How should we engage with Oil and Gas companies?
Engagement is now a big part of sustainability investing, but I argue that it's still in its infancy. It's not an “invest in renewables vs invest in O&G debate”, it's more about who is best placed to invest this capital wisely, the upstream O&G company or their shareholders.
Summary: Part of the engagement process should involve us thinking like corporate raiders - not in terms of the outcomes they seek, but the process they use. It's not an 'invest in renewables vs invest in Oil and Gas (O&G)' debate, it's more about who is best placed to invest this capital wisely: the upstream O&G company or their shareholders. Any engagement has to start from a position of looking to create financial value over the long term.
Why this is important: Climate-related activist engagement is likely to increase. Non-profit organisation ClientEarth alleging that Shell's directors breached their legal duties by failing to manage climate risk or plan for the energy transition is one such example.
The big theme: The O&G sector is likely to play an important part in the sustainability transitions. The finance sector needs to support the sustainability transitions. We need to understand the real world complexity and how to effect change. Otherwise we end up investing our capital in projects that make little or no difference, other than to make us feel good - what economists would call a misallocation of capital on a grand scale.
The details
Corporate change can be brought about through the 'three P's' - Persuasion, Pressure and Profit. Persuasion, because you are trying to get the board and management to see the problem differently, and as a result to select a different strategy. Pressure, because there is always an implied threat in any engagement. Possibly the best pressure is to destroy their end markets, by supporting Electrification (EV's, heat pumps, industry decarbonisation etc). And price (share price), because your engagement, if it's going to be successful, must have an element of producing a better financial outcome.
Engagement is now a big part of sustainability investing, but I argue that it's still in its infancy. The thing about engagement is that it really should have a very concrete objective - "through my engagement with this company I want them to do XX". And XX is going to produce a different outcome than their current strategy.
