Climate-related Investor Engagement in the Oil and Gas Sector: How To Have the Greatest Impact

Sofia Elina Bartholdy

Student thesis: Master thesis

Abstract

The energy transition from a fossil fuel-based economy to an economy based on renewables is necessary to limit the impacts from climate change. The transition poses a risk to the fossil fuel sector, the fossil fuel-dependent sectors and their investors. While activists and NGOs promote divestment from fossil fuels, international organisations and industry coalitions urge investors to use their influence as owners to change the behaviour of portfolio companies exposed to risk from the transition. However, there is a lack of research on whether investor engagement actually changes the behaviour of companies, and what type of engagement is most effective. Zooming in on the oil and gas sector, this thesis will answer the question:
How can institutional investors best influence oil and gas companies in their portfolio to include climate change considerations in their business?
An analysis of the top 15 listed oil and gas companies showed that their efforts to mitigate the risks they face from an energy transition are very limited. However, a survey of European investors’ climate-related engagement with oil and gas companies showed that engagement is widespread. The essence of the respondents’ view of impact was that the sum of efforts is what drives change, but that it also takes cooperation by the target company. Four semi-structured interviews provided a deeper insight into the current quality of engagement. The analysis exposed how climate-related investor engagement in the oil and gas sector looks better than it performs.
Five steps for effective investor engagement were identified. 1. The investor needs to position itself as powerful and legit, e.g. by cooperating with other investors to aggregate their share. 2. The investor needs to identify the companies which are subject to the transition risk 3. The method choice depends on the target company, but should include informal engagement, potentially backed up by shareholder resolutions or pressure through the media. 4. Divest if unsuccessful 5. Follow up with the target company to hold it accountable. The five steps provide a structure of engagement, but the process will be different for every company.
Good-quality engagement will be difficult to introduce without a change in the financial system from profiting of transactions to the ownership of the underlying assets. Furthermore, investors need political pressure and thereby increased legitimacy to push for climate mitigating initiatives in the oil and gas sector.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2017
Number of pages136
SupervisorsCaspar Rose