The responsible revolution: a watershed moment

17 June 2021

By Ken Rayner, Verbatim RSMR Model Portfolio Manager

Royal Dutch Shell were recently instructed by a civil court in the Netherlands to cut their global carbon emissions by 45% compared to 2019 levels by the end of the decade. They’ll appeal the decision, but this marks a watershed moment as it’s the first time a company has been subject to this kind of ruling. 

In 2019, Royal Dutch Shell’s total greenhouse gas emissions were 1.65 billion tonnes, representing roughly the same carbon footprint as Russia. Originally, they were aiming to cut emissions by 20% by 2030 and to be net zero before 2050, but the Dutch court has said that they aren’t going far enough, fast enough. The Paris Agreement, aiming to limit global warming to 1.5°c compared to pre-industrial levels, has been the driving force behind the decision. This type of regulatory scrutiny has major implications for businesses, affecting their balance sheets and their ability to generate revenue, and could represent a new precedent for all businesses with a high carbon footprint. 

It’s not just Royal Dutch Shell that are under pressure, two other oil giants have also suffered blows recently. At the annual shareholder meeting of ExxonMobil in Dallas, an activist hedge fund looking to make the shift away from fossil fuels towards renewables won 2 seats on the Board of Directors. And at the Chevron annual investor meeting, a vote was cast forcing the company to make a plan to cut emissions generated from the use of its product, making the firm responsible for the pollution its customers create when burning oil and gas. It’s been a turbulent time for the oil industry during the pandemic and with governments facing mounting pressure to restrict fossil fuels and invest in zero-emissions alternatives, this is clearly the start of a new era for oil companies.

On top of this, the Biden administration recently suspended oil leases in the Arctic National Wildlife Refuge in Alaska, blocking plans for the first-ever drilling programme in the 19-million-acre wilderness. The programme is on hold until a comprehensive analysis is completed, and the review could ultimately lead to the leases being terminated altogether. 

The path to zero emissions is gaining momentum but it isn’t all plain sailing. Targets can be set but how will we get there? The long-term goal is to become fully electric and digital but what will the environmental fallout be from building the necessary infrastructure to power these systems? China’s ‘artificial sun’ nuclear fusion reactor, designed to replicate the nuclear fusion process that occurs naturally in the sun, has recently set a new world record achieving a peak temperature of 288million°F, more than ten times hotter than the sun. The aim is to create limitless clean power but what damage will be caused to the environment in the quest to get there? We’ve got a long way to go to before we achieve a greener world with zero emissions.

International Renewable Energy Agency (IRENA) have set out a roadmap of what’s needed to move towards global energy transformation and a greener economy; between 2016 and 2050 they expect $100 trillion of cumulative investment to be made predominantly in low carbon technologies such as renewable energy, electrification and energy efficient technologies. This would equate to an average of around 2% of global GDP per year. In March 2021, IRENA published the World Energy Transitions Outlook indicating that energy transition investment would have to increase by 30% to a total of $131 trillion between 2021 and 2050, corresponding to $4.4 trillion on average every year. With such a shift in the responsible roadmap, it’s not surprising that oil companies are being ordered to accelerate emission cuts. 

A new precedent has been set by the landmark ruling that could pave the way for legal action against energy companies around the world. The implications are vast and unfolding and investors will be watching this space, keen to understand what else might come out of the woodwork...

 

The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. The contents of this article should not be construed as advice and is for information only. Individual stock selection should only be performed by suitably qualified advisers.