwether for the wider sector, amid lingering concerns over companies’ ability to marry climate and financial targets.

“Our concern is that Shell moves towards lower returning/lower value businesses, leaving behind viable activities too soon,” analysts at UBS said after Shell laid out its net-zeroplan. “The transition strategy needs to be judged on its economic merits as well as its environmental/ESG ones.”

A group of environmental organizations already wrote to investors engaging with Shell in February to urge them to vote against the transition plan, criticizing Shell for not setting any targets for absolute emissions reductions before 2050. Its intensity targets theoretically allow Shell to raise hydrocarbon production if it balances out the additional emissions with low-carbon activities.

Kelly Trout, a senior research analyst at Oil Change International, one of the climate groups that signed the letter, said companies’ actions by 2025 and 2030 are the “true test” of their climate commitments. “This is the critical decade,” Trout said.

Shell said in February that its carbon emissions and oil production had already peaked, but the company plans to increase its gas output until 2030. BP, for example, has said it will cut its oil and gas production by 40% until then.

At least one outspoken investor has already endorsed Shell’s plan. Adam Matthews, chief responsible investment officer at the Church of England Pensions Board, said in a statement that the asset manager would likely vote in support of the strategy. Matthews co-leads engagement with oil majors on behalf of Climate Action 100+, an influential investor group with $54 trillion in assets.

Dutch asset manager Robeco Institutional Asset Management BV, the other co-leader, declined to comment on its voting strategy. A spokesperson said that Climate Action 100+ will continue to engage with Shell, specifically on getting the company aligned to the net-zero benchmark it recently launched, which found oil companies lacking on several fronts.

Follow This, a small activist investor with stakes in all the big oil companies, also plans to keep filing shareholder resolutions to ask companies including Shell to set quantitative targets for emissions cuts.

Writing on the wall

In the meantime, not everyone is sticking around to see how the transition plays out.

Sarasin & Partners, a London-based investor managing £17 billion in assets, decided to sell its holdings in Shell, BP and Total in 2020 because it saw too much financial risk in the companies’ hydrocarbon businesses. The decision followed several years of lobbying by Sarasin to get the majors to set climate targets and lower their oil price forecasts.

“There were potentially rather material but invisible stranded assets within all of these companies’ balance sheets,” Natasha Landell-Mills, a partner and the head of stewardship at Sarasin, said in an interview. “But it was impossible to know how large those write-downs would be.”

Over the past five quarters, eight of the largest integrated majors have collectively made write-downs of more than $100 billion, according to figures compiled by the International Energy Agency. The organization said that while the coronavirus pandemic and falling oil prices were behind some impairments, the accelerated shift to a lower-carbon economy also played a part, particularly for the European majors.

“The writing’s on the wall. We decided that was not a risk worth taking for our clients,” Landell-Mills said.

Analysts have already flagged rising risk in the industry. S&P Global Ratings in January changed its risk outlook for the integrated oil and gas sector from intermediate to moderately high, citing, among other factors, the impact of the energy transition.

The rating agency has since downgraded Shell, Total, Chevron and Exxon; Moody’s followed in March by knocking a notch off Exxon, Total and BP.

“We have this gathering storm cloud on the horizon, which many of these companies are explicitly already recognizing with changes in their strategy. But that’s having an impact today,” Simon Redmond, a senior director at S&P Global Ratings, said in an interview.

“There is a clear risk that either companies move too quickly to embrace or address energy transition issues, or indeed they move too slowly. And equally, there’s a challenge to make sure that the investment is proportionate and indeed profitable,” Redmond said.

Shell’s Daniels said the balance between shareholder returns and climate action will continue to be a key focus for the company.

“We need to be able to show that we’re building new businesses that will start to replace the cash flows that we currently get from a hydrocarbon-based economy,” he said. “The reality is that the easiest way that we could become a net-zero emissions company [is to] do it overnight by simply shutting the whole machine down. Now, of course, that would fail tragically in terms of the ability of our company to deliver cash flows to shareholders.”

While Landell-Mills gives Shell and other oil companies some credit for responding to investor concerns and starting to move in the right direction, she said their shift is just not happening fast enough.

“Climate change is not a relative game and, at the end of the day, you have to get to net-zero,” she said. “And none of them are really on a clear pathway to get there.”

S&P Global, by Yannic Rack, April 26, 2021