Press release: ShareAction urges shareholders to reject BP’s and Shell’s remuneration policies for rewarding risky high-carbon strategy
Responsible investment organisation ShareAction is calling on investors to vote down BP’s and Shell’s remuneration policies at the AGMs this May. ShareAction accuses the compensation frameworks of being ‘misaligned with the interests of long-term shareholders’, rewarding the delivery of corporate strategies that could put value at risk as the economy shifts towards a low-carbon energy-mix.
“A cocktail of policy, technology and market-driven factors are brewing up a storm of uncertainty over the future of fossil fuels. To encourage oil executives to focus on ‘business as usual’ seems an imprudent approach to remuneration,” says Juliet Phillips, Campaigns Manager at ShareAction. “Both companies seem complacent about the challenge to their commercial prospects of the action now underway at city, regional, national and international level to decarbonise economies.”
In two new briefing papers, ShareAction provides evidence to suggest that both companies are positioning themselves for climate scenarios that significantly exceed the guardrail set by the Paris Agreement, which governments agreed pose unacceptably high levels of risk. An analysis of the firms’ demand projections, capital allocation plans, and strategic priority areas poses challenges to their resilience to low-carbon outcomes. For example, BP proposes to spend $200 million a year on the ‘venturing and low-carbon’ pillar of its strategy. This represents 1.3% of the company’s total capital expenditure, down from previous years. In 2005, BP committed to $800 million a year. Similarly, Shell’s ‘New Energies’ low-carbon portfolio is projected to represent just 3% of the firm’s capital expenditure by 2020.
Shell’s annual bonus includes a 10% weighted metric based on the reduction of operational greenhouse gas emissions. ShareAction warns that reducing operational emissions plays a limited role in ensuring portfolio resilience under low-carbon, low-demand scenarios, which requires looking at demand-side changes to the energy mix. Furthermore, the remaining 90% of the bonus remains heavily weighted towards hydrocarbon project delivery, with the annual bonus containing a 12.5% weighting for LNG liquefaction volumes, a 12.5% weighting for maximising oil and gas production, and a 12.5% weighting for project delivery. ShareAction warns that these features could stall progress towards the adoption of a low-carbon business model.
BP has gone further than Shell to remove volume related incentives, including the controversial ‘Reserves Replacement Ratio’. BP has also included indicators related to strategic progress on renewables trading and venturing. However, similarly to Shell, the company has not set clear timelines or milestones for transitioning to a low-carbon business model.
ShareAction has circulated this briefing to global shareholders in both companies. The organisation has also assisted pension savers to write to their funds about voting down the remuneration policies. So far, funds with £2 trillion AUM have been contacted by savers.
“It’s a dangerous neglect of fiduciary duty for pension providers to rubber-stamp pay policies which egregiously reward oil executives for delivering strategies that put our pension savings at risk,” says Alban Thurston, a pension saver with Zurich and with Aviva. “That’s why I’ve written to my pension providers, requesting they vote against short-term remuneration proposals.”
In 2015, special shareholder resolutions on climate change were filed and passed at BP and Shell, providing a mandate to link KPIs and executive incentives to long-term strategic changes required in the context of the transition to a low-carbon economy. These resolutions passed with the support of nearly 99% of the company’s shareholders.
“These remuneration policies are the first to be put to the vote following the successful ‘Aiming for A’ resolutions,” Juliet Phillips adds. “This is an important test of investor stewardship to see whether investors hold BP and Shell to account on their lack of progress on transitioning for low-carbon resilience.”